<PAGE>
- -----------------------------------------------------------------------------
MAS PROSPECTUS
- ---------
MAS FUNDS
January 30, 1996
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, twenty-four of which are described in this Prospectus. Each
portfolio in this Prospectus operates as a separate diversified investment
company except the Global Fixed Income, International Fixed Income, and
Emerging Markets Portfolios which are non-diversified investment companies.
The investment objective of each portfolio is described with a summary of
investment policies as referenced below. The Fund's Select Equity and Small
Cap Value Portfolios are not currently being offered to new investors. This
Prospectus offers the Institutional Class Shares of the Fund. The Fund also
offers Adviser Class Shares and Investment Class Shares.
Shares of the Cash Reserves Portfolios are neither insured nor guaranteed by
the U.S. Government. The Portfolio seeks to maintain, but there can be no
assurance that it will be able to maintain, a constant net asset value of
$1.00 per share.
The High Yield Portfolio will invest primarily, and certain other portfolios
of the Fund may invest to varying degrees, in high yield, high risk
securities which are speculative with regard to payment of interest and
return of principal (commonly referred to as junk bonds); therefore,
investments in these portfolios may not be suitable for all investors. See
High Yield Investing in the Glossary of Strategies for additional information
regarding certain risks associated with investment in such securities.
PORTFOLIO PAGE REFERENCE
<TABLE>
<CAPTION>
How to Use This Prospectus: 3 Fixed Income Balanced: 36
- -------------------------- ------------ ---------
<S> <C> <C> <C>
Cash Reserves 23 Multi-Asset-Class: 37
Portfolio Summaries: Domestic Fixed Income 24 -----------------
- ------------------- Fixed Income 25 Select Equity Portfolio: 6
Equity: Fixed Income II 26 ------------------------
- ------- Global Fixed Income 27 Prospectus Glossary:
Emerging Markets 19 High Yield 28 -------------------
Equity 19 Intermediate Duration 29 Strategies 38
Growth 20 International Fixed Income 30 Investments 43
International Equity 20 Limited Duration 31
Mid Cap Growth 21 Mortgage-Backed Securities 32 General Shareholder
Mid Cap Value 21 Municipal 33 -------------------
Small Cap Value 22 PA Municipal 34 Information: 53
Value 22 Special Purpose Fixed Income 35 ------------
</TABLE>
This Prospectus, which should be retained for future reference, sets forth
concisely information that you should know before you invest. A Statement of
Additional Information containing additional information about the Fund has
been filed with the Securities and Exchange Commission. Such Statement is
dated January 30, 1996 as revised from time to time, and has been
incorporated by reference into this Prospectus. A copy of the Statement may
be obtained, without charge, by writing to the Fund or by calling the Client
Services Group at the telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
<PAGE>
EXPENSE SUMMARY - INSTITUTIONAL CLASS SHARES
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
expenses and fees set forth below are based on each portfolio's operations
during the fiscal year ended September 30, 1995, except portfolios whose
Total Operating Expenses have been capped. An estimate has been provided for
portfolios with less than 10 months of operations.
Shareholder Transaction Expenses:
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses:
(as a percentage of average net assets after fee waivers)
12b-1 Fees None
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
---------------------------- ------------ ---------- -----------
<S> <C> <C> <C>
Emerging Markets 0.460%* 0.720% 1.180%
Equity 0.500 0.106 0.606
Growth 0.500 0.100 0.600
International Equity 0.500 0.198 0.698
Mid Cap Growth 0.500 0.109 0.609
Mid Cap Value 0.000* 0.926 0.926
Small Cap Value 0.750 0.124 0.874
Value 0.500 0.105 0.605
Cash Reserves 0.140* 0.186 0.326
Domestic Fixed Income 0.285* 0.227 0.512
Fixed Income 0.375 0.114 0.489
Fixed Income II 0.375 0.132 0.507
Global Fixed Income 0.375* 0.205 0.580
High Yield 0.375* 0.121 0.496
Intermediate Duration 0.295* 0.225 0.520
International Fixed Income 0.375* 0.169 0.544
Limited Duration 0.280* 0.149 0.429
Mortgage-Backed Securities 0.365* 0.135 0.500
Municipal 0.285* 0.215 0.500
PA Municipal 0.185* 0.315 0.500
Special Purpose Fixed Income 0.375 0.114 0.489
Balanced 0.450 0.126 0.576
Multi-Asset-Class 0.310* 0.274 0.584
Select Equity 0.370* 0.245 0.615
</TABLE>
* Where applicable as described in Financial Highlights, the Total Operating
Expense ratios reflected in the table above are higher than the ratio of
expenses actually deducted from portfolio assets because of the effect of
expense offset arrangements. The result of such arrangements is to offset
expense that otherwise would be deducted from portolio assets. Until
further notice, the Adviser has voluntarily agreed to waive its advisory
fees and reimburse certain expenses to the extent necessary to keep Total
Operating Expenses actually deducted from portfolio assets for the Emerging
Markets, Mid Cap Value, Cash Reserves, Domestic Fixed Income, Global Fixed
Income, High Yield, Intermediate Duration, International Fixed Income,
Limited Duration, Mortgage-Backed Securities, Municipal, PA Municipal,
Multi-Asset-Class and Select Equity Portfolios from exceeding 1.18%, 0.88%,
0.32%, 0.50%, 0.58%, 0.525%, 0.52%, 0.60%, 0.42%, 0.50%, 0.50%, 0.50%,
0.58% and 0.61%, respectively. Absent fee waivers and reimbursements by the
Adviser, Total Operating Expenses would be 1.470%, 3.060%, 0.436%, 0.602%,
0.600%, 0.449%, 0.510%, 0.590%, 0.690%, 0.724%, and 0.745% for the Emerging
Markets, Mid Cap Value, Cash Reserves, Domestic Fixed Income, Intermediate
Duration, Limited Duration, Mortgage-Backed Securities, Municipal, PA
Municipal, Multi-Asset-Class and Select Equity Portfolios, respectively.
<PAGE>
EXAMPLE
The purpose of this table is to assist in understanding the various expenses
that a shareholder in a portfolio will bear directly or indirectly. The
following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return, and (2) redemption at the end of each time period. The example should
not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown. For portfolios with less
than 10 months of operations, only the 1 and 3 year examples are shown.
<TABLE>
<CAPTION>
Portfolio 1 year 3 year 5 year 10 year
---------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Emerging Markets $12 $37 $65 $143
Equity 6 19 34 76
Growth 6 19 -- --
International Equity 7 22 39 87
Mid Cap Growth 6 20 34 76
Mid Cap Value 9 30 51 114
Small Cap Value 9 28 48 108
Value 6 19 34 76
Cash Reserves 3 10 18 41
Domestic Fixed Income 5 16 29 64
Fixed Income 5 16 27 61
Fixed Income II 5 16 28 64
Global Fixed Income 6 19 32 73
High Yield 5 16 28 62
Intermediate Duration 5 17 29 65
International Fixed Income 6 17 30 68
Limited Duration 4 14 24 54
Mortgage-Backed Securities 5 16 28 63
Municipal 5 16 28 63
PA Municipal 5 16 28 63
Special Purpose Fixed Income 5 16 27 61
Balanced 6 18 32 72
Multi-Asset-Class 6 19 33 73
Select Equity 6 20 34 77
</TABLE>
HOW TO USE THIS PROSPECTUS
A PROSPECTUS SUMMARY begins on page 4;
FINANCIAL HIGHLIGHTS and a description of YIELD AND TOTAL RETURN begin on
page 8;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all
portfolios begins on page 16;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin
on page 19;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 38;
GENERAL SHAREHOLDER INFORMATION begins on page 53.
<PAGE>
PROSPECTUS SUMMARY
EQUITY PORTFOLIOS
Emerging Markets - seeks to achieve long-term capital growth by investing
primarily in Common Stocks of Emerging Market Issuers.
Equity - seeks to achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing primarily
in a diversified portfolio of Common Stocks of companies which are deemed by
the Adviser to have earnings growth potential greater than the economy in
general and greater than the expected rate of inflation.
Growth - seeks to achieve long-term capital growth by investing primarily in
a diversified portfolio of Common Stocks of larger size companies that are
deemed by the Adviser to offer long-term growth potential.
International Equity - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of Foreign Equities.
Mid Cap Growth - seeks to achieve long-term capital growth by investing
primarily in a diversified portfolio of Common Stocks of smaller and medium
size companies that are deemed by the Adviser to offer long-term growth
potential.
Mid Cap Value - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
in Common Stocks with equity capitalizations in the range of the companies
represented in the S&P MidCap 400 Index which are deemed by the Adviser to be
relatively undervalued based on certain proprietary measures of value. The
portfolio will typically exhibit a lower price/earnings value ratio than the
S&P MidCap 400 Index.
Small Cap Value - (not currently offered to new investors) seeks to achieve
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, by investing primarily in a diversified
portfolio of Common Stocks with equity capitalizations in the range of
companies represented in the Russell 2000 Index which are deemed by the
Adviser to be relatively undervalued based on certain proprietary measures of
value. The portfolio will typically exhibit lower price/earnings and
price/book value ratios than the Russell 2000.
Value - seeks to achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing primarily
in a diversified portfolio of Common Stocks which are deemed by the Adviser
to be relatively undervalued based on various measures such as price/earnings
ratios and price/book ratios.
FIXED-INCOME PORTFOLIOS
Cash Reserves - seeks to realize maximum current income, consistent with
preservation of capital and liquidity, by investing in a diversified
portfolio of money-market instruments, Cash Equivalents and other short-term
securities having expected maturities of thirteen months or less. The
portfolio seeks to maintain, but does not guarantee, a constant net asset
value of $1.00 per share.
Domestic Fixed Income - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Governments, Corporates rated
"A" or higher, Mortgage Securities, other Fixed-Income Securities rated "A"
or higher of domestic issuers and Derivatives. The portfolio's average
weighted maturity will ordinarily be greater than five years.
<PAGE>
Fixed Income - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of U.S. Governments, Corporates,
Mortgage Securities, Foreign Bonds and other Fixed-Income Securities and
Derivatives. The portfolio's average weighted maturity will ordinarily exceed
five years.
Fixed Income II - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of U.S. Governments, investment grade
Corporates, Mortgage Securities, Foreign Bonds and other Fixed-Income
Securities (rated A or higher) and Derivatives. The portfolio's average
weighted maturity will ordinarily exceed five years.
Global Fixed Income - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high-grade Fixed-Income Securities, Foreign Bonds and
Derivatives representing securities of United States and foreign issuers. The
portfolio's average weighted maturity will ordinarily exceed five years.
High Yield - seeks to achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of High Yield Securities, Corporates and
other Fixed-Income Securities (including bonds rated below investment grade)
and Derivatives. The portfolio's average weighted maturity will ordinarily
exceed five years.
Intermediate Duration - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments and
investment-grade Corporates, Mortgage Securities, Foreign Bonds and other
Fixed-Income Securities and Derivatives. The portfolio will maintain an
average duration of between two and five years.
International Fixed Income - seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high-grade Foreign Bonds and Derivatives. The
portfolio's average weighted maturity will ordinarily exceed five years.
Limited Duration - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of U.S. Governments, Mortgage
Securities, investment-grade Corporates and other Fixed-Income Securities.
The portfolio will maintain an average duration of between one and three
years.
Mortgage-Backed Securities - seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of Mortgage Securities and
other Fixed-Income Securities and Derivatives. The portfolio's average
weighted maturity will ordinarily exceed seven years.
Municipal - seeks to realize above-average total return over a market cycle
of three to five years, consistent with conservation of capital and the
realization of current income which is exempt from federal income tax, by
investing primarily in a diversified portfolio of Municipals and other
Fixed-Income Securities and Derivatives, including a limited percentage of
bonds rated below investment grade. The portfolio's average weighted maturity
will ordinarily be between ten and thirty years.
PA Municipal - seeks to realize above-average total return over a market
cycle of three to five years, consistent with the conservation of capital and
the realization of current income which is exempt from federal income tax and
Pennsylvania personal income tax by investing in a diversified portfolio of
PA Municipals and other Fixed-Income Securities and Derivatives including a
limited percentage of bonds rated below investment grade. The portfolio's
average weighted maturity will ordinarily be between ten and thirty years.
Special Purpose Fixed Income - seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments, Corporates,
Mortgage Securities, Foreign Bonds and other Fixed-Income Securities and
Derivatives. The portfolio is structured to complement an investment in one or
more of the Fund's Equity Portfolios for investors seeking a balanced
investment. The portfolio's average weighted maturity will ordinarily exceed
five years.
<PAGE>
BALANCED INVESTING
Balanced Portfolio - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of Equity Securities, Fixed-Income
Securities and Derivatives. When the Adviser judges the relative outlook for
the equity and fixed-income markets to be neutral, the portfolio will be
invested 60% in equity securities and 40% in fixed-income securities. The
asset mix is actively managed by the Adviser, with equity securities
ordinarily representing between 45% and 75% of the total investment. The
average weighted maturity of the fixed-income portion of the portfolio will
ordinarily be greater than five years.
Multi-Asset-Class Portfolio - seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable risk,
by investing primarily in a diversified portfolio of Equity Securities,
Fixed-Income Securities and High Yield Securities of United States and
foreign issuers and Derivatives. The asset mix is actively managed by the
Adviser.
Balanced Investing and the Balanced Investment Program - MAS offers a
balanced investing option allowing clients to combine investments in two or
more portfolios of the Fund. Clients can authorize MAS to manage the mix of
assets among the portfolios according to their individual objectives and
specifications. If client objectives are consistent with active management of
investments in the Equity and Special Purpose Fixed Income Portfolios around
a 60/40 asset mix, the account will be managed in the same manner as the
Adviser's fully-discretionary, Balanced Investment Program. When client
objectives require use of different portfolios, a different neutral asset mix
or specific limitations, a balanced program is managed according to those
specifications.
SELECT EQUITY PORTFOLIO (Not currently offered to new investors)
The Select Equity Portfolio has the same investment objective as the Equity
Portfolio with the investment restriction that it not invest in companies
listed as of August 31, 1993 by the Investor Responsibility Research Center
as having direct investment or employees in South Africa. The Portfolio is
not currently accepting new investors.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each Portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold
type:
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the
security which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which
entails a risk of loss should a borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest
rates resulting in increases or decreases in the value of the obligations
held by a portfolio. The value of fixed-income securities can be expected
to vary inversely to changes in prevailing interest rates, i.e., as
interest rates decline, market value tends to increase and vice versa;
o Investments in common stocks are subject to market risks which may cause
their prices to fluctuate over time. Changes in the value of portfolio
securities will not necessarily affect cash income derived from these
securities, but will affect a Portfolio's net asset value.
o Securities purchased on a When-Issued basis may decline or appreciate in
market value prior to their actual delivery to the portfolio;
<PAGE>
o Each portfolio (except the Cash Reserves Portfolio) may invest a portion
of its assets in Derivatives including Futures & Options. Futures
contracts, options and options on futures contracts entail certain costs
and risks, including imperfect correlation between the value of the
securities held by the portfolio and the value of the particular
derivative instrument, and the risk that a portfolio could not close out a
futures or options position when it would be most advantageous to do so;
o Investments in floating rate securities (Floaters) and inverse floating
rate securities (Inverse Floaters) and mortgage-backed securities
(Mortgage Securities), including principal-only and interest-only Stripped
Mortgage-Backed Securities (SMBS), may be highly sensitive to interest
rate changes, and highly sensitive to the rate of principal payments
(including prepayments on underlying mortgage assets);
o From time to time Congress has considered proposals to restrict or
eliminate the tax-exempt status of Municipals. If such proposals were
enacted in the future, the Municipal Portfolio and the PA Municipal
Portfolio would reconsider their investment objectives and policies;
o Investments in securities rated below investment grade, generally referred
to as High Yield, high risk or junk bonds, carry a high degree of credit
risk and are considered speculative by the major rating agencies;
o Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies. See
Foreign Investing. The portfolios investing in foreign securities may also
engage in foreign currency exchange transactions. See Forwards, Futures &
Options, and Swaps; and,
o The Emerging Markets, Global Fixed Income, and International Fixed Income
Portfolios are Non-Diversified for purposes of the Investment Company Act
of 1940, as amended, meaning that they may invest a greater percentage of
assets in the securities of one issuer than the other portfolios.
HOW TO INVEST: Institutional Class Shares of each portfolio are available to
clients of the Adviser with combined investments of $5,000,000 and
Shareholder Organizations who have a contractual arrangement with the Fund,
including institutions such as trusts, foundations or broker-dealers
purchasing for the accounts of others. Shares are offered directly to
investors without a sales commission at the net asset value of the portfolio
next determined after receipt of the order. Share purchases may be made by
sending investments directly to the Fund, subject to acceptance by the Fund.
The Fund also offers Investment and Adviser Class Shares which differ from
the Institutional Class Shares in expenses charged and purchase requirements.
Further information relating to the other classes may be obtained by calling
800-354-8185.
HOW TO REDEEM: Shares of each portfolio may be redeemed at any time at the
net asset value of the portfolio next determined after receipt of the
redemption request. The redemption price may be more or less than the
purchase price, except ordinarily in the case of the Cash Reserves Portfolio
which seeks to maintain, but does not guarantee, a constant net asset value
per share of $1.00. See Redemption of Shares and Shareholder Services.
THE FUND'S INVESTMENT ADVISER: Miller Anderson & Sherrerd, LLP (the "Adviser"
or "MAS") is a Pennsylvania limited liability partnership founded in 1969,
wholly owned by indirect subsidiaries of the Morgan Stanley Group, Inc. and
is located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser is
an Equal Opportunity/Affirmative Action Employer. The Adviser provides
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors, and as of the date of this
Prospectus had in excess of $35 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor")
provides distribution services to the Fund.
ADMINISTRATIVE SERVICES: The Adviser provides the Fund directly, or through
third parties, with fund administration services. Chase Global Funds Services
Company, a subsidiary of The Chase Manhattan Bank, N.A., serves as Transfer
Agent to the Fund. See Administrative Services.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratios for a share outstanding throughout each
period
The following information should be read in conjunction with the Fund's
financial statements which are included in the Annual Report to Shareholders
incorporated by reference in the Statement of Additional Information. The
Fund's financial statements for the year ended September 30, 1995 have been
examined by Price Waterhouse LLP whose opinion thereon (which was
unqualified) is also incorporated by reference in the Statement of Additional
Information.
(Adjusted to reflect a 2.5 for 1 share split as of August 13,
1993 except for the Emerging Markets, Mid Cap Value, Cash Reserves, Global
Fixed Income, Intermediate Duration, International Fixed Income and
Multi-Asset-Class Portfolios)
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio (Commencement of Operations 2/28/95)##
1995 $10.00 $0.10 $1.53 $1.63 -- -- --
Equity Portfolio (Commencement of Operations 11/14/84)##
1995 $21.05 $0.52 $4.55 $5.07 ($0.52) ($1.17) --
1994 22.82 0.44 0.41 0.85 (0.41) (2.21) --
1993 22.04 0.41 1.95 2.36 (0.43) (1.15) --
1992 20.78 0.43 1.86 2.29 (0.42) (0.61) --
1991 15.86 0.44 5.64 6.08 (0.44) (0.72) --
1990 18.65 0.48 (2.57) (2.09) (0.54) (0.16) --
1989 14.48 0.51 4.15 4.66 (0.46) (0.03) --
1988 17.14 0.40 (1.93) (1.53) (0.32) (0.81) --
1987 14.09 0.43 3.67 4.10 (0.41) (0.64) --
1986 10.83 0.45 3.49 3.94 (0.49) (0.19) --
International Equity Portfolio (Commencement of Operations 11/25/88)##
1995 $14.52 $0.19 ($0.75) ($0.56) -- ($1.35) ($0.10)+
1994 13.18 0.12 1.63 1.75 (0.16) (0.25) --
1993 11.03 0.21 2.14 2.35 (0.20) -- --
1992 11.56 0.36 (0.33) 0.03 (0.56) -- --
1991 9.83 0.22 1.83 2.05 (0.23) (0.09) --
1990 11.86 0.26 (1.90) (1.64) (0.31) (0.08) --
1989 10.00 0.26 1.75 2.01 (0.15) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio (Commencement of Operations 2/28/95)##
1995 -- $11.63 16.30% $42,459 1.18%*++ 2.04%* 63%
Equity Portfolio (Commencement of Operations 11/14/84)##
1995 $(1.69) $24.43 26.15% $1,597,632 0.61% 2.39% 67%
1994 (2.62) 21.05 4.11 1,193,017 0.60 2.10 41
1993 (1.58) 22.82 11.05 1,098,003 0.59 1.86 51
1992 (1.03) 22.04 11.55 918,989 0.59 2.03 21
1991 (1.16) 20.78 40.18 675,487 0.60 2.36 33
1990 (0.70) 15.86 (11.67) 473,261 0.59 2.66 44
1989 (0.49) 18.65 32.95 602,261 0.59 3.29 29
1988 (1.13) 14.48 (8.41) 385,864 0.62 2.99 51
1987 (1.05) 17.14 30.89 322,803 0.66 2.88 66
1986 (0.68) 14.09 37.60 108,367 0.68 3.17 52
International Equity Portfolio (Commencement of Operations 11/25/88)##
1995 ($1.45) $12.51 (3.36%) $1,160,986 0.70% 1.90% 112%
1994 (0.41) 14.52 13.33 1,132,867 0.64 0.89 69
1993 (0.20) 13.18 21.64 891,675 0.66 1.23 43
1992 (0.56) 11.03 0.37 512,127 0.70 1.41 42
1991 (0.32) 11.56 21.22 274,295 0.67 2.08 51
1990 (0.39) 9.83 (14.38) 126,035 0.65 2.40 45
1989 (0.15) 11.86 20.36 87,083 0.63* 3.05* 4
</TABLE>
<PAGE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the Emerging Markets Portfolio from exceeding 1.18%.
Voluntarily waived fees and reimbursed expenses totalled 0.29%* for the
period ended September 30, 1995.
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Emerging Markets Portfolio excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would not significantly differ. For the period ended September 30,
1995, the Ratio of Expenses to Average Net Assets for the Equity and
International Equity Portfolios excludes the effect of expense offsets. If
expense offsets were included, the Ratio of Expenses to Average Net Assets
would be 0.60% and 0.66%, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1995 $16.29 $0.03 $4.21 $4.24 ($0.03) ($1.90) --
1994 18.56 0.02 (0.58) (0.56) (0.01) (1.70) --
1993 14.51 0.01 4.80 4.81 -- (0.76) --
1992 14.92 0.01 0.44 0.45 (0.03) (0.83) --
1991 9.00 0.04 5.91 5.95 (0.03) -- --
1990 10.00 0.02 (1.01) (0.99) (0.01) -- --
Mid Cap Value Portfolio (Commencement of Operations 12/30/94)##
1995 $10.00 $0.55o $2.90 $3.45 -- -- --
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1995 $17.67 $0.19 $2.49 $2.68 ($0.14) ($1.93) --
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) --
1993 12.84 0.18 4.64 4.82 (0.11) -- --
1992 11.45 0.10 1.48 1.58 (0.19) -- --
1991 7.20 0.23 4.21 4.44 (0.19) -- --
1990 10.42 0.28 (3.05) (2.77) (0.45) -- --
1989 8.54 0.34 1.74 2.08 (0.20) -- --
1988 10.24 0.18 (1.42) (1.24) (0.14) (0.32) --
1987 9.35 0.13 0.84 0.97 (0.08) -- --
1986 10.00 0.08 (0.73) (0.65) -- -- --
Value Portfolio (Commencement of Operations 11/05/84)##
1995 $12.63 $0.31 $3.34 $3.65 ($0.31) ($1.08) --
1994 12.76 0.30 0.59 0.89 (0.29) (0.73) --
1993 12.67 0.30 1.92 2.22 (0.31) (1.82) --
1992 12.92 0.35 1.05 1.40 (0.38) (1.27) --
1991 10.29 0.44 3.79 4.23 (0.44) (1.16) --
1990 14.56 0.52 (3.14) (2.62) (0.62) (1.03) --
1989 12.42 0.54 2.73 3.27 (0.47) (0.66) --
1988 15.81 0.48 (1.68) (1.20) (0.46) (1.73) --
1987 14.26 0.55 2.47 3.02 (0.53) (0.94) --
1986 10.78 0.57 3.89 4.46 (0.58) (0.40) --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1995 ($1.93) $18.60 30.56% $373,547 0.61% 0.21% 129%
1994 (1.71) 16.29 (3.28) 302,995 0.60 0.12 55
1993 (0.76) 18.56 33.92 309,459 0.59 0.07 69
1992 (0.86) 14.51 2.87 192,817 0.60 0.05 39
1991 (0.03) 14.92 66.26 171,163 0.60 0.29 46
1990 (0.01) 9.00 (9.98) 76,398 0.64* 0.34* 23
Mid Cap Value Portfolio (Commencement of Operations 12/30/94)##
1995 -- $13.45 34.50% $4,507 0.93%*++ 10.13%*o 639%o
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1995 ($2.07) $18.28 18.39% $430,368 0.87% 1.20% 119%
1994 (1.18) 17.67 8.04 308,156 0.88 0.91 162
1993 (0.11) 17.55 37.72 175,029 0.88 1.33 93
1992 (0.19) 12.84 14.12 105,886 0.86 1.06 50
1991 (0.19) 11.45 63.07 52,182 0.88 1.70 53
1990 (0.45) 7.20 (27.63) 100,848 0.85 1.77 59
1989 (0.20) 10.42 24.85 189,223 0.85 3.48 36
1988 (0.46) 8.54 (11.50) 202,500 0.86 2.32 41
1987 (0.08) 10.24 10.53 201,621 0.92 1.67 38
1986 -- 9.35 (6.52) 87,755 0.90 2.27* 0
Value Portfolio (Commencement of Operations 11/05/84)##
1995 ($1.39) $14.89 32.58% $1,271,586 0.60% 2.43% 56%
1994 (1.02) 12.63 7.45 981,337 0.61 2.40 54
1993 (2.13) 12.76 19.67 762,175 0.59 2.48 43
1992 (1.65) 12.67 12.83 448,329 0.60 2.87 55
1991 (1.60) 12.92 45.54 458,117 0.60 3.67 64
1990 (1.65) 10.29 (19.88) 369,044 0.59 3.87 51
1989 (1.13) 14.56 28.49 726,776 0.59 4.05 35
1988 (2.19) 12.42 (5.40) 619,287 0.59 3.96 47
1987 (1.47) 15.81 22.99 700,538 0.62 3.68 28
1986 (0.98) 14.26 43.65 636,805 0.66 4.26 33
</TABLE>
<PAGE>
* Annualized
** Total return figures for partial years are not annualized.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary in order to keep the total annual
operating expenses for the Mid Cap Value Portfolio from exceeding 0.88%.
Voluntarily waived and reimbursed expenses totalled 2.13%* for the period
ended September 30, 1995.
# Formerly Emerging Growth Portfolio (through May 17, 1995) and Small
Capitalization Value Portfolio (through December 23, 1994)
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Mid Cap Growth and Mid Cap Value Portfolios excludes the
effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.60% and 0.88%*, respectively. For
the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Small Cap Value Portfolio excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would not significantly differ. For the period ended September 30,
1995, the Ratio of Expenses to Average Net Assets for the Value Portfolio
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would not significantly differ.
o Net Investment Income, the Ratio of Net Investment Income to Average Net
Assets and the Portfolio Turnover Rate reflect activity relating to a
nonrecurring initiative to invest in higher-paying dividend income producing
securities.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Operations 8/29/90)##
1995 $1.000 $.055 -- $.055 ($.055) -- --
1994 1.000 .034 -- .034 (.034) -- --
1993 1.000 .028 -- .028 (.028) -- --
1992 1.000 .038 -- .038 (.038) -- --
1991 1.000 .064 -- .064 (.064) -- --
1990 1.000 .007 -- .007 (.007) -- --
Domestic Fixed Income Portfolio (Commencement of Operations 9/30/87)#,##
1995 $9.87 $0.52 $0.87 $1.39 ($0.23) -- --
1994 11.99 0.94 (1.23) (0.29) (0.95) ($0.73) ($0.15)+
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) --
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) --
1991 10.26 0.92 1.10 2.02 (0.94) -- --
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) --
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) --
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) --
1987 10.00 -- (0.01) (0.01) -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Operations 8/29/90)##
1995 ($.055) $1.000 5.57% $44,624 0.33%++ 5.45% N/A
1994 (.034) 1.000 3.40 37,933 0.32++ 3.70 N/A
1993 (.028) 1.000 2.81 10,717 0.32++ 2.78 N/A
1992 (.038) 1.000 3.89 12,935 0.32++ 3.95 N/A
1991 (.064) 1.000 6.63 24,163 0.32++ 6.57 N/A
1990 (.007) 1.000 0.74 23,285 0.48* 8.31* N/A
Domestic Fixed Income Portfolio (Commencement of Operations 9/30/87)#, ##
1995 ($0.23) $11.03 14.33% $36,147 0.51%++ 6.80% 313%
1994 (1.83) 9.87 (2.87) 36,521 0.50++ 7.65 78
1993 (1.31) 11.99 14.08 90,350 0.50 7.15 96
1992 (1.17) 11.80 15.41 98,130 0.47 7.67 136
1991 (0.94) 11.34 20.99 83,200 0.48 8.18 131
1990 (1.06) 10.26 3.90 77,622 0.48 8.35 181
1989 (0.82) 10.90 9.14 68,855 0.49 8.24 219
1988 (0.46) 10.78 12.63 53,236 0.50 8.62 224
1987 -- 9.99 (0.10) 14,981 N/A N/A N/A
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of realized net gains.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the Cash Reserves and Domestic Fixed Income Portfolios
from exceeding 0.32% and 0.50% respectively for the periods indicated.
Voluntarily waived fees and reimbursed expenses totalled 0.05%, 0.08%, 0.24%,
0.14% and 0.11% for the years 1991, 1992, 1993, 1994 and 1995, respectively,
for the Cash Reserves Portfolio. For 1994 and 1995, such fees and expenses
were 0.03% and 0.09%, respectively, for the Domestic Fixed Income Portfolio.
# Formerly Select Fixed Income Portfolio (through December 23, 1994)
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Cash Reserves and Domestic Fixed Income Portfolios excludes
the effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.32% and 0.50%, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Operations 11/14/84)##
1995 $10.93 $0.80 $0.69 $1.49 ($0.60) -- --
1994 12.86 0.77 (1.28) (0.51) (0.82) ($0.47) ($0.13)+
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) --
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) --
1991 10.94 0.94 1.25 2.19 (0.93) -- --
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) --
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) --
1988 10.86 0.97 0.43 1.40 (0.86) -- --
1987 11.95 0.93 (0.61) 0.32 (0.91) (0.50) --
1986 10.92 0.99 1.20 2.19 (1.02) (0.14) --
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1995 $10.42 $0.71 $0.71 $1.42 ($0.51) -- --
1994 11.97 0.63 (1.16) (0.53) (0.67) ($0.21) ($0.14)+
1993 11.67 0.69 0.77 1.46 (0.61) (0.55) --
1992 11.34 0.77 0.61 1.38 (0.81) (0.24) --
1991 10.09 0.81 1.10 1.91 (0.66) -- --
1990 10.00 0.04 0.05 0.09 -- -- --
Global Fixed Income Portfolio (Commencement of Operations 4/30/93)##
1995 $10.20 $0.71 $0.81 $1.52 ($0.67) -- --
1994 10.67 0.58 (0.61) (0.03) (0.41) ($0.03) --
1993 10.00 0.13 0.61 0.74 (0.07) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Operations 11/14/84)##
1995 ($0.60) $11.82 14.19% $1,487,409 0.49% 7.28% 140%
1994 (1.42) 10.93 (4.43) 1,194,957 0.49 6.79 100
1993 (1.44) 12.86 14.26 909,738 0.47 7.06 144
1992 (1.17) 12.67 14.35 859,712 0.47 7.50 137
1991 (0.93) 12.20 21.12 831,547 0.47 8.25 143
1990 (1.13) 10.94 3.79 666,736 0.46 8.43 209
1989 (0.77) 11.64 9.25 559,995 0.47 8.36 100
1988 (0.86) 11.40 13.43 405,385 0.49 8.91 168
1987 (1.41) 10.86 2.55 290,824 0.52 8.54 202
1986 (1.16) 11.95 21.27 95,898 0.55 8.39 169
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1995 ($0.51) $11.33 14.13% $176,945 0.51% 6.75% 153%
1994 (1.02) 10.42 (4.76) 129,902 0.51 6.07 137
1993 (1.16) 11.97 13.53 94,836 0.51 6.17 101
1992 (1.05) 11.67 13.02 78,302 0.49 7.05 182
1991 (0.66) 11.34 19.59 42,881 0.49 7.76 190
1990 -- 10.09 0.88 20,729 0.52* 8.00* 7
Global Fixed Income Portfolio (Commencement of Operations 4/30/93)##
1995 ($0.67) $11.05 15.54% $55,147 0.58% 6.34% 118%
1994 (0.44) 10.20 (0.29) 43,066 0.57 5.48 117
1993 (0.07) 10.67 7.43 53,164 0.58*++ 5.08* 30
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of realized net gain.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the Global Fixed Income Portfolio from exceeding
0.58%. Voluntarily waived fees and reimbursed expenses totalled 0.18%* for
the Global Fixed Income Portfolio in 1993.
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Fixed Income, Fixed Income II and Global Fixed Income
Portfolios excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would be 0.48%, 0.49%
and 0.56%, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Operations 2/28/89)#, ##
1995 $ 8.97 $0.90 $ 0.19 $1.09 ($0.85) ($0.08) ($ 0.05)+
1994 9.49 0.75 (0.42) 0.33 (0.69) (0.16) --
1993 8.58 0.73 0.90 1.63 (0.72) -- --
1992 7.80 0.74 0.89 1.63 (0.85) -- --
1991 7.07 1.42 0.82 2.24 (1.51) -- --
1990 9.98 1.36 (2.82) (1.46) (1.42) (0.03) --
1989 10.00 0.55 (0.44) 0.11 (0.13) -- --
Intermediate Duration Portfolio (Commencement of Operations 10/3/94)#, ##
1995 $10.00 $0.69 $ 0.42 $1.11 ($0.43) -- --
International Fixed Income Portfolio (Commencement of Operations 4/29/84)##
1995 $10.05 $0.67 $ 0.92 $1.59 ($0.63) -- --
1994 10.00 0.21 (0.11) 0.10 (0.05) -- --
Limited Duration Portfolio (Commencement of Operations 3/31/92)#, ##
1995 $10.19 $0.56 $ 0.22 $0.78 ($0.55) -- ($ 0.01)+
1994 10.72 0.56 (0.52) 0.04 (0.51) ($0.04) (0.02) +
1993 10.58 0.32 0.22 0.54 (0.32) (0.08) --
1992 10.00 0.19 0.49 0.68 (0.10) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Operations 2/28/89)#, ##
1995 ($0.98) $ 9.08 13.58% $220,785 0.50% 10.68% 96%
1994 (0.85) 8.97 3.57 182,969 0.50 9.01 112
1993 (0.72) 9.49 20.12 50,396 0.53++ 8.94 99
1992 (0.85) 8.58 22.49 20,491 0.53++ 9.74 148
1991 (1.51) 7.80 36.70 6,453 0.76 19.45 106
1990 (1.45) 7.07 (16.26) 4,820 0.82 16.93 65
1989 (0.13) 9.98 0.91 3,479 0.73* 11.66* 17
Intermediate Duration Portfolio (Commencement of Operations 10/3/94)#, ##
1995 ($0.43) $10.68 11.39% $ 19,237 0.52*++ 6.56%* 168%
International Fixed Income Portfolio (Commencement of Operations 4/29/84)##
1995 ($0.63) $11.01 16.36% $127,882 0.54% 6.35% 140%
1994 (0.05) 10.05 1.01 66,879 0.60*++ 5.83* 31
Limited Duration Portfolio (Commencement of Operations 3/31/92)#, ##
1995 ($0.56) $10.41 7.95% $100,186 0.43%++ 5.96% 119%
1994 (0.57) 10.19 0.40 62,775 0.41 4.16 192
1993 (0.40) 10.72 5.33 128,991 0.42++ 3.92 217
1992 (0.10) 10.58 6.90 13,065 0.49* 4.99* 159
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the High Yield, Intermediate Duration, International
Fixed Income and Limited Duration Portfolios from exceeding 0.525%, 0.52%,
0.60%, and 0.42%, respectively. Voluntarily waived fees and reimbursed
expenses totalled 0.22% and 0.09% in 1992 and 1993 for the High Yield
Portfolio; 0.08%* for the period ended September 30, 1995 for the
Intermediate Duration Portfolio; 0.11%* in 1994 for the International Fixed
Income Portfolio; and 0.03% and 0.02% for the years ended September 30, 1993
and 1995, respectively.
# Formerly High Yield Securities Portfolio, Intermediate Duration Fixed Income
Portfolio and Limited Duration Fixed Income Portfolio, respectively (through
December 23, 1994).
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Intermediate Duration and International Fixed Income
Portfolios excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would not significantly
differ. For the period ended September 30, 1995, the Ratio of Expenses to
Average Net Assets for the High Yield and Limited Duration Portfolios
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would be 0.49% and 0.42%,
respectively.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1995 $9.95 $0.72 $0.47 $1.19 ($0.65) -- --
1994 10.95 0.52 (0.83) (0.31) (0.45) ($0.21) ($0.03)+
1993 10.44 0.63 0.48 1.11 (0.60) -- --
1992 10.00 0.29 0.28 0.57 (0.13) -- --
Municipal Portfolio (Commencement of Operations 10/01/92)#, ##
1995 $10.04 $0.59 $0.71 $1.30 ($0.59) -- --
1994 11.15 0.51 (1.01) (0.50) (0.54) -- ($0.07)+
1993 10.00 0.37 1.04 1.41 (0.26) -- --
PA Municipal Portfolio (Commencement of Operations 10/01/92)#
1995 $10.13 $0.58 $0.77 $1.35 ($0.57) -- --
1994 11.26 0.56 (1.00) (0.44) (0.64) ($0.05) --
1993 10.00 0.39 1.17 1.56 (0.30) -- --
Special Purpose Fixed Income Portfolio (Commencement of Operations 3/31/92)
1995 $11.52 $0.91 $0.75 $1.66 ($0.65) -- --
1994 13.40 0.80 (1.28) (0.48) (0.78) ($0.53) ($0.09)+
1993 12.72 0.88 0.92 1.80 (0.82) (0.30) --
1992 11.80 0.39 0.72 1.11 (0.19) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1995 ($0.65) $10.49 12.52% $49,766 0.50%++ 6.35% 107%
1994 (0.69) 9.95 (2.95) 119,518 0.50++ 5.30 220
1993 (0.60) 10.95 11.03 50,249 0.50++ 6.92 93
1992 (0.13) 10.44 5.75 13,601 0.50*++ 8.11* 133
Municipal Portfolio (Commencement of Operations 10/01/92)#, ##
1995 ($0.59) $10.75 13.37% $36,040 0.50%++ 5.64% 58%
1994 (0.61) 10.04 (4.64) 38,549 0.50++ 4.98 34
1993 (0.26) 11.15 14.20 26,914 0.50*++ 4.65* 66
PA Municipal Portfolio (Commencement of Operations 10/01/92)#
1995 ($0.57) $10.91 13.74% $15,734 0.50%++ 5.56% 57%
1994 (0.69) 10.13 (4.08) 23,515 0.50++ 5.39 69
1993 (0.30) 11.26 15.81 15,633 0.50*++ 4.74* 94
Special Purpose Fixed Income Portfolio (Commencement of Operations 3/31/92)
1995 ($0.65) $12.53 14.97% $390,258 0.49% 7.33% 143%
1994 (1.40) 11.52 (4.00) 384,731 0.50 6.66 100
1993 (1.12) 13.40 15.19 300,185 0.48 6.84 124
1992 (0.19) 12.72 9.47 274,195 0.53* 6.94* 138
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the Mortgage-Backed Securities, Municipal and PA
Municipal Portfolios from exceeding 0.50%, 0.50% and 0.50%, respectively, for
the periods indicated. Voluntarily waived fees and reimbursed expenses
totalled 0.30%*,0.06%, 0.01% for the period ended September 30, 1992, and the
years ended 1993, 1994 and 1995, respectively, for the Mortgage-Backed
Securities Portfolio; 0.20%*, 0.06% and 0.09% in 1993, 1994 and 1995 for the
Municipal Portfolio; and 0.25%*, 0.09% and 0.19%* for 1993, 1994 and 1995,
respectively, for the PA Municipal Portfolio.
+ Represents distributions in excess of net investment income.
# Formerly Municipal Fixed Income Portfolio and Pennsylvania Municipal Fixed
Income Portfolio, respectively (through December 23, 1994).
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Mortgage-Backed Securities and the Municipal Portfolios
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would not significantly differ. For
the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Special Purpose Fixed Income Portfolio excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be 0.48%.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Operations 12/31/92)##
1995 $11.28 $0.54 $1.78 $2.32 ($0.47) ($0.07) --
1994 11.84 0.47 (0.45) 0.02 (0.43) (0.15) --
1993 11.06 0.25 0.66 0.91 (0.13) -- --
Multi-Asset-Class Portfolio (Commencement of Operations 7/29/94)#, ##
1995 $ 9.97 $0.44 $1.33 $1.77 ($0.40) -- --
1994 10.00 0.07 (0.10) (0.03) -- -- --
Select Equity Portfolio (Commencement of Operations 2/26/88)##
1995 $17.29 $0.27 $2.07 $2.34 ($0.30) ($7.53) --
1994 18.41 0.71 0.06 0.77 (0.70) (1.19) --
1993 17.65 0.31 1.49 1.80 (0.32) (0.72) --
1992 16.09 0.32 1.76 2.08 (0.31) (0.21) --
1991 11.86 0.34 4.26 4.60 (0.33) (0.04) --
1990 13.69 0.30 (1.63) (1.33) (0.34) (0.16) --
1989 10.90 0.38 2.82 3.20 (0.34) (0.07) --
1988 10.00 0.19 0.82 1.01 (0.11) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Operations 12/31/92)##
1995 ($0.54) $13.06 21.37% $334,630 0.58% 4.55% 95%
1994 (0.58) 11.28 0.19 309,596 0.58 4.06 75
1993 (0.13) 11.84 8.31 291,762 0.58* 3.99* 62
Multi-Asset-Class Portfolio (Commencement of Operations 7/29/94)#, ##
1995 ($0.40) $11.34 18.28% $ 96,839 0.58%++ 4.56% 112%
1994 -- 9.97 (0.30) 51,877 0.58*++ 4.39* 20
Select Equity Portfolio (Commencement of Operations 2/26/88)##
1995 ($7.83) $11.80 26.22% $ 29,581 0.62%++ 2.48% 73%
1994 (1.89) 17.29 4.50 29,155 0.62++ 1.75 27
1993 (1.04) 18.41 10.46 295,050 0.60 1.78 33
1992 (0.52) 17.65 13.26 205,264 0.60 1.89 19
1991 (0.37) 16.09 39.48 118,557 0.60 2.41 29
1990 (0.50) 11.86 (10.07) 71,481 0.61 2.75 39
1989 (0.41) 13.69 30.20 34,415 0.64 3.29 35
1988 (0.11) 10.90 10.13 20,541 0.70* 3.13* 16
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
++ The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary, if any, to keep the total annual
operating expenses for the Multi-Asset-Class and the Select Equity Portfolios
from exceeding 0.58% and 0.61%, respectively. Voluntarily waived fees for
1994 and 1995 were 0.26% and 0.14%, respectively, for the Multi-Asset-Class
Portfolio; for the Select Equity Portfolio, such fees were less than 0.01%
and 0.13% for 1994 and 1995, respectively.
# Formerly known as Global Balanced Portfolio (through December 23, 1994).
## For the period ended September 30, 1995, the Ratio of Expenses to Average Net
Assets for the Multi-Asset-Class Portfolio excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would not significantly differ. For the period ended September 30,
1995, the Ratio of Expenses to Average Net Assets for the Balanced and Select
Equity Portfolios excludes the effect of expense offsets. If expense offsets
were included, the Ratio of Expenses to Average Net Assets would be 0.57% and
0.61%, respectively.
<PAGE>
YIELD AND TOTAL RETURN:
From time to time each portfolio of the Fund advertises its yield and total
return. Both yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The average annual total
return reflects changes in the price of a portfolio's shares and assumes that
any income dividends and/or capital gain distributions made by the portfolio
during the period were reinvested in additional shares of the portfolio.
Figures will be given for one-, five- and ten-year periods ending with the
most recent calendar quarter-end (if applicable), and may be given for other
periods as well (such as from commencement of the portfolio's operations).
When considering average total return figures for periods longer than one
year, it is important to note that a portfolio's annual total return for any
one year in the period might have been greater or less than the average for
the entire period.
In addition to average annual total return, a portfolio may also quote an
aggregate total return for various periods representing the cumulative change
in value of an investment in a portfolio for a specific period. Aggregate
total returns may be shown by means of schedules, charts or graphs and may
include subtotals of the various components of total return (e.g., income
dividends or returns for specific types of securities such as industry or
country types).
The yield of a portfolio (other than the Cash Reserves Portfolio) is computed
by dividing the net investment income per share (using the average number of
shares entitled to receive dividends) earned during the 30-day period stated
in the advertisement by the closing price per share on the last day of the
period. For the purpose of determining net investment income, the calculation
includes as expenses of the portfolio all recurring fees and any non
recurring charges for the period stated. The yield formula provides for
semiannual compounding, which assumes that net investment income is earned
and reinvested at a constant rate and annualized at the end of a six-month
period. Methods used to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ from the
accounting methods used by the portfolio to maintain its books and records,
therefore the advertised 30-day yield may not reflect the income paid to your
own account or the yield reported in the portfolio's reports to shareholders.
A portfolio may also advertise or quote a yield which is gross of expenses.
The Municipal and PA Municipal Portfolios may also advertise or quote
tax-equivalent yields and after-tax total returns. A tax-equivalent yield
shows the level of taxable yield needed to produce an after-tax equivalent to
the portfolio's tax-free yield. This is done by increasing the portfolio's
yield (computed as above) by the amount necessary to reflect the payment of
Federal income tax (and Pennsylvania income tax, in the case of the PA
Municipal Portfolio) at a tax rate stated in the advertisement or quote. An
after-tax return reflects the average annual or cumulative change in value
over the measuring period after the deduction of taxes at rates stated in the
advertisement or quote.
From time to time the Cash Reserves Portfolio may advertise or quote its
yield and effective yield. The yield of the Cash Reserves Portfolio refers to
the income generated by an investment in the portfolio over a stated seven
day period. This income is then annualized. That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly, but the income earned over the
seven day period by an investment in the portfolio is assumed to be
reinvested when the return is annualized. The "effective yield" will be
higher than the yield because of the compounding effect of this assumed
reinvestment.
The performance of a portfolio may be compared to data prepared by
independent services which monitor the performance of investment companies,
data reported in financial and industry publications, returns of other
investment advisers and mutual funds, and various indices as further
described in the Statement of Additional Information.
The performance of Institutional Class Shares, Investment Class Shares and
Adviser Class Shares differ because of any class specific expenses paid by
each class and the shareholder servicing fees charged to Investment Class
Shares and distribution fees charged to Adviser Class Shares.
<PAGE>
The Annual Report to Shareholders of the Fund for the Fund's most recent
fiscal year-end contains additional performance information that includes
comparisons with appropriate indices. The Annual Report is available without
charge upon request by writing to the Fund or calling the Client Services
Group at the telephone number shown on the front cover of this Prospectus.
GENERAL INFORMATION:
The following information relates to each portfolio of the Fund and should be
read in conjunction with the specific information about each portfolio.
Objectives: Each portfolio seeks to achieve its investment objective relative
to the universe of securities in which it is authorized to invest and,
accordingly, the total return or current income achieved by a portfolio may
not be as great as that achieved by another portfolio that can invest in a
broader range of securities. Fixed-Income Portfolios will seek to produce
total return by actively trading portfolio securities. The objective of each
portfolio is fundamental and may only be changed with approval of holders of
a majority of the shares of each portfolio. The achievement of any
portfolio's objective cannot be assured.
Suitability: The Fund's portfolios are designed for long-term investors who
can accept the risks entailed in investing in the stock and bond markets, and
are not meant to provide a vehicle for playing short-term swings in the
market. The Fund's portfolios are designed principally for the investments of
tax-exempt fiduciary investors who are entrusted with the responsibility of
investing assets held for the benefit of others. Since such investors are not
subject to Federal income taxes, securities transactions for all portfolios
except the Municipal and PA Municipal Portfolios will not be influenced by
the different tax treatment of long-term capital gains, short-term capital
gains, and dividend income under the Internal Revenue Code. Investments in
the Municipal and PA Municipal Portfolios are suitable for taxable investors
who would benefit from the portfolios' tax-exempt income.
Securities Lending: Each portfolio may lend its securities to qualified
brokers, dealers, banks and other financial institutions for the purpose of
realizing additional income. Loans of securities will be collateralized by
cash, letters of credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities. In addition, a portfolio will
not loan its portfolio securities to the extent that greater than one-third
of its total assets, at fair market value, would be committed to loans at
that time.
Illiquid Securities/Restricted Securities: Each of the portfolios may invest
up to 15% of its net assets (except the Cash Reserves Portfolio, which may
invest up to 10% of its net assets) in securities that are illiquid by virtue
of the absence of a readily available market, or because of legal or
contractual restrictions on resale. This policy does not limit the
acquisition of (i) restricted securities eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933
or (ii) commercial paper issued pursuant to Section 4(2) under the Securities
Act of 1933, that are determined to be liquid in accordance with guidelines
established by the Fund's Board of Trustees.
Turnover: The Adviser manages the portfolios generally without regard to
restrictions on portfolio Turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the portfolios
will not trade for short-term profits, but when circumstances warrant,
investments may be sold without regard to the length of time held.
The larger than expected turnover rate for the Mid Cap Value Portfolio was
due to the small size of the portfolio and the fact that it commenced
operations during the fiscal year. In addition, the portfolio entered into
various transactions which increased the turnover rate in order to qualify
under certain tax rules. With respect to the Fixed Income Portfolios and the
fixed-income portion of the Balanced Portfolio, the annual turnover rate will
ordinarily exceed 100% due to changes in portfolio duration, yield curve
strategy or commitments to forward delivery mortgage-backed securities.
<PAGE>
Portfolio turnover rates for certain portfolios are as follows: International
Equity - 112%, Mid Cap Growth - 129%, Mid Cap Value - 639%, Domestic Fixed
Income - 313%, Fixed Income - 140%, Fixed Income II - 153%, Global Fixed
Income - 118%, Intermediate Duration - 168%, International Fixed Income -
140%, Limited Duration - 119%, Mortgage-Backed Securities - 107%, Special
Purpose Fixed Income - 143% and Multi-Asset-Class - 112%.
High rates of portfolio turnover necessarily result in correspondingly
heavier brokerage and portfolio trading costs which are paid by a portfolio.
Trading in Fixed-Income Securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. In
addition to portfolio trading costs, higher rates of portfolio turnover may
result in the realization of capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes.
Cash Equivalents/Temporary Defensive Investing: Although each portfolio
intends to remain substantially fully invested, a small percentage of a
portfolio's assets are generally held in the form of Cash Equivalents in
order to meet redemption requests and otherwise manage the daily affairs of
each portfolio. In addition, any portfolio may, when the Adviser deems that
market conditions are such that a temporary defensive approach is desirable,
invest in cash equivalents or the Fixed-Income Securities listed for that
portfolio without limit. In addition, the Adviser may, for temporary
defensive purposes, increase or decrease the average weighted maturity or
duration of any Fixed-Income portfolio without regard to that portfolio's
usual average weighted maturity.
Concentration: Concentration is defined as investment of 25% or more of a
portfolio's total assets in the securities of issuers operating in any one
industry. Except as provided in a portfolio's specific investment policies, a
portfolio will not concentrate investments in any one industry.
Select Equity Portfolio: The Select Equity Portfolio has the same investment
objective as the Equity Portfolio with the investment restriction that it
will not invest in companies listed as of August 31, 1993 by the Investor
Responsibility Research Center as having any direct investment or employees
in South Africa. The Select Equity Portfolio is not currently accepting new
investors. The Investor Responsibility Research Center (IRRC) is an
independent, not-for-profit corporation that conducts research and publishes
impartial reports on contemporary social and public policy issues and the
impact of those issues on major corporations and institutional investors. In
May 1986 the IRRC's South Africa Review Section first published a
comprehensive directory of U.S. and Canadian companies which do business in
South Africa.
Investment Limitations: Each portfolio is subject to certain limitations
designed to reduce its exposure to specific situations. Some of these
limitations are:
(a) with respect to 75% of its assets, a portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the portfolio's
total assets taken at market value would be invested in the securities of any
single issuer except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. This limitation is not applicable to the Global Fixed
Income, International Fixed Income and Emerging Markets Portfolios. However,
these portfolios will comply with the diversification requirements imposed by
Sub-Chapter M of the Internal Revenue Code;
(b) with respect to 75% of its assets, a Portfolio will not purchase a
security if, as a result, the portfolio would hold more than 10% of the
outstanding voting securities of any issuer. This limitation is not
applicable to the Global Fixed Income, International Fixed Income and
Emerging Markets Portfolios. However, these portfolios will comply with the
diversification requirements imposed by Sub-Chapter M of the Internal Revenue
Code;
(c) a portfolio will not invest more than 5% of its total assets in the
securities of issuers (other than securities issued or guaranteed by U.S. or
foreign governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years of continuous operation;
<PAGE>
(d) a portfolio will not acquire any securities of companies within one
industry, if, as a result of such acquisition, more than 25% of the value of
the portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that (1) there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; (2) the Cash Reserves
Portfolio may invest without limitation in certificates of deposit or
bankers' acceptances of domestic banks; (3) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (4) financial service
companies will be classified according to the end users of their services,
for example, automobile finance, bank finance and diversified finance will
each be considered a separate industry; (5) asset-backed securities will be
classified according to the underlying assets securing such securities, and
(6) the Mortgage-Backed Securities Portfolio will concentrate in
mortgage-backed securities.
(e) a portfolio will not make loans except (i) by purchasing debt securities
in accordance with its investment objectives and policies, or entering into
Repurchase Agreements, (ii) by lending its portfolio securities and (iii) by
lending portfolio assets to other portfolios of the Fund, so long as such
loans are not inconsistent with the Investment Company Act of 1940, as
amended or the Rules and Regulations, or interpretations or orders of the
Securities and Exchange Commission thereunder;
(f) a portfolio will not borrow money, except (i) as a temporary measure for
extraordinary or emergency purposes or (ii) in connection with reverse
repurchase agreements provided that (i) and (ii) in combination do not exceed
33 1/3% of the portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings);
(g) a portfolio will not pledge, mortgage, or hypothecate any of its assets
to an extent greater than 50% of its total assets at fair market value; and
(h) a portfolio will not invest its assets in securities of any investment
company, except by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by the Investment
Company Act of 1940, as amended.
Limitations (a), (b), (d), (e) and (f),and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a majority of the shares
of each portfolio. The other investment limitations described here and in the
Statement of Additional Information are not fundamental policies meaning that
the Board of Trustees may change them without shareholder approval. If a
percentage limitation on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the
portfolio's assets will not be considered a violation of the restriction, and
the sale of securities will not be required.
<PAGE>
Emerging Markets Portfolio - (a non-diversified portfolio)
Objective: To achieve long-term capital growth by investing
primarily in common stocks of emerging markets issuers.
Approach: The Adviser evaluates both short-term and long-term
international economic trends and relative attractiveness
of emerging markets and individual emerging market
securities.
Policies: Generally at least 65% invested in Equity Securities of
Emerging Markets Issuers Derivatives may be used to
pursue portfolio strategy
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Emerging Markets Issuers Foreign Equities ADRs Eastern European Issuers
Investment Funds Foreign Currency Forwards Cash Equivalents
Repurchase Agreements Common Stocks Preferred Stock Convertibles
U.S. Governments Zero Coupons Agencies Corporates
High Yield Foreign Bonds Futures & Options Swaps
Investment Companies When Issued Rights Warrants
Brady Bonds Loan Participations Structured Investments Structured Notes
</TABLE>
Comparative Index: MSCI Emerging Markets Free Index
Strategies: Emerging Markets Investing
Foreign Investing
Non-Diversified Status
===============================================================================
Equity Portfolio
Objective: To achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk,
by investing primarily in dividend-paying common stocks
of companies which are deemed by the Adviser to
demonstrate long-term earnings growth that is greater
than the economy in general and greater than the expected
rate of inflation.
Approach: The Adviser evaluates both short-term and long-term
economic trends and their impact on corporate profits and
the relative value offered by different sectors and
securities within the equity markets. Individual
securities are selected based on fundamental business and
financial factors (such as earnings growth, financial
position, price volatility, and dividend payment records)
and the measurement of those factors relative to the
current market price of the security.
Policies: Generally at least 65% invested in Equity Securities
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally greater than $1 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: S&P 500 Index
Strategies: Core Equity Investing
<PAGE>
Growth Portfolio
Objective: To achieve long-term capital growth by investing
primarily in common stocks of large size companies which
the Adviser believes offer long-term growth potential.
Approach: The Adviser selects common stocks which meet certain
criteria which the Adviser believes are related to the
stability and growth of the fundamental characteristics
of the company.
Policies: Generally at least 65% invested in Equity Securities of
companies offering long-term growth potential
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally greater than $1 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Growth Stock Investing
===============================================================================
International Equity Portfolio
Objective: To achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk,
by investing in common stocks of companies based outside
of the United States.
Approach: The Adviser evaluates both short-term and long-term
international economic trends and the relative
attractiveness of non-U.S. equity markets and individual
securities.
Policies: Generally at least 65% invested in Foreign Equities of
issuers in at least 3 countries other than the U.S.
Derivatives may be used to pursue portfolio strategy
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Foreign Equities ADRs Emerging Markets Issuers Eastern European Issuers
Investment Funds Foreign Currency Forwards Cash Equivalents
Repurchase Agreements Common Stock Preferred Stock Convertibles
U.S. Governments Zero Coupons Agencies Corporates
Foreign Bonds Futures & Options Swaps Investment Companies
When Issued Rights Warrants Brady Bonds
Loan Participations Structured Investments Structured Notes
</TABLE>
Comparative Index: MSCI World Ex-U.S. Index
Strategies: International Equity Investing
Emerging Markets Investing
Foreign Investing
<PAGE>
Mid Cap Growth Portfolio
Objective: To achieve long-term capital growth by investing
primarily in common stocks of smaller and medium size
companies which are deemed by the Adviser to offer
long-term growth potential. Due to its emphasis on
long-term capital growth, dividend income will be lower
than for the Equity and Value Portfolios.
Approach: MAS screens a universe of about 900 companies to find a
relatively small number of high quality companies that it
believes have passed the earliest and riskiest stages of
growth. MAS selects individual stocks by fundamental
business and financial factors relative to the current
market price. The fund will purchase shares of companies
that MAS believes are capable of sustaining short-term
and long-term earnings growth and that are capable of
producing positive earnings surprises relative to
consensus earnings estimates.
Policies: Generally at least 65% invested in Equity Securities of
mid-cap companies offering long-term growth potential
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally $300 million to $3 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
===============================================================================
Mid Cap Value Portfolio
Objective: To achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk,
by investing in common stocks with equity capitalizations
in the range of the companies represented in the S&P
MidCap 400 Index which are deemed by the Adviser to be
relatively undervalued based on certain proprietary
measures of value. The Portfolio will typically exhibit a
lower price/earnings value ratio than the S&P MidCap 400
Index.
Approach: The Adviser selects common stocks which are deemed to be
undervalued at the time of purchase, based on proprietary
measures of value. The Portfolio will be structured
taking into account the economic sector weights of the
S&P MidCap 400 Index, with sector weights normally being
within 5% of the sector weights of the Index.
Policies: Generally at least 65% invested in Equity Securities of
mid-cap companies deemed to be undervalued
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally matching the S&P MidCap 400 Index (currently
$500 million to $3 billion)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
<PAGE>
Small Cap Value Portfolio (not currently being offered to new investors)
Objective: To achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk,
by investing in common stocks with equity capitalizations
in the range of the companies represented in the Russell
2000 Small Stock Index which are deemed by the Adviser to
be relatively undervalued based on certain proprietary
measures of value. The Portfolio will typically exhibit
lower price/earnings and price/book value ratios than the
Russell 2000. Dividend income will typically be lower
than for the Equity and Value Portfolios.
Approach: The Adviser selects common stocks which are deemed to be
undervalued at the time of purchase, based on proprietary
measures of value. The Portfolio will be structured
taking into account the economic sector weights of the
Russell 2000 Index, with the portfolio's sector weights
normally being within 5% of the sector weights for the
Index.
Policies: Generally at least 65% invested in Equity Securities of
small-cap companies deemed to be undervalued
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally matching the Russell 2000 size distribution
(currently $50 million to $800 million)
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: Russell 2000 Index
Strategies: Value Stock Investing
===============================================================================
Value Portfolio
Objective: To achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk,
by investing in common stocks with equity capitalizations
usually greater than $300 million which are deemed by the
Adviser to be relatively undervalued, based on various
measures such as price/earnings ratios and price/book
ratios. While capital return will be emphasized somewhat
more than income return, the Portfolio's total return
will consist of both capital and income returns. It is
expected that income return will be higher than that of
the Equity Portfolio because stocks which are deemed to
be undervalued in the marketplace have, under most market
conditions, provided higher dividend income returns than
stocks which are deemed to have long-term earnings growth
potential which normally sell at higher price/earnings
ratios.
Approach: The Adviser selects common stocks which are deemed to be
undervalued relative to the stock market in general as
measured by the Standard & Poor's 500 Index, based on the
value measures such as price/earnings ratios and
price/book ratios, as well as fundamental research.
Policies: Generally at least 65% invested in Equity Securities
deemed to be undervalued Up to 5% invested in Foreign
Equities (excluding ADRs) Derivatives may be used to
pursue portfolio strategy
Capitalization Range: Generally greater than $300 million
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock Convertibles ADRs
Cash Equivalents Repurchase Agreements Foreign Equities Rights
Warrants Futures & Options Swaps Foreign Currency
Forwards U.S. Governments Zero Coupons Agencies
Corporates Foreign Bonds Investment Companies When Issued
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
<PAGE>
Cash Reserves Portfolio
Objective: To realize maximum current income, consistent with the
preservation of capital and liquidity, by investing in
money market instruments and other short-term securities
having expected maturities of thirteen months or less.
The Portfolio's average weighted maturity will not
exceed 90 days. The securities in which the Portfolio
will invest may not yield as high a level of current
income as securities of lower quality or longer
maturities which generally have less liquidity, greater
market risk and more price fluctuation. The Portfolio is
designed to provide maximum principal stability for
investors seeking to invest funds for the short term,
or, for investors seeking to combine a long-term
investment program in other portfolios of the Fund with
an investment in money market instruments. The Portfolio
seeks to maintain, but there can be no assurance that it
will be able to maintain, a constant net asset value of
$1.00 per share.
Approach: The Adviser selects a diversified portfolio of money
market securities of government and corporate issuers,
any of which may be variable or floating rate, and which
have remaining maturities of thirteen months or less
from the date of purchase. For the purpose of
determining remaining maturity on Floaters, demand
features and interest reset dates will be taken into
consideration.
Policies: The Portfolio seeks to maintain, but there can be no
assurance that it will be able to maintain, a constant
net asset value of $1.00 per share.
Quality Specifications: 100% of Commercial Paper Rated in Top Tier
Maturity and Duration: Dollar weighted average maturity less than 90 days
Individual maturities 13 months or less
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Allowable Investments: Cash Equivalents Repurchase Agreements U.S. Governments Zero Coupons
Corporates Agencies Asset-Backeds Floaters
</TABLE>
Comparative Index: Lipper Money Market Index
Strategy: Money Market Investing
<PAGE>
Domestic Fixed Income Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities, corporate bonds rated A or
higher, and other fixed-income securities rated A or
higher of domestic issuers. The Portfolio's average
weighted maturity will ordinarily be greater than five
years.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term
trends in interest rates and inflation. Investments are
diversified among a wide variety of U.S. Fixed-Income
Securities (rated as A or higher at the time of
purchase) in all market sectors.
Policies: Generally at least 65% invested in Fixed-Income
Securities
100% invested in domestic issuers
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 100% of securities rated A or higher
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
Mortgage Securities SMBS CMOs Asset-Backeds
When Issued Convertibles Floaters Inverse Floaters
Structured Notes Futures & Options Swaps Cash Equivalents
Repurchase Agreements Municipals Preferred Stock Investment Companies
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
<PAGE>
Fixed Income Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds
rated below investment grade, commonly referred to as
junk bonds), foreign fixed-income securities and
mortgage-backed securities of domestic issuers and other
fixed-income securities. The Portfolio's average
weighted maturity will ordinarily be greater than five
years.
Approach: The Adviser actively manages the maturity and duration
structure of the Portfolio in anticipation of long-term
trends in interest rates and inflation. Investments are
diversified among a wide variety of Fixed-Income
Securities in all market sectors.
Policies: Generally at least 65% invested in Fixed-Income
Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
High Yield Mortgage Securities SMBS CMOs
Asset-Backeds When Issued Convertibles Foreign Bonds
Brady Bonds Foreign Currency Forwards Floaters
Inverse Floaters Structured Notes Futures & Options Swaps
Cash Equivalents Repurchase Agreements Municipals Preferred Stock
Investment Companies Loan Participations
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
<PAGE>
Fixed Income Portfolio II
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities, investment grade corporate bonds
and other fixed-income securities (rated A or higher).
The Portfolio's average weighted maturity will
ordinarily be greater than five years.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term
trends in interest rates and inflation. Investments are
diversified among a wide variety of Fixed-Income
Securities (rated A or higher at the time of purchase)
in all market sectors.
Policies: Generally at least 65% invested in Fixed-Income
Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: Individual securities rated A or higher
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
Mortgage Securities SMBS CMOs Asset-Backeds
When Issued Convertibles Foreign Bonds Brady Bonds
Foreign Currency Forwards Floaters Inverse Floaters
Structured Notes Futures & Options Swaps Cash Equivalents
Repurchase Agreements Municipals Preferred Stock Investment Companies
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
<PAGE>
Global Fixed Income Portfolio - (a non-diversified portfolio)
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in high grade fixed-income securities
of United States and foreign issuers. Total return is
the combination of income and changes in value. The
Portfolio's average weighted maturity will ordinarily be
greater than five years.
Approach: The Adviser manages the duration, country, and currency
exposure of the Portfolio by combining fundamental
research on relative values with analyses of economic,
interest-rate, and exchange-rate trends. MAS will invest
in mortgage and corporate bonds when it believes they
offer the most value, although most foreign currency
denominated investments are in government and
supranational securities.
Policies: Generally at least 65% invested in Fixed-Income
Securities of issuers in at least 3 countries, one of
which may be the U.S.
Derivatives may be used to represent country
investments, and otherwise pursue portfolio strategy
Quality Specifications: 95% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Foreign Bonds Foreign Currency Forwards U.S. Governments
Zero Coupons Agencies Corporates Mortgage Securities
CMOs SMBS Asset-Backeds Floaters
Futures & Options Swaps Cash Equivalents Emerging Markets Issuers
Eastern European Issuers Convertibles When Issued Brady Bonds
Inverse Floaters Structured Notes Repurchase Agreements Municipals
Preferred Stock Investment Companies
</TABLE>
Comparative Index: Salomon World Government Bond Index
Strategies: Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Foreign Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
<PAGE>
High Yield Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in high yielding corporate
fixed-income securities (including bonds rated below
investment grade, commonly referred to as junk bonds).
The Portfolio may also invest in U.S. Government
securities, mortgage-backed securities, investment grade
corporate bonds and in short-term fixed-income
securities, such as certificates of deposit, treasury
bills, and commercial paper. The Portfolio expects to
achieve its objective through maximizing current income,
although the Portfolio may seek capital growth
opportunities when consistent with its objective. The
Portfolio's average weighted maturity will ordinarily be
greater than five years.
Approach: The Adviser uses equity and fixed-income valuation
techniques and analyses of economic and industry trends
to determine portfolio structure. Individual securities
are selected, and monitored, by fixed-income portfolio
managers who specialize in corporate bonds and use
in-depth financial analysis to uncover opportunities in
undervalued issues.
Policies: Generally at least 65% invested in High Yield securities
(including bonds rated below investment grade, commonly
referred to as junk bonds)
Derivatives may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: High Yield Corporates U.S. Governments Zero Coupons
Agencies Mortgage Securities SMBS CMOs
Asset-Backeds When Issued Convertibles Foreign Bonds
Brady Bonds Foreign Currency Forwards Floaters
Inverse Floaters Structured Notes Futures & Options Swaps
Cash Equivalents Repurchase Agreements Municipals Preferred Stock
Investment Companies Loan Participations Eastern European Issuers Emerging Markets Issuers
Foreign Equities
</TABLE>
Comparative Index: Salomon High Yield Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
Emerging Markets Investing
<PAGE>
Intermediate Duration Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities and investment grade corporate,
foreign and other investment grade fixed-income
securities. The Portfolio will maintain an average
duration of between two and five years.
Approach: The Adviser constructs a portfolio with a duration
between two and five years by actively managing the
maturity and duration structure of the portfolio in
anticipation of long-term trends in interest rates and
inflation. Investments are diversified among a wide
variety of investment grade Fixed-Income Securities in
all market sectors.
Policies: Generally at least 65% invested in Fixed-Income
Securities
Derivatives may be used to pursue portfolio strategy
May invest greater than 50% in Mortgage Securities
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average duration between 2 and 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
Mortgage Securities SMBS CMOs Asset-Backeds
When Issued Convertibles Foreign Bonds Brady Bonds
Foreign Currency Forwards Floaters Inverse Floaters
Structured Notes Futures & Options Swaps Cash Equivalents
Repurchase Agreements Municipals Preferred Stock Investment Companies
</TABLE>
Comparative Index: Lehman Brothers Intermediate Government/Corporate Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
<PAGE>
International Fixed Income Portfolio - (a non-diversified portfolio)
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing primarily in high-grade fixed-income
securities of foreign issuers.
Approach: The Adviser manages the duration, country, and currency
exposure of the portfolio by combining fundamental
research on relative values with analyses of economic,
interest-rate, and exchange-rate trends. MAS will invest
in mortgage and corporate bonds when it believes they
offer the most value, although most foreign currency
denominated investments are in government and
supranational securities.
Policies: Generally at least 80% invested in Fixed-Income
Securities of issuers in at least 3 countries other than
the U.S.
Derivatives may be used to represent country
investments, and otherwise pursue portfolio strategy
Quality Specifications: 95% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Foreign Bonds Foreign Currency Forwards Floaters
Futures & Options Swaps Cash Equivalents U.S. Governments
Zero Coupons Agencies Corporates Mortgage Securities
CMOs SMBS Asset-Backeds Emerging Markets Issuers
Eastern European Issuers Convertibles When Issued Brady Bonds
Inverse Floaters Structured Notes Repurchase Agreements Municipals
Preferred Stock Investment Companies
</TABLE>
Comparative Index: Salomon World Government Bond Index Except U.S.
Strategies: Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Foreign Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
<PAGE>
Limited Duration Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities, investment-grade corporate bonds
and other fixed-income securities. The portfolio will
maintain an average duration of between one and three
years. Duration is a measure of the life of the
portfolio's debt securities on a present-value basis and
is indicative of a security's price volatility relative
to interest rate changes.
Approach: The Adviser manages the duration of the overall
portfolio as a more effective way to control interest-
rate risk than limiting the maturity of individual
securities within the portfolio. In this way investors
can benefit from opportunities across the entire yield
curve as well as in various market sectors, and at the
same time limit the volatility of investment returns.
MAS establishes the duration target through the use of
its top-down view of the economy and analysis of the
current level of interest rates and the shape of the
yield curve. MAS then strives to purchase the most
attractively priced portfolio that meets our duration
and investment objectives. When purchasing securities
other than U.S. Governments, MAS evaluates credit,
liquidity, and option risk. When MAS believes the
portfolio is compensated for these risks, it includes
agency, mortgage, and corporate securities which meet
the Portfolio's quality specifications.
Policies: Generally at least 65% invested in Fixed-Income
Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average duration between 1 and 3 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
Mortgage Securities CMOs Asset-Backeds When Issued
Convertibles Floaters Structured Notes Futures & Options
Swaps Cash Equivalents Repurchase Agreements
</TABLE>
Comparative Index: Salomon 1-3 Year Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
<PAGE>
Mortgage-Backed Securities Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing primarily (at least 65% of its assets
under normal circumstances) in mortgage-backed
securities. In addition, the portfolio may also invest
in U.S. government securities and in short-term
fixed-income securities such as certificates of deposit,
treasury bills, and commercial paper. The portfolio's
average weighted maturity will ordinarily be greater
than seven years.
Approach: The Adviser sets three portfolio targets: (1)
interest-rate sensitivity; (2) yield-curve sensitivity;
and (3) prepayment sensitivity. The Adviser increases
the sensitivity of the portfolio to changes in interest
rates when bonds offer greater value on the basis of
inflation-adjusted interest rates. Similarly, the
Adviser increases yield-curve sensitivity when
long-maturity interest rates offer exceptional value
relative to short-maturity interest rates. Finally, the
Adviser increases prepayment exposure when mortgage
yields, adjusted for probable prepayments, indicate
unusual value in mortgage-backed securities.
Policies: Generally at least 65% invested in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: Securities not guaranteed by the U.S. Government or a
private organization will be rated Investment Grade
Securities
Maturity and Duration: Average weighted maturity generally greater than 7 years
Duration generally between 2 and 7 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Mortgage Securities CMOs Asset-Backeds SMBS
U.S. Governments Zero Coupons Agencies When Issued
Floaters Inverse Floaters Structured Notes Futures & Options
Cash Equivalents Repurchase Agreements Municipals Investment Companies
Swaps
</TABLE>
Comparative Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
<PAGE>
Municipal Portfolio
Objective: To realize above-average total return over a market
cycle of three to five years, consistent with the
conservation of capital and the realization of current
income which is exempt from federal income tax, by
investing in a diversified portfolio of investment grade
and short-term municipal debt securities, other
investment grade fixed-income securities and a limited
percentage of bonds rated below investment grade
(commonly referred to as junk bonds). The portfolio's
average weighted maturity will ordinarily be between ten
and thirty years.
Approach: The Adviser varies portfolio structure--the average
duration and maturity and the amount of the portfolio
invested in various types of bonds--according to its
outlook for interest rates and its analysis of the risks
and rewards offered by different classes of bonds. The
portfolio will invest in taxable bonds only in cases
where MAS believes they improve the risk/reward profile
of the portfolio on an after-tax basis.
Policies: Generally at least 80% invested in Municipals
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally between 10 and
30 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Municipals Taxable Investments U.S. Governments Agencies
Corporates Mortgage Securities SMBS CMOs
Asset-Backeds When Issued Convertibles Floaters
Inverse Floaters Structured Notes Futures & Options Swaps
Cash Equivalents Repurchase Agreements Preferred Stock Investment Companies
High Yield Zero Coupons Foreign Bonds Forwards
Foreign Currency Brady Bonds Emerging Markets Issuers Eastern European Issuers
</TABLE>
Comparative Index: Lehman Long-Term Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
<PAGE>
PA Municipal Portfolio
Objective: To realize above-average total return over a market
cycle of three to five years, consistent with the
conservation of capital and the realization of current
income which is exempt from federal income tax and
Pennsylvania personal income tax by investing in a
diversified portfolio of investment grade and short-term
municipal debt securities, other investment grade
fixed-income securities and a limited percentage of
bonds rated below investment grade (commonly referred to
as junk bonds). The Portfolio's average weighted
maturity will ordinarily be between ten and thirty
years.
Approach: The Adviser varies portfolio structure--the average
duration and maturity and the amount of the portfolio
invested in various types of bonds--according to its
outlook for interest rates and its analysis of the risks
and rewards offered by different classes of bonds. The
portfolio will invest in federally or Pennsylvania State
taxable bonds only in cases where MAS believes they
improve the risk/reward profile of the portfolio on an
after-tax basis for Pennsylvania residents.
Policies: Generally at least 80% invested in Municipal Securities
Generally at least 65% invested in PA Municipal
Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally between 10 and
30 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: PA Municipals Municipals Taxable Investments U.S. Governments
Agencies Corporates Mortgage Securities SMBS
CMOs Asset-Backeds When Issued Convertibles
Floaters Inverse Floaters Structured Notes Futures & Options
Swaps Cash Equivalents Repurchase Agreements Preferred Stock
Investment Companies High Yield Foreign Bonds Forwards
Foreign Currency Zero Coupons Brady Bonds Emerging Markets Issuers
Eastern European Issuers
</TABLE>
Comparative Index: Lehman Long-Term Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
<PAGE>
Special Purpose Fixed Income Portfolio
Objective: To achieve above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds
rated below investment grade, commonly referred to as
junk bonds), foreign fixed-income securities and
mortgage-backed securities and other fixed-income
securities. The portfolio is structured to complement an
investment in one or more of the Fund's equity
portfolios for investors seeking a balanced investment.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term
trends in interest rates and inflation. Investments are
diversified among a wide variety of Fixed-Income
Securities in all market sectors. Both duration/maturity
strategy and sector allocation are determined based on
the presumption that investors are combining an
investment in the portfolio with an equity investment.
Policies: Generally at least 65% invested in Fixed-Income
Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: U.S. Governments Zero Coupons Agencies Corporates
High Yield Mortgage Securities SMBS CMOs
Asset-Backeds When Issued Convertibles Foreign Bonds
Brady Bonds Foreign Currency Forwards Floaters
Inverse Floaters Structured Notes Futures & Options Swaps
Cash Equivalents Repurchase Agreements Municipals Preferred Stock
Investment Companies Loan Participations
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
<PAGE>
Balanced Portfolio
Objective: To achieve above average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of common
stocks and fixed-income securities. When the Adviser
judges the relative outlook for the equity and fixed-
income markets to be neutral the portfolio will be
invested 60% in common stocks and 40% in fixed-income
securities. The asset mix may be changed, however, with
common stocks ordinarily representing between 45% and
75% of the total investment. The average weighted
maturity of the fixed-income portion of the portfolio
will ordinarily be greater than five years.
Approach: The Adviser determines investment strategies for the
equity and fixed-income portions of the portfolio
separately and then determine the mix of those
strategies expected to maximize the return available
from both the stock and bond markets. Strategic
judgments on the equity/fixed-income asset mix are based
on valuation disciplines and tools for analysis
developed by the Adviser over its twenty-five year
history of managing balanced accounts.
Policies: Generally 45% to 75% invested in Equity Securities
Up to 25% invested in Foreign Bonds and/or Foreign
Equities (excluding ADRs)
Up to 10% invested in Brady Bonds
At least 25% invested in senior Fixed-Income Securities
Derivatives may be used to pursue portfolio strategy
Equity Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock Preferred Stock U.S. Governments Zero Coupons
Corporates High Yield Foreign Bonds Mortgage Securities
CMOs Asset-Backeds SMBS When Issued
Brady Bonds Floaters Inverse Floaters Structured Notes
Agencies Convertibles Futures & Options Swaps
Foreign Currency Forwards Cash Equivalents Repurchase Agreements
Eastern European Issuers Investment Funds Municipals Investment Companies
ADRs Foreign Equities Rights Warrants
Loan Participations
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
60% S&P 500 Index
40% Salomon Broad Investment Grade Index
Strategies: Asset Allocation Management
Core Equity Investing
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
<PAGE>
Multi-Asset-Class Portfolio
Objective: To achieve above average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of common
stocks and fixed-income securities of United States and
Foreign issuers.
Approach: The Adviser determines the mix of investments in
domestic and foreign equity and fixed-income and high
yield securities expected to maximize available total
return. Strategic judgments on the asset mix are based
on valuation disciplines and tools for analysis which
have been developed by the Adviser to compare the
relative potential returns and risks of global stock and
bond markets.
Policies: Generally at least 65% invested in issuers located in at
least 3 countries, including the U.S.
Derivatives may be used to pursue portfolio strategy
Domestic Equity
Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Common Stock U.S. Governments Agencies Corporates
High Yield Foreign Bonds Foreign Equities Foreign Currency
Eastern European Issuers Investment Funds Mortgage Securities CMOs
SMBS Asset-Backeds When Issued Brady Bonds
Floaters Inverse Floaters Structured Notes Zero Coupons
Futures & Options Swaps Forwards Cash Equivalents
Repurchase Agreements Convertibles Preferred Stock Municipals
Investment Companies ADRs Rights Warrants
Loan Participations Emerging Markets Issuers Structured Investments
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
50% S&P 500 Index
14% EAFE-GDP Weighted Index
24% Salomon Broad Investment Grade Index
6% Salomon World Ex U.S. Government Bond Index
6% Salomon High Yield Market Index
Strategies: Asset Allocation Management
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Foreign Fixed Income Investing
Core Equity Management
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Investing
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
Asset Allocation Management: The Adviser's approach to asset allocation
management is to determine investment strategies for each asset class in a
portfolio separately, and then determine the mix of those strategies expected to
maximize the return available from each market. Strategic judgments on the mix
among asset classes are based on valuation disciplines and tools for analysis
which have been developed over the Adviser's twenty-five year history of
managing balanced accounts.
Tactical asset-allocation shifts are based on comparisons of prospective risks,
returns, and the likely risk-reducing benefits derived from combining different
asset classes into a single portfolio. Experienced teams of equity, fixed-
income, and international investment professionals manage the investments in
each asset class.
Core Equity Investing: The Adviser's "core" or primary equity strategy
emphasizes common stocks of large companies, with targeted investments in small
company stocks that promise special growth opportunities. Depending on MAS's
outlook for the economy and different market sectors, the mix between value
stocks and growth stocks will change.
Emerging Markets Investing: The Adviser's approach to emerging markets investing
is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Currently, investing in many emerging markets is either not feasible or very
costly, or may involve unacceptable political risks. Other special risks include
the possible increased likelihood of expropriation or the return to power of a
communist regime which would institute policies to expropriate, nationalize or
otherwise confiscate investments. A portfolio will focus its investments on
those emerging market countries in which the Adviser believes the potential for
market appreciation outweighs these risks and the cost of investment. Investing
in emerging markets also involves an extra degree of custodial and/or market
risk, especially where the securities purchased are not traded on an official
exchange or where ownership records regarding the securities are maintained by
an unregulated entity (or even the issuer itself).
Fixed Income Management and Asset Allocation: Within the Balanced,
Multi-Asset-Class and Special Purpose Fixed Income Portfolios, the Adviser
selects fixed-income securities not only on the basis of judgments regarding
Maturity and Duration Management and Value Investing, but also on the basis of
the value offered by various segments of the fixed-income securities market
relative to Cash Equivalents and Equity Securities. In this context, the Adviser
may find that certain segments of the fixed-income securities market offer more
or less attractive relative value when compared to Equity Securities than when
compared to other Fixed-Income Securities.
For example, in a given interest rate environment, equity securities may be
judged to be fairly valued when compared to intermediate duration fixed-income
securities, but overvalued compared to long duration fixed-income securities.
Consequently, while a portfolio investing only in fixed-income securities may
not emphasize long duration assets to the same extent, the fixed-income portion
of a balanced investment may invest a percentage of its assets in long duration
bonds on the basis of their valuation relative to equity securities.
<PAGE>
Foreign Fixed Income Investing: The Adviser invests in Foreign Bonds and other
Fixed-Income Securities denominated in foreign currencies, where, in the opinion
of the Adviser, the combination of current yield and currency value offer
attractive expected returns. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency Futures &
Options, Forwards and Swaps may be used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in Foreign Bonds
and Foreign Equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign Bonds and Foreign
Equities may be less liquid and more volatile than securities of comparable U.S.
companies. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the U.S. With respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Since Foreign Bonds and Foreign Equities may be denominated in foreign
currencies, and since a portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, a portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Although a portfolio will endeavor to achieve the most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of a portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a portfolio receives from the companies comprising the portfolio's
investments.
Growth Stock Investing: Seeks to invest in Common Stocks generally characterized
by higher growth rates, betas, and price/earnings ratios, and lower yields than
the stock market in general as measured by the S&P 500 Index.
High Yield Investing: Involves investing in high yield securities based on the
Adviser's analysis of economic and industry trends and individual security
characteristics. The Adviser conducts credit analysis for each security
considered for investment to evaluate its attractiveness relative to its risk. A
high level of diversification is also maintained to limit credit exposure to
individual issuers.
To the extent a portfolio invests in high yield securities it will be exposed to
a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High yield securities may be
issued as a consequence of corporate restructuring or similar events. Also, high
yield securities are often issued by smaller, less credit worthy companies, or
by highly leveraged (indebted) firms, which are generally less able than more
established or less leveraged firms to make scheduled payments of interest and
principal. The risks posed by securities issued under such circumstances are
substantial.
The market for high yield securities is still relatively new. Because of this, a
long-term track record for bond default rates does not exist. In addition, the
secondary market for high yield securities is generally less liquid than that
for investment grade corporate securities. In periods of reduced market
liquidity, high yield bond prices may become more volatile, and both the high
yield market and a portfolio may experience sudden and substantial price
declines. This lower liquidity might have an effect on a portfolio's ability to
<PAGE>
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for high yield securities by various dealers. Under such
conditions, a portfolio may find it difficult to value its securities
accurately. A portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in high yield securities.
High yield bonds may also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a high yield bond's
value will decrease in a rising interest rate market.
Certain types of high yield bonds are non-income paying securities. For example,
zero coupon bonds pay interest only at maturity and payment-in-kind bonds pay
interest in the form of additional securities. Payment in the form of additional
securities, or interest income recognized through discount accretion, will,
however, be treated as ordinary income which will be distributed to shareholders
even though the portfolio does not receive periodic cash flow from these
investments.
The table below provides a summary of ratings assigned to all U.S. and foreign
debt holdings of those portfolios with more than 5% invested in High Yield
securities (not including money market instruments). These figures are
dollar-weighted averages of month-end portfolio holdings and do not necessarily
indicate a portfolio's current or future debt holdings. Portfolios whose debt
holdings total less than 100% also invest in Equity Securities.
High Yield Portfolio Fixed Income Portfolio
QUALITY QUALITY
TSY, AGY, AAA 4.85% TSY, AGY, AAA 66.18%
AA 0.00% AA 10.03%
A 0.37% A 7.16%
BAA 3.12% BAA 4.54%
BA 26.14% BA 7.39%
B 49.15% B 3.27%
CAA 8.13% CAA 0.01%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Rated 8.24% Not Rated 1.42%
TOTAL 100.00% TOTAL 100.00%
Special Purpose
Fixed Income Portfolio Balanced Portfolio
QUALITY QUALITY
TSY, AGY, AAA 64.17% TSY, AGY, AAA 28.21%
AA 12.04% AA 4.47%
A 6.49% A 2.65%
BAA 4.20% BAA 2.22%
BA 7.49% BA 4.02%
B 3.18% B 2.19%
CAA 0.09% CAA 0.18%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Rated 2.34% Not Rated 0.98%
TOTAL 100.00% TOTAL 44.92%
Multi-Asset-Class Portfolio Emerging Markets Portfolio
QUALITY QUALITY
TSY, AGY, AAA 26.50% TSY, AGY, AAA 0.83%
AA 1.98% AA 0.00%
A 1.97% A 0.00%
BAA 1.35% BAA 1.39%
BA 3.73% BA 1.43%
B 4.13% B 3.47%
CAA 0.46% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Rated 0.72% Not Rated 2.69%
TOTAL 40.84% TOTAL 9.81%
<PAGE>
International Equity Investing: The Adviser's approach to international
equity investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S.
equity markets and individual securities.
MAS considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely
be influenced by the relative market capitalizations of different non-U.S.
stock markets and individual securities. Portfolios seek to diversify
investments broadly among both developed and newly industrializing foreign
countries. Where appropriate, a portfolio may also invest in regulated
Investment Companies or Investment Funds which invest in such countries to
the extent allowed by applicable law.
Maturity and Duration Management: One of two primary components of the
Adviser's fixed-income investment strategy is maturity and duration
management. The maturity and duration structure of a portfolio investing in
Fixed-Income Securities is actively managed in anticipation of cyclical
interest rate changes. Adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented
in anticipation of longer term shifts in the levels of interest rates.
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for maturity and duration strategy lies in analysis of the U.S.
and global economies, focusing on levels of real interest rates, monetary and
fiscal policy actions, and cyclical indicators. See Value Investing for a
description of the second primary component of the Adviser's fixed-income
strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations
also have call provisions. Depending on the relative magnitude of these
payments and the nature of the call provisions, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's term-to-maturity has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the interest rate risk or volatility of the
security). However, term-to-maturity measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security that
was developed as a more precise alternative to the concept of
term-to-maturity. Duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration is one
of the fundamental tools used by the Adviser in the selection of fixed-income
securities. Duration is a measure of the expected life of a fixed-income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other factors being the same, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a fixed-income security, the shorter the duration
of the security.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other
similar situations, the Adviser will use sophisticated analytical techniques
that incorporate the economic life of a security into the determination of
its interest rate exposure.
Money Market Investing: A money market fund like the Cash Reserves Portfolio
invests in securities which present minimal credit risk and may not yield as
high a level of current income as securities of lower quality or longer
maturities which generally have less liquidity, greater market risk and more
price fluctuation. A money market portfolio is designed to provide maximum
principal stability for investors seeking to invest funds for the short-term,
<PAGE>
or, for investors seeking to combine a long-term investment program in other
portfolios of the Fund with an investment in money market instruments. However,
because the Cash Reserves Portfolio invests in the money market obligations of
private financial and non-financial corporations in addition to those of the
U.S. Government or its agencies and instrumentalities, it offers higher credit
risk and yield potential relative to money market funds which invest exclusively
in U.S. Government securities. The Cash Reserves Portfolio seeks to maintain,
but does not guarantee, a constant net asset value of $1.00 per share.
Mortgage Investing: At times it is anticipated that greater than 50% of a
fixed-income portfolio's assets may be invested in mortgage-related
securities. These include mortgage-backed securities, which represent
interests in pools of mortgage loans made by lenders such as commercial
banks, savings and loan associations, mortgage bankers and others. The pools
are assembled by various organizations, including the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association (FNMA), other government agencies, and
private issuers. It is expected that a portfolio's primary emphasis will be
on mortgage-backed securities issued by the various Government-related
organizations. However, a portfolio may invest, without limit, in
mortgage-backed securities issued by private issuers when the Adviser deems
that the quality of the investment, the quality of the issuer, and market
conditions warrant such investments. Securities issued by private issuers
will be rated investment grade by Moody's or Standard & Poor's or be deemed
by the Adviser to be of comparable investment quality.
Municipals Management: MAS manages municipal portfolios in a total return
context. This means that taxable investments will regularly be included in a
portfolio when they have an attractive prospective after-tax total return,
regardless of the taxable nature of income on the security.
MAS Municipals Management emphasizes a diversified portfolio of high grade
municipal debt securities. Under normal circumstances, a portfolio will
invest at least 80% of net assets in municipal securities including AMT Bonds
and at least 80% will be Investment Grade Securities.
Under normal conditions, a portfolio may hold up to 20% of net assets in U.S.
Governments, Agencies, Corporates, Cash Equivalents, Preferred Stocks,
Mortgage Securities, Asset-Backeds, Floaters, and Inverse Floaters and other
Fixed Income Securities (collectively "Taxable Investments").
Non-Diversified Status: A portfolio may be classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended.
Non-diversified portfolios may invest more than 25% of assets in securities
of individual issuers representing greater than 5% each of a portfolio's
total assets, whereas diversified investment companies may only invest up to
25% of assets in positions of greater than 5%. Both diversified and non-
diversified portfolios are subject to diversification specifications under
the Internal Revenue Code of 1986, as amended, which require that, as of the
close of each fiscal quarter, (i) no more than 25% of a portfolio's total
assets may be invested in the securities of a single issuer (except for U.S.
Government securities) and (ii) with respect to 50% of its total assets, no
more than 5% of such assets may be invested in the securities of a single
issuer (except for U.S. Government securities) or invested in more than 10%
of the outstanding voting securities of a single issuer. Because of its
non-diversified status, a portfolio may be subject to greater credit and
other risks than a diversified investment company.
Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing, whereby MAS seeks to identify undervalued
sectors and securities through analysis of credit quality, option
characteristics and liquidity. Quantitative models are used in conjunction
with judgment and experience to evaluate and select securities with embedded
put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit a portfolio to benefit from the
price appreciation of individual securities during periods when interest
rates are unchanged. See Maturity and Duration Management for a description
of the other key component of MAS's fixed-income investment strategy.
<PAGE>
Value Stock Investing: Emphasizes Common Stocks which are deemed by the
Adviser to be undervalued relative to the stock market in general as measured
by the appropriate market index, based on value measures such as
price/earnings ratios and price/book ratios. Value stocks are generally
dividend paying common stocks. However, non-dividend paying stocks may also
be selected for their value characteristics.
INVESTMENTS
Each Portfolio may invest in the securities defined below in accordance with
their listing of Allowable Investments and any quality or policy constraints.
ADRs--American Depository Receipts: are dollar-denominated securities which
are listed and traded in the United States, but which represent claims to
shares of foreign stocks. ADRs may be either sponsored or unsponsored.
Unsponsored ADR facilities typically provide less information to ADR holders.
Agencies: are securities which are not guaranteed by the U.S. Government, but
which are issued, sponsored or guaranteed by a federal agency or federally
sponsored agency such as the Student Loan Marketing Association, Resolution
Funding Corporation, or any of several other agencies.
Asset-Backeds: are securities collateralized by shorter term loans such as
automobile loans, home equity loans, computer leases, or credit card
receivables. The payments from the collateral are passed through to the
security holder. The collateral behind asset-backed securities tends to have
prepayment rates that do not vary with interest rates. In addition the
short-term nature of the loans reduces the impact of any change in prepayment
level. Due to amortization, the average life for these securities is also the
conventional proxy for maturity.
Possible Risks: Due to the possibility that prepayments (on automobile loans
and other collateral) will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity date or
average life. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the security. In selecting these securities, the Adviser will
look for those securities that offer a higher yield to compensate for any
variation in average maturity.
Brady Bonds: are debt obligations which are created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds
have been issued only recently, and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. For further information on
these securities, see the Statement of Additional Information. Portfolios
will only invest in Brady Bonds consistent with quality specifications.
Cash Equivalents: are short-term fixed-income instruments comprising:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time
at a stated interest rate. Certificates of deposit are negotiable short-term
obligations issued by commercial banks or savings and loan associations
against funds deposited in the issuing institution. Variable rate
certificates of deposit are certificates of deposit on which the interest
rate is periodically adjusted prior to their stated maturity based upon a
specified market rate. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage of
goods).
A portfolio may invest in obligations of U.S. banks, foreign branches of U.S.
banks (Eurodollars), and U.S. branches of foreign banks (Yankee dollars).
Euro and Yankee dollar investments will involve some of the same risks of
investing in international securities that are discussed in the Foreign
Investing section of this Prospectus.
<PAGE>
Portfolios will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the
case of U.S. banks, it is a member of the Federal Deposit Insurance
Corporation, and (iii) in the case of foreign branches of U.S. banks, the
security is deemed by the Adviser to be of an investment quality comparable
with other debt securities which may be purchased by the portfolio.
(2) Each portfolio (except Cash Reserves) may invest in commercial paper
rated at time of purchase by one or more NRSRO in one of their two highest
categories, (e.g., A-l or A-2 by Standard & Poor's or Prime 1 or Prime 2 by
Moody's), or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by a NRSRO (e.g. A or better by
Moody's, Standard & Poor's or Fitch). The Cash Reserves Portfolio invests
only in commercial paper rated in the highest category;
(3) Short-term corporate obligations rated high-grade at the time of purchase
by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Securities issued or guaranteed by U.S. Government sponsored
instrumentalities and Federal agencies. These include securities issued by
the Federal Home Loan Banks, Federal Land Bank, Farmers Home Administration,
Farm Credit Banks, Federal Intermediate Credit Bank, Federal National
Mortgage Association, Federal Financing Bank, the Tennessee Valley Authority,
and others;
(6) Repurchase agreements collateralized by securities listed above; and
(7) Investments by the Cash Reserve Portfolio in Cash Equivalents are limited
by the quality, maturity and diversification requirements adopted under Rule
2a-7 of the 1940 Act.
CMOs--Collateralized Mortgage Obligations: are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a
"tranche" is essentially a separate security) in a predetermined, specified
order. Each tranche has a stated maturity -- the latest date by which the
tranche can be completely repaid, assuming no prepayments -- and has an
average life -- the average of the time to receipt of a principal payment
weighted by the size of the principal payment. The average life is typically
used as a proxy for maturity because the debt is amortized (repaid a portion
at a time), rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
Possible Risks: Due to the possibility that prepayments (on home mortgages
and other collateral) will alter the cash flow on CMOs, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement
could be and to calculate the effect that it will have on the price of the
security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in
average maturity.
Prepayment risk has two important effects. First, like bonds in general,
mortgage-backed securities will generally decline in price when interest
rates rise. However, when interest rates fall, mortgages may not enjoy as
large a gain in market value due to prepayment risk. Second, when interest
rates fall, additional mortgage prepayments must be reinvested at lower
interest rates. In part to compensate for these risks, mortgages will
generally offer higher yields than comparable bonds.
<PAGE>
Common Stocks: are Equity Securities which represent an ownership interest in
a corporation, entitling the shareholder to voting rights and receipt of
dividends paid based on proportionate ownership.
Convertibles: are convertible bonds or shares of convertible Preferred Stock
which may be exchanged for a fixed number of shares of Common Stock at the
purchaser's option.
Corporates--corporate bonds: are debt instruments issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets
for the principal and interest due to the bondholder. A portfolio will buy
Corporates subject to any quality constraints. If a security held by a
portfolio is down-graded, the portfolio may retain the security if the
Adviser deems retention of the security to be in the best interests of the
portfolio.
Derivatives: A financial instrument whose value and performance are based on
the value and performance of another security or financial instrument. The
Adviser will use derivatives only in circumstances where they offer the most
economic means of improving the risk/reward profile of the portfolio. The
Adviser will not use derivatives to increase portfolio risk above the level
that could be achieved in the portfolio using only traditional investment
securities. In addition, the Adviser will not use derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
listed in the applicable Allowable Investments for the portfolio. Any
applicable limitations are described under each investment definition. All of
the portfolios of MAS Funds, except the Cash Reserves Portfolio, may enter
into over-the-counter Derivatives transactions (Swaps, Caps, Floors, Puts,
etc., but excluding CMOs, Forwards, Futures and Options, and SMBS) with
counterparties approved by MAS in accordance with guidelines established by
the Board of Trustees. These guidelines provide for a minimum credit rating
for each counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA. Derivatives include, but are not
limited to, CMOs, Forwards, Futures and Options, SMBS, Structured
Investments, Structured Notes and Swaps. See each individual Portfolio's
listing of Allowable Investments to determine which of these the Portfolio
may hold.
Eastern European Issuers: The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment
associated with the transition to market economics. Unstable economic and
political conditions may adversely affect security values. Upon the accession
to power of Communist regimes approximately 40 years ago, the governments of
a number of Eastern European countries expropriated a large amount of
property. The claims of many property owners against those governments were
never finally settled. In the event of the return to power of the Communist
Party, there can be no assurance that the portfolio's investments in Eastern
Europe would not be expropriated, nationalized or otherwise confiscated.
Emerging Markets Issuers: An emerging market security is one issued by a
company that has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets,
or (iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to
eligibility on publicly available information and inquiries made to the
companies. Investing in emerging markets may entail purchasing securities
issued by or on behalf of entities that are insolvent, bankrupt, in default
or otherwise engaged in an attempt to reorganize or reschedule their
obligations, and in entities that have little or no proven credit rating or
credit history. In any such case, the issuer's poor or deteriorating
financial condition may increase the likelihood that the investing fund will
experience losses or diminution in available gains due to bankruptcy,
insolvency or fraud.
Equity Securities: Commonly include but are not limited to Common Stock,
Preferred Stock, ADRs, Rights, Warrants, Convertibles, and Foreign Equities.
See each individual portfolio listing of Allowable Investments to determine
which of the above the portfolio can hold. Preferred Stock is contained in
both the definition of Equity Securities and Fixed-Income Securities since it
exhibits characteristics commonly associated with each type.
Fixed-Income Securities: Commonly include but are not limited to U.S.
Governments, Zero Coupons, Agencies, Corporates, High Yield, Mortgage
Securities, SMBS, CMOs, Asset-Backeds, Convertibles, Brady Bonds, Floaters,
<PAGE>
Inverse Floaters, Cash Equivalents, Repurchase Agreements, Preferred Stock, and
Foreign Bonds. See each individual portfolio listing of Allowable Investments to
determine which securities a portfolio may hold. Preferred Stock is contained in
both the definition of Equity Securities and Fixed-Income Securities since it
exhibits characteristics commonly associated with each type of security.
Floaters--Floating and Variable Rate Obligations: are debt obligations with a
floating or variable rate of interest, i.e. the rate of interest varies with
changes in specified market rates or indices, such as the prime rate, or at
specified intervals. Certain floating or variable rate obligations may carry
a demand feature that permits the holder to tender them back to the issuer of
the underlying instrument, or to a third party, at par value prior to
maturity. When the demand feature of certain floating or variable rate
obligations represents an obligation of a foreign entity, the demand feature
will be subject to certain risks discussed under Foreign Investing.
Foreign Currency: Portfolios investing in foreign securities will regularly
transact security purchases and sales in foreign currencies. These portfolios
may hold foreign currency or purchase or sell currencies on a forward basis
(see Forwards).
Foreign Equities: are Common Stock, Preferred Stock, Rights and Warrants of
foreign issuers denominated in foreign currency and traded primarily in
non-U.S. markets. Investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies (see Foreign Investing).
Foreign Bonds: are Fixed-Income Securities denominated in foreign currency
and issued and traded primarily outside of the U.S., including: (1)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) debt securities
issued, guaranteed or sponsored by supranational organizations established or
supported by several national governments, including the World Bank, the
European Community, the Asian Development Bank and others; (3) non-government
foreign corporate debt securities; and (4) foreign Mortgage Securities and
various other mortgage and asset-backed securities.
Forwards--Forward Foreign Currency Exchange Contracts: are Derivatives which
are used to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract is an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Such contracts, which
protect the value of a portfolio's investment securities against a decline in
the value of a currency, do not eliminate fluctuations caused by changes in
the local currency prices of the securities, but rather, they simply
establish an exchange rate at a future date. Also, although such contracts
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they limit any potential gain that might be
realized.
A portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales
of securities denominated in foreign currencies (transaction hedge) or to
lock in the U.S. dollar value of portfolio positions (position hedge). In
addition the portfolios may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a portfolio has or
expects to have portfolio exposure. Portfolios may also engage in proxy
hedging which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where the two currencies are
economically linked. A portfolio's entry into forward contracts, as well as
any use of Cross or Proxy hedging techniques will generally require the
portfolio to hold high-grade, liquid securities or cash equal to the
portfolio's obligations in a segregated account throughout the duration of
the contract.
A portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and
currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, a portfolio
may purchase a U.S. dollar-denominated security and at the same time enter
into a forward contract to exchange U.S. dollars for the contract's
underlying currency at a future date. By matching the amount of U.S. dollars
to be exchanged with the anticipated value of the U.S. dollar-denominated
security, a portfolio may be able to lock in the foreign currency value of
the security and adopt a synthetic investment position reflecting the credit
quality of the U.S. dollar-denominated security.
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There is a risk in adopting a synthetic investment position to the extent
that the value of a security denominated in the U.S. dollar or other foreign
currency is not exactly matched with a portfolio's obligation under the
forward contract. On the date of maturity, a portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Adviser will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Adviser will be able to do so. When a portfolio enters into a forward
contract for purposes of creating a synthetic security, it will generally be
required to hold high-grade, liquid securities or cash in a segregated
account with a daily value at least equal to its obligation under the forward
contract.
Futures & Options--Futures Contracts, Options on Futures Contracts and
Options: are Derivatives. Futures contracts provide for the sale by one party
and purchase by another party of a specified amount of a specific security,
at a specified future time and price. An option is a legal contract that
gives the holder the right to buy or sell a specified amount of the
underlying security or futures contract at a fixed or determinable price upon
the exercise of the option. A call option conveys the right to buy and a put
option conveys the right to sell a specified quantity of the underlying
security.
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets. It will maintain assets
sufficient to meet its obligations under such contracts in a segregated
account with the custodian bank or will otherwise comply with the SEC's
position on asset coverage.
Possible Risks: The primary risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
the securities held by a portfolio and the prices of futures and options
relating to the stocks, bonds or futures contracts purchased or sold by a
portfolio; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on a portfolio's ability to execute futures and
options strategies. Additional risks associated with options transactions are
(i) the risk that an option will expire worthless; (ii) the risk that the
issuer of an over-the-counter option will be unable to fulfill its
obligation to the portfolio due to bankruptcy or related circumstances; (iii)
the risk that options may exhibit greater short-term price volatility than
the underlying security; and (iv) the risk that a portfolio may be forced to
forego participation in the appreciation of the value of underlying
securities, futures contracts or currency due to the writing of a call
option.
High Yield: High yield securities are generally considered to be corporate
bonds, preferred stocks, and convertible securities rated Ba through C by
Moody's or BB through D by Standard & Poor's, and unrated securities
considered to be of equivalent quality. Securities rated less than Baa by
Moody's or BBB by Standard & Poor's are classified as non-investment grade
securities and are commonly referred to as junk bonds or high yield, high
risk securities. Such securities carry a high degree of risk and are
considered speculative by the major credit rating agencies. The following are
excerpts from the Moody's and Standard & Poor's definitions for
speculative-grade debt obligations:
Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and
interest is "moderate" and "not well safeguarded during both good
and bad times in the future." B-rated bonds "lack characteristics of
a desirable investment" and the assurance of interest or principal
payments "may be small." Caa-rated bonds are "of poor standing" and
"may be in default" or may have "elements of danger with respect to
principal or interest." Ca-rated bonds represent obligations which
are speculative in a high degree. Such issues are often in default
or have other marked shortcomings. C-rated bonds are the "lowest
rated" class of bonds, and issues so rated can be regarded as having
"extremely poor prospects" of ever attaining any real investment
standing.
Standard & Poor's: BB-rated bonds have "less near-term vulnerability
to default" than B- or CCC-rated securities but face "major ongoing
uncertainties . . . which may lead to inadequate capacity" to pay
interest or principal. B-rated bonds have a "greater vulnerability
to default than BB-rated bonds and the ability to pay interest or
principal will likely be impaired by adverse business conditions."
CCC-rated bonds have a currently identifiable "vulnerability to
default" and, without favorable business conditions, will be "unable
to repay interest and principal." C The rating C is reserved for
income bonds on which "no interest is being paid." D - Debt rated D
is in "default", and "payment of interest and/or repayment of
principal is in arrears."
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While these securities offer high yields, they also normally carry with them
a greater degree of risk than securities with higher ratings. Lower-rated
bonds are considered speculative by traditional investment standards. High
yield securities may be issued as a consequence of corporate restructuring or
similar events. Also, high yield securities are often issued by smaller, less
credit worthy companies, or by highly leveraged (indebted) firms, which are
generally less able than more established or less leveraged firms to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
investment grade bonds.
The risks posed by securities issued under such circumstances are
substantial. If a security held by a portfolio is down-graded, the portfolio
may retain the security.
Inverse Floaters--Inverse Floating Rate Obligations: are Fixed-Income
Securities, which have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop
in the reference rate of an inverse floater causes an increase in the coupon
rate. Inverse floaters may exhibit substantially greater price volatility
than fixed rate obligations having similar credit quality, redemption
provisions and maturity, and inverse floater CMOs exhibit greater price
volatility than the majority of mortgage pass-through securities or CMOs. In
addition, some inverse floater CMOs exhibit extreme sensitivity to changes in
prepayments. As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.
Investment Companies: The portfolios that are permitted to invest in shares
of other open-end or closed-end investment companies. The Investment Company
Act of 1940, as amended, generally prohibits the portfolios from acquiring
more than 3% of the outstanding voting shares of an investment company and
limits such investments to no more than 5% of the portfolio's total assets in
any one investment company and no more than 10% in any combination of
investment companies. The 1940 Act also prohibits the portfolios from
acquiring in the aggregate more than 10% of the outstanding voting shares of
any registered closed-end investment company.
To the extent a portfolio invests a portion of its assets in Investment
Companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the portfolio itself. The portfolios
may not purchase shares of any affiliated investment company except as
permitted by SEC Rule or Order.
Investment Funds: Some emerging market countries have laws and regulations
that currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of
companies listed and traded on the stock exchanges in these countries is
permitted by certain emerging market countries through investment funds.
Portfolios that may invest in these investment funds are subject to
applicable law as discussed under Investment Restrictions and will invest in
such investment funds only where appropriate given that the portfolio's
shareholders will bear indirectly the layer of expenses of the underlying
investment funds in addition to their proportionate share of the expenses of
the portfolio. Under certain circumstances, an investment in an investment
fund will be subject to the additional limitations that apply to investments
in Investment Companies.
Investment Grade Securities: are those rated by one or more nationally
recognized statistical rating organization (NRSRO) in one of the four highest
rating categories at the time of purchase (e.g. AAA, AA, A or BBB by Standard
& Poor's Corporation (Standard & Poor's) or Fitch Investors Service, Inc.,
(Fitch) or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. (Moody's).
Securities rated BBB or Baa represent the lowest of four levels of investment
grade securities and are regarded as borderline between definitely sound
obligations and those in which the speculative element begins to predominate.
Mortgage-backed securities, including mortgage pass-throughs and
collateralized mortgage obligations (CMOs), deemed investment grade by the
Adviser, will either carry a guarantee from an agency of the U.S. Government
or a private issuer of the timely payment of principal and interest (such
guarantees do not extend to the market value of such securities or the net
asset value per share of the portfolio) or, in the case of unrated
securities, be sufficiently seasoned that they are considered by the Adviser
to be investment grade quality. The Adviser may retain securities if their
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ratings falls below investment grade if it deems retention of the security to be
in the best interests of the portfolio. Any Portfolio permitted to hold
Investment Grade Securities may hold unrated securities if the Adviser considers
the risks involved in owning that security to be equivalent to the risks
involved in holding an Investment Grade Security.
Loan Participations: are loans or other direct debt instruments which are
interests in amounts owed by a corporate, governmental or other borrower to
another party. They may represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve the risk
of loss in case of default or insolvency of the borrower. Direct debt
instruments may offer less legal protection to the portfolio in the event of
fraud or misrepresentation. In addition, loan participations involve a risk
of insolvency of the lending bank or other financial intermediary. Direct
debt instruments may also include standby financing commitments that obligate
the investing portfolio to supply additional cash to the borrower on demand.
Loan participations involving Emerging Market Issuers may relate to loans as
to which there has been or currently exists an event of default or other
failure to make payment when due, and may represent amounts owed to financial
institutions that are themselves subject to political and economic risks,
including the risk of currency devaluation, expropriation, or failure. Such
loan participations present additional risks of default or loss.
Mortgage Securities--Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her
lending institution are passed through to investors such as the portfolio.
Most issuers or poolers provide guarantees of payments, regardless of whether
the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit, collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance
purchased by the issuer. The pools are assembled by various Governmental,
Government-related and private organizations. Portfolios may invest in
securities issued or guaranteed by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA), private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. Mortgage-backed securities issued by
non-agency issuers, whether or not such securities are subject to guarantees,
may entail greater risk. If there is no guarantee provided by the issuer,
mortgage- backed securities purchased by the portfolio will be those which at
time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the Adviser to be of investment grade quality.
Due to the possibility that prepayments on home mortgages will alter cash
flow on mortgage securities, it is not possible to determine in advance the
actual final maturity date or average life. Faster prepayment will shorten
the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
There are two methods of trading mortgage-backed securities. A specified pool
transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This
is in contrast with the typical mortgage security transaction, called a TBA
(to be announced) transaction, in which the type of mortgage securities to be
delivered is specified at the time of trade but the actual pool numbers of
the securities that will be delivered are not known at the time of the trade.
The pool numbers of the pools to be delivered at settlement will be announced
shortly before settlement takes place. The terms of the TBA trade may be made
more specific if desired. Generally, agency pass-through mortgage-backed
securities are traded on a TBA basis.
A mortgage-backed bond is a collateralized debt security issued by a thrift
or financial institution. The bondholder has a first priority perfected
security interest in collateral, usually consisting of agency mortgage
pass-through securities, although other assets, including U.S. Treasuries
(including Zero Coupon Treasury Bonds), agencies, cash equivalent securities,
whole loans and corporate bonds, may qualify. The amount of collateral must
be continuously maintained at levels from 115% to 150% of the principal
amount of the bonds issued, depending on the specific issue structure and
collateral type.
Municipals--Municipal Securities: are debt obligations issued by local, state
and regional governments that provide interest income which is exempt from
federal income taxes. Municipal securities include both municipal bonds
<PAGE>
(those securities with maturities of five years or more) and municipal notes
(those with maturities of less than five years). Municipal bonds are issued
for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation,
streets, water and sewer works; to obtain funds for operating expenses; to
refund outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewage works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not
the public issuer.
General obligation municipal bonds are secured by the issuer's pledge of full
faith, credit and taxing power. Revenue or special tax bonds are payable from
the revenues derived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax revenue.
Municipal notes are issued to meet the short-term funding requirements of
local, regional and state governments. Municipal notes include bond
anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. These are short-term debt obligations issued by state and
local governments to aid cash flows while waiting for taxes or revenue to be
collected, at which time the debt is retired. Other types of municipal notes
in which the portfolio may invest are construction loan notes, short-term
discount notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the portfolio) to
demand from the issuer payment of principal plus accrued interest upon a
specified number of days' notice. The portfolios eligible to purchase
municipal bonds may also purchase AMT bonds. AMT bonds are tax-exempt private
activity bonds issued after August 7, 1986, the proceeds of which are
directed, at least in part, to private, for-profit organizations. While the
income from AMT bonds is exempt from regular federal income tax, it is a tax
preference item in the calculation of the alternative minimum tax. The
alternative minimum tax is a special separate tax that applies to a limited
number of taxpayers who have certain adjustments to income or tax preference
items.
PA Municipals: are obligations of the Pennsylvania state government, state
agencies and various local governments, including counties, cities,
townships, special districts and authorities. In general, the credit quality
and credit risk of any issuer's debt is contingent upon the state and local
economy, the health of the issuer's finances, the amount of the issuer's
debt, the quality of management and the strength of legal provisions in the
debt document that protect debt holders. Credit risk is usually lower
wherever the economy is strong, growing and diversified, where financial
operations are sound and the debt burden is reasonable.
Concentration of investment in the securities of one state exposes a
portfolio to greater credit risks than would be present in a nationally
diversified portfolio of municipal securities. The risks associated with
investment in the securities of a single state include possible tax changes
or a deterioration in economic conditions and differing levels of supply and
demand for the municipal obligations of that state.
Debt of Government Agencies, Authorities and Commissions: Certain
state-created agencies have statutory authorization to incur debt for which
legislation providing for state appropriations to pay debt service thereon is
not required. The debt of these agencies is supported by assets of, or
revenues derived from, the various projects financed; it is not an obligation
of the Commonwealth. Some of these agencies, however, such as the Delaware
River Joint Toll Bridge Commission, are indirectly dependent on Commonwealth
funds through various state-assisted programs.
Preferred Stock: are non-voting ownership shares in a corporation which pay a
fixed or variable stream of dividends.
Repurchase Agreements: are transactions by which a portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or date of maturity of the purchased security. Such
<PAGE>
agreements permit the portfolio to keep all its assets at work while retaining
overnight flexibility in pursuit of investments of a longer term nature. The
Adviser will continually monitor the value of the underlying collateral to
ensure that its value, including accrued interest, always equals or exceeds the
repurchase price.
Pursuant to an order issued by the Securities and Exchange Commission, the
Fund's portfolios may pool their daily uninvested cash balances in order to
invest in repurchase agreements on a joint basis. By entering into repurchase
agreements on a joint basis, it is expected that the portfolios will incur
lower transaction costs and potentially obtain higher rates of interest on
such repurchase agreements. Each portfolio's participation in the income from
jointly purchased repurchase agreements will be based on that portfolio's
percentage share in the total purchase agreement.
Rights: represent a preemptive right of stockholders to purchase additional
shares of a stock at the time of a new issuance, before the stock is offered
to the general public, allowing the stockholder to retain the same ownership
percentage after the new stock offering.
SMBS--Stripped Mortgage-Backed Securities: are Derivatives in the form of
multi-class mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class
will receive most of the interest and the remainder of the principal. In some
cases, one class will receive all of the interest (the IO class), while the
other class will receive all of the principal (the principal-only or PO
class). The yield to maturity on IOs and POs is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on a portfolio yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, a
portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, certain of these securities
may be deemed illiquid and subject to a portfolio's limitations on investment
in illiquid securities.
Structured Investments: are Derivatives in the form of a unit or units
representing an undivided interest(s) in assets held in a trust that is not
an investment company as defined in the Investment Company Act of 1940. A
trust unit pays a return based on the total return of securities and other
investments held by the trust and the trust may enter into one or more Swaps
to achieve its objective. For example, a trust may purchase a basket of
securities and agree to exchange the return generated by those securities for
the return generated by another basket or index of securities. A portfolio
will purchase Structured Investments in trusts that engage in such Swaps only
where the counterparties are approved by MAS in accordance with credit-risk
guidelines established by the Board of Trustees.
Structured Notes: are Derivatives on which the amount of principal repayment
and or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices
such as the S&P 500 Index. In some cases, the impact of the movements of
these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
Swaps--Swap Contracts: are Derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
<PAGE>
notional amount. The term specified index includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
portfolio may agree to swap the return generated by a fixed-income index for the
return generated by a second fixed-income index. The currency swaps in which the
portfolios may enter will generally involve an agreement to pay interest streams
in one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon national amount.
A portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with a portfolio receiving or paying, as
the case may be, only the net amount of the two returns. A portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the portfolio) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government securities, or high grade debt
obligations. A portfolio will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Trustees.
Possible Risks: Interest rate and total rate of return swaps do not involve
the delivery of securities, other underlying assets, or principal.
Accordingly, the risk of loss with respect to interest rate and total rate of
return swaps is limited to the net amount of interest payments that a
portfolio is contractually obligated to make. If the other party to an
interest rate or total rate of return swap defaults, a portfolio's risk of
loss consists of the net amount of interest payments that a portfolio is
contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of the entire principal value of one designated currency
in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. If
there is a default by the counterparty, a portfolio may have contractual
remedies pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Swaps that include caps, floors, and collars are
more recent innovations for which standardized documentation has not yet been
fully developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the portfolios would be less favorable than it would have been
if this investment technique were not used.
Taxable Investments: comprise Fixed-Income Securities and other instruments
which pay income that is not exempt from taxation. Investors may be liable
for tax on the income distributed as a result of the portfolio holding
taxable investments. In this event, shareholders will receive an IRS form
1099 disclosing the taxable income paid for a calendar year.
U.S. Governments--U.S. Treasury securities: are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the
payment of both principal and interest.
Warrants: are options issued by a corporation which give the holder the
option to purchase stock.
When-Issued Securities: are securities purchased at a certain price even
though the securities may not be delivered for up to 90 days. No payment or
delivery is made by a portfolio in a when-issued transaction until the
portfolio receives payment or delivery from the other party to the
transaction. Although a portfolio receives no income from the above described
securities prior to delivery, the market value of such securities is still
subject to change. As a consequence, it is possible that the market price of
the securities at the time of delivery may be higher or lower than the
purchase price. A portfolio will maintain with the custodian a separate
account with a segregated portfolio of liquid, high-grade debt securities or
cash in an amount at least equal to these commitments.
<PAGE>
Zero Coupons--Zero Coupon Obligations: are Fixed-Income Securities that do
not make regular interest payments. Instead, zero coupon obligations are sold
at substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until
maturity. Zero coupon obligations may offer investors the opportunity to earn
higher yields than those available on ordinary interest-paying obligations of
similar credit quality and maturity. However, zero coupon obligation prices
may also exhibit greater price volatility than ordinary fixed-income
securities because of the manner in which their principal and interest are
returned to the investor.
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
Institutional Class Shares are available to clients of the Adviser with
combined investments of $5,000,000 and Shareholder Organizations who have a
contractual arrangement with the Fund, including institutions such as trusts,
foundations or broker-dealers purchasing for the accounts of others.
Institutional Class Shares of each portfolio except for the Cash Reserves
Portfolio may be purchased at the net asset value per share next determined
after receipt of the purchase order. Such portfolios determine net asset
value as described under Other Information-Valuation of Shares each day that
the portfolios are open for business. See Other Information-Closed Holidays
and Valuation of Shares.
The Cash Reserves Portfolio declares dividends daily and, therefore, at the
time of a purchase must have funds immediately available for investment. As a
result, payment for the purchase of shares must be in the form of Federal
Funds (monies credited to the portfolio's Custodian by a Federal Reserve
Bank) before they can be accepted by the portfolio. The portfolio is credited
with Federal Funds on the same day if the investment is made by Federal
Funds. Institutional Class Shares of the Cash Reserves Portfolio may be
purchased at the net asset value next determined after an order is received
by the portfolio and Federal Funds are received by the Custodian. The Cash
Reserves Portfolio determines net asset value as of 12:00 noon (Eastern Time)
each day that the portfolios are open for business. See Other
Information-Closed Holidays and Valuation of Shares.
Initial Purchase by Mail: Subject to acceptance by the Fund, an account may
be opened by contacting MAS Funds' Client Service Group at 1-800-354-8185,
One Tower Bridge, Suite 1150, P.O. Box 868, West Conshohocken, Pennsylvania
19428-0868.
Subject to acceptance by the Fund, payment for the purchase of shares
received by mail will be credited at the net asset value per share of the
portfolio next determined after receipt. Such payment need not be converted
into Federal Funds (monies credited to the Fund's Custodian Bank by a Federal
Reserve Bank) before acceptance by the Fund, except for the Cash Reserves
Portfolio. Purchases made by check in the Cash Reserves Portfolio are
ordinarily credited at the net asset value per share determined two business
days after receipt of the check by the Fund. Please note that purchases made
by check in any portfolio are not permitted to be redeemed until payment of
the purchase has been collected, which may take up to eight business days
after purchase. Shareholders can avoid this delay by purchasing shares by
wire.
Initial Purchase by Wire: Subject to acceptance by the Fund, Institutional
Class Shares of each portfolio may also be purchased by wiring Federal Funds
to the Fund's Custodian Bank, The Chase Manhattan Bank, N.A. (see
instructions below). A completed Account Registration Form should be
forwarded to MAS Funds' Client Services Group in advance of the wire. For all
portfolios (except the Cash Reserves Portfolio), notification must be given
to MAS Funds' Client Services Group at 1-800-354-8185 prior to the
determination of net asset value. Institutional Class Shares will be
purchased at the net asset value per share next determined after receipt of
the purchase order. (Prior notification must also be received from investors
with existing accounts.) Instruct your bank to send a Federal Funds Wire in a
specified amount to the Fund's Custodian Bank using the following wiring
instructions:
<PAGE>
The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds
Ref: (Portfolio Name, Account Number, Account Name)
Purchases in the Cash Reserves Portfolio may also be made by Federal Funds
wire to the Fund's Custodian. If the portfolio receives notification of an
order prior to 12:00 noon (Eastern Time) and funds are received by the
Custodian the same day, purchases of portfolio shares will become effective
and begin to earn income on that business day. Orders received after 12:00
noon (Eastern Time) will be effective on the next business day upon receipt
of funds. Federal Funds purchases will be accepted only on a day on which the
portfolio is open for business. See Other Information-Closed Holidays.
Additional Investments: Additional investments of Institutional Class Shares
at net asset value may be made at any time (minimum investment $1,000) by
mailing a check (payable to MAS Funds) to MAS Funds' Client Services Group at
the address noted under Initial Investments by Mail or by wiring Federal
Funds to the Custodian Bank as outlined above. Shares will be purchased at
the net asset value per share next determined after receipt of the purchase
order. For all portfolios, notification must be given to MAS Fund's Client
Services Group at 1-800-354-8185 prior to the determination of net asset
value. For the Cash Reserves Portfolio, notification of a Federal Funds wire
must be received by 12:00 noon (Eastern Time). Purchases made by check in the
Cash Reserves Portfolio are ordinarily credited at the net asset value per
share determined two business days after receipt of the check by the Fund.
Other Purchase Information: The Fund reserves the right, in its sole
discretion, to suspend the offering of Institutional Class Shares of any of
its portfolios or to reject any purchase orders when, in the judgment of
management, such suspension or rejection is in the best interest of the Fund.
The Fund also reserves the right, in its sole discretion, to waive the
minimum initial and subsequent investment amounts.
Purchases of a portfolio's Institutional Class Shares will be made in full
and fractional shares of the portfolio calculated to three decimal places. In
the interest of economy and convenience, certificates for shares will not be
issued except at the written request of the shareholder. Certificates for
fractional shares, however, will not be issued.
Institutional Class Shares of the Fund's portfolios are also sold to
corporations or other institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others (Shareholder
Organizations). Investors purchasing and redeeming shares of the portfolios
through a Shareholder Organization may be charged a transaction-based fee or
other fee for the services of such organization. Each Shareholder
Organization is responsible for transmitting to its customers a schedule of
any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Customers of Shareholder
Organizations should read this Prospectus in light of the terms governing
accounts with their organization. The Fund does not pay compensation to or
receive compensation from Shareholder Organizations for the sale of
Institutional Class Shares.
REDEMPTION OF SHARES
Institutional Class Shares of each portfolio may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of
Institutional Class Shares redeemed may be more or less than the purchase
price, depending on the net asset value at the time of redemption which is
based on the market value of the investment securities held by the portfolio.
See other Information-Closed Holidays and Valuation of Shares.
By Mail: Each portfolio will redeem Institutional Class Shares at the net
asset value next determined after the request is received in good order.
Requests should be addressed to MAS Funds: c/o the Client Services Group, One
Tower Bridge, Suite 1150, P.O. Box 868, West Conshohocken, PA 19428-0868.
<PAGE>
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying
the number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which the shares are
registered;
(c) Any required signature guarantees (see Signature Guarantees); and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
Signature Guarantees: To protect your account, the Fund and the Administrator
from fraud, signature guarantees are required to enable the Fund to verify
the identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are
to be sent to someone other than the registered shareholder(s) and the
registered address, and (2) share transfer requests. Please contact MAS
Funds' Client Services Group for further details.
By Telephone: Provided the Telephone Redemption Option has been authorized by
the shareholder on the Account Registration Form, a redemption of shares may
be requested by calling MAS Funds' Client Services Group and requesting that
the redemption proceeds be mailed to the primary registration address or
wired per the authorized instructions. Shares cannot be redeemed by telephone
if share certificates are held for those shares.
By Facsimile: Written requests in good order (see above) for redemptions,
exchanges, and transfers may be forwarded to the Fund via facsimile. All
requests sent to the Fund via facsimile must be followed by a telephone call
to MAS Funds' Client Services Group to ensure that the instructions have been
properly received by the Fund. The original request must be promptly mailed
to MAS Funds, c/o Client Services Group, One Tower Bridge, Suite 1150, P. O.
Box 868, West Conshohocken, PA 19428-0868.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order
to confirm that telephone instructions in connection with redemptions are
genuine, the Fund and Distributor will provide written confirmation of
transactions initiated by telephone.
Payment of the redemption proceeds will ordinarily be made within three
business days after receipt of an order for a redemption. The Fund may
suspend the right of redemption or postpone the date of redemption at times
when the NYSE, the Custodian, or the Fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as
determined by the Securities and Exchange Commission.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in-kind of readily marketable securities held by a
portfolio in lieu of cash in conformity with applicable rules of the
Securities and Exchange Commission. Investors may incur brokerage charges on
the sale of portfolio securities received in such payments of redemptions.
SHAREHOLDER SERVICES
Exchange Privilege: Each portfolio's Institutional Class Shares may be
exchanged for shares of the Fund's other portfolios (except the Select Equity
and Small Cap Value Portfolios which are currently not accepting new
investors) based on the respective net asset values of the shares involved.
<PAGE>
The exchange privilege is only available, however, with respect to portfolios
that are registered for sale in a shareholder's state of residence. There are no
exchange fees. Exchange requests should be sent to MAS Funds, c/o Client
Services Group, One Tower Bridge, Suite 1150, P.O. Box 868, West Conshohocken,
PA 19428-0868, 1-800-354-8185.
Because an exchange of shares amounts to a redemption from one portfolio and
purchase of shares of another portfolio, the above information regarding
purchase and redemption of shares applies to exchanges. Shareholders should
note that an exchange between portfolios is considered a sale and purchase of
shares for tax purposes.
The officers of the Fund reserve the right not to accept any request for an
exchange when, in their opinion, the exchange privilege is being used as a
tool for market timing. The Fund reserves the right to change the terms or
conditions of the exchange privilege discussed herein upon sixty days'
notice.
Transfer of Registration: The registration of Fund shares may be transferred
by writing to MAS Funds, c/o Client Service Group, One Tower Bridge, Suite
1150, P.O. Box 868, West Conshohocken, PA 19428-0868. As in the case of
redemptions, the written request must be received in good order as defined
above.
VALUATION OF SHARES
Equity, Select Equity, Value, Small Cap Value, Mid Cap Value, Growth, Mid Cap
Growth, International Equity and Emerging Markets Portfolios:
Net asset value per share of each class is determined by dividing the total
market value of each portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of that portfolio. Net asset
value per share is determined as of the close of the NYSE (normally 4:00 p.m.
Eastern Time) on each day the portfolio is open for business (See Other
Information-Closed Holidays). Equity Securities listed on a U.S. securities
exchange or NASDAQ for which market quotations are available are valued at
the last quoted sale price on the day the valuation is made. Price
information on listed Equity Securities is taken from the exchange where the
security is primarily traded. Equity Securities listed on a foreign exchange
are valued at the latest quoted sales price available before the time when
assets are valued. For purposes of net asset value per share, all assets and
liabilities initially expressed in foreign currencies are converted into U.S.
dollars at the bid price of such currencies against U.S. dollars. Unlisted
Equity Securities and listed U.S. Equity Securities not traded on the
valuation date for which market quotations are readily available are valued
at the mean of the most recent quoted bid and asked price. The value of other
assets and securities for which no quotations are readily available
(including restricted securities) are determined in good faith at fair value
using methods approved by the Trustees.
Domestic Fixed Income, Fixed Income, Fixed Income Portfolio II, Special
Purpose Fixed Income, High Yield, Limited Duration, Intermediate Duration,
Mortgage-Backed Securities, Global Fixed Income, International Fixed Income,
Municipal and PA Municipal Portfolios:
Net asset value per share is computed by dividing the total value of the
investments and other assets of the portfolio, less any liabilities, by the
total outstanding shares of the portfolio. The net asset value per share is
determined as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day the portfolio is open for business (See Other
Information-Closed Holidays). Bonds and other Fixed-Income Securities listed
on a foreign exchange are valued at the latest quoted sales price available
before the time when assets are valued. For purposes of net asset value per
share, all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at the bid price of such currencies
against U.S. dollars.
Net asset value includes interest on bonds and other Fixed-Income Securities
which is accrued daily. Bonds and other Fixed-Income Securities which are
traded over the counter and on an exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds
and other Fixed-Income Securities this ordinarily will be the
over-the-counter market.
<PAGE>
However, bonds and other Fixed-Income Securities may be valued on the basis
of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices but
take into account institutional size trading in similar groups of securities
and any developments related to specific securities. Bonds and other Fixed-
Income Securities not priced in this manner are valued at the most recent
quoted bid price, or when stock exchange valuations are used, at the latest
quoted sale price on the day of valuation. If there is no such reported sale,
the latest quoted bid price will be used. Securities purchased with remaining
maturities of 60 days or less are valued at amortized cost when the Board of
Trustees determines that amortized cost reflects fair value. In the event
that amortized cost does not approximate market, market prices as determined
above will be used. Other assets and securities, for which no quotations are
readily available (including restricted securities), will be valued in good
faith at fair value using methods approved by the Board of Trustees.
Balanced and Multi-Asset-Class Portfolios: Net asset value per share is
computed by dividing the total value of the investments and other assets of
the portfolio, less any liabilities, by the total outstanding shares of the
portfolio. The net asset value per share of the Balanced and
Multi-Asset-Class Portfolios is determined as of the latter of the close of
the NYSE or one hour after the close of the bond markets on each day the
portfolios are open for business. Equity, fixed-income and other securities
held by the portfolios will be valued using the policies described above.
Cash Reserves Portfolio: The net asset value per share of the Cash Reserves
Portfolio is calculated daily as of 12:00 noon (Eastern Time) on each day
that the portfolio is open for business (See Other Information-Closed
Holidays). The portfolio determines its net asset value per share by
subtracting the portfolio's liabilities (including accrued expenses and
dividends payable) from the total value of the portfolio's investments and
other assets and dividing the result by the total outstanding shares of the
portfolio.
For the purpose of calculating the portfolio's net asset value per share,
securities are valued by the amortized cost method of valuation, which does
not take into account unrealized gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value
based on amortized cost is higher or lower than the price the portfolio would
receive if it sold the instrument.
The use of amortized cost and the maintenance of the portfolio's per share
net asset value at $1.00 is based on its election to operate under the
provisions of Rule 2a-7 under the Investment Company Act of 1940, as amended.
As conditions of operating under Rule 2a-7, the portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of thirteen months or less and invest
only in U.S. dollar-denominated securities which are determined by the
Trustees to present minimal credit risks and which are of eligible quality as
determined under the rule.
The Trustees have also agreed to establish procedures reasonably designed,
taking into account current market conditions and the portfolio's investment
objective, to stabilize the net asset value per share as computed for the
purposes of sales and redemptions at $1.00. These procedures include periodic
review, as the Trustees deem appropriate and at such intervals as are
reasonable in light of current market conditions, of the relationship between
the amortized cost value per share and a net asset value per share based upon
available indications of market value. In such a review, investments for
which market quotations are readily available are valued at the most recent
bid price or quoted yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the
major market makers for the securities to be valued. Other investments and
assets are valued at fair value, as determined in good faith by the Trustees.
In the event of a deviation of over 1/2 of 1% between a portfolio's net asset
value based upon available market quotations or market equivalents and $1.00
per share based on amortized cost, the Trustees will promptly consider what
action, if any, should be taken. The Trustees will also take such action as
they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise
from differences between the two. Such action may include redeeming shares in
kind, selling instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends, paying
distributions from capital or capital gains, or utilizing a net asset value
per share not equal to $1.00 based upon available market quotations.
<PAGE>
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES: Dividends and Capital Gains
Distributions: The Fund maintains different dividend and capital gain
distribution policies for each portfolio. These are:
o The Equity, Value, Growth, Fixed Income, Fixed Income Portfolio II,
Special Purpose Fixed Income, High Yield, Limited Duration, Intermediate
Duration, Mortgage-Backed Securities, Balanced, Multi-Asset-Class, Global
Fixed Income, International Fixed Income, Select Equity and Domestic Fixed
Income Portfolios normally distribute substantially all of their net
investment income to shareholders in the form of quarterly dividends.
o The International Equity, Small Cap Value, Mid Cap Value, Mid Cap Growth
and Emerging Markets Portfolios normally distribute substantially all of
their net investment income in the form of annual dividends.
o The Municipal and the PA Municipal Portfolios normally distribute
substantially all of their net investment income in the form of monthly
dividends.
o The Cash Reserves Portfolio declares dividends daily and normally
distributes substantially all of its investment income in the form of
monthly dividends.
If any portfolio does not have income available to distribute, as determined
in compliance with the appropriate tax laws, no distribution will be made.
If any net capital gains are realized from the sale of underlying securities,
the portfolios normally distribute such gains with the last dividend for the
calendar year.
All dividends and capital gains distributions are automatically paid in
additional shares of the portfolio unless the shareholder elects otherwise.
Such election must be made in writing to the Fund and may be made on the
Account Registration Form.
In all portfolios except the Cash Reserves Portfolio, undistributed net
investment income is included in the portfolio's net assets for the purpose
of calculating net asset value per share. Therefore, on the ex-dividend date,
the net asset value per share excludes the dividend (i.e., is reduced by the
per share amount of the dividend). Dividends paid shortly after the purchase
of shares by an investor, although in effect a return of capital, are taxable
as ordinary income.
Certain Mortgage Securities may provide for periodic or unscheduled payments
of principal and interest as the mortgages underlying the securities are paid
or prepaid. However, such principal payments (not otherwise characterized as
ordinary discount income or bond premium expense) will not normally be
considered as income to the portfolio and therefore will not be distributed
as dividends. Rather, these payments on mortgage-backed securities will be
reinvested on behalf of the shareholders by the portfolio in accordance with
its investment objectives and policies.
Special Considerations for the Cash Reserves Portfolio: Net investment income
is computed and dividends declared as of 12:00 noon (Eastern Time), on each
day. Such dividends are payable to Cash Reserves Portfolio shareholders of
record as of 12:00 noon (Eastern Time) on that day, if the portfolio is open
for business. Shareholders who redeem prior to 12:00 noon (Eastern Time) are
not entitled to dividends for that day. Dividends declared for Saturdays,
Sundays and holidays are payable to shareholders of record as of 12:00 noon
(Eastern Time) on the preceding business day on which the portfolio was open
for business.
For the purpose of calculating dividends, net income shall consist of
interest earned, including any discount or premium ratably amortized to the
date of maturity, minus estimated expenses of the portfolio.
<PAGE>
Net realized short-term capital gains, if any, of the Cash Reserves Portfolio
will be distributed whenever the Trustees determine that such distributions
would be in the best interest of shareholders, but at least once a year. The
portfolio does not expect to realize any long-term capital gains. Should any
such gains be realized, they will be distributed annually.
Federal Taxes: Each portfolio of the Fund intends to qualify for taxation as
a regulated investment company under the Code so that each portfolio will not
be subject to Federal income tax to the extent it distributes its income to
its shareholders. Dividends, either in cash or reinvested in shares, paid by
a portfolio from net investment income will be taxable to shareholders as
ordinary income, except for the Municipal and PA Municipal Portfolios (see
Special Tax Considerations for the Municipal and PA Municipal Portfolios). In
the case of the Equity, Value, Small Cap Value, Mid Cap Growth, Growth,
Balanced, Multi-Asset-Class, Mid Cap Value, Select Equity, and Select Value
Portfolios, such dividends will generally qualify in part for the dividends
received deduction for corporations, but the portion of the dividends so
qualified depends on the aggregate taxable qualifying dividend income
received by each portfolio from domestic (U.S.) sources. The Fund will send
each shareholder a statement each year indicating the amount of the dividend
income which qualifies for such treatment.
Whether paid in cash or additional shares of a portfolio, and regardless of
the length of time the shares in such portfolio have been owned by the
shareholder, distributions from long-term capital gains are taxable to
shareholders as such, but are not eligible for the dividends received
deduction for corporations. Shareholders are notified annually by the Fund as
to Federal tax status of dividends and distributions paid by a portfolio.
Such dividends and distributions may also be subject to state and local
taxes.
Exchanges and redemptions of shares in a portfolio are taxable events for
Federal income tax purposes. Individual shareholders may also be subject to
state and municipal taxes on such exchanges and redemptions.
Each portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so,
each portfolio expects to distribute an amount at least equal to (i) 98% of
its calendar year ordinary income, (ii) 98% of its capital gains net income
(the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st, and (iii) 100% of
any undistributed ordinary and capital gain net income from the prior year.
Dividends declared in December by a portfolio will be deemed to have been
paid by such portfolio and received by shareholders on the record date
provided that the dividends are paid before February 1 of the following year.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions, and redemptions)
paid to shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, you must certify on the Account
Registration Form that your Social Security or Taxpayer Identification Number
provided is correct and that you are not currently subject to back-up
withholding, or that you are exempt from back-up withholding.
Foreign Income Taxes: Investment income received by the portfolios from
sources within foreign countries may be subject to foreign income taxes
withheld at the source. The U.S. has entered into Tax Treaties with many
foreign countries which entitle these portfolios to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the portfolios'
assets to be invested within various countries is not known. The portfolios
intend to operate so as to qualify for treaty reduced rates of tax where
applicable.
The International Equity, Emerging Markets, Global Fixed Income and
International Fixed Income Portfolios may file an election with the Internal
Revenue Service to pass through to the portfolio's shareholders the amount of
foreign income taxes paid by the portfolio, but may do so only if more than
50% of the value of the total assets of the portfolio at the end of the
fiscal year is represented by foreign securities. These portfolios will make
such an election only if they deem it to be in the best interests of their
shareholders.
<PAGE>
If this election is made, shareholders of the portfolio will be required to:
(i) include in gross income, even though not actually received, their
respective pro rata share of foreign taxes paid by the portfolio; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either
deduct their pro rata share of foreign taxes in computing their taxable
income or use it within the limitations set forth in the Internal Revenue
Code as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions.
Each shareholder of the portfolio will be notified within 60 days after the
close of each taxable (fiscal) year of the Fund if the foreign taxes paid by
the portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the portfolio's gross income from foreign sources. Shareholders who are
not liable for Federal income taxes, such as retirement plans qualified under
Section 401 of the Internal Revenue Code, will not be affected by any such
"pass through" of foreign tax credits.
State and Local Taxes: The Fund is formed as a Pennsylvania Business Trust
and therefore is not liable, under current law, for any corporate income or
franchise tax of the Commonwealth of Pennsylvania. The Fund will provide
Pennsylvania taxable values on a per share basis.
Special Tax Considerations for the Municipal and PA Municipal
Portfolios: These portfolios intend to invest a sufficient portion of their
assets in municipal bonds and notes so that each will qualify to pay
exempt-interest dividends to shareholders. Such exempt-interest dividends are
excluded from a shareholder's gross income for Federal personal income tax
purposes. Tax-exempt dividends received from the Municipal and PA Municipal
Portfolios may be subject to state and local taxes. However, some states
allow shareholders to exclude that portion of a portfolio's tax-exempt income
which is attributable to municipal securities issued within the shareholder's
state of residence. Furthermore, the PA Municipal Portfolio invests at least
65% of its assets in PA Municipals. As a result, the income of the portfolio
that is derived from PA Municipals and U.S. Governments will not be subject
to the Pennsylvania personal income tax or to the Philadelphia School
District investment net income tax. Distributions by the PA Municipal
Portfolio to a Pennsylvania resident that are attributable to most other
sources may be subject to the Pennsylvania personal income tax and (for
residents of Philadelphia) to the Philadelphia School District investment net
income tax. To the extent, if any, that dividends paid to shareholders of the
Municipal and PA Municipal Portfolios are derived from taxable interest or
long-term or short-term capital gains, such dividends will be subject to
Federal personal income tax (whether such dividends are paid in cash or in
additional shares) and may also be subject to state and local taxes. In
addition, the Municipal and PA Municipal Portfolios may invest in private
activity municipal securities, the interest on which is subject to the
Federal alternative minimum tax for individuals (AMT bonds). To the extent
that the portfolios invest in AMT bonds, individuals who are subject to the
AMT will be required to report a portion of dividends as a tax preference
item in determining their federal taxes. A shareholder may lose the tax
exempt status of the accrual income of these portfolios if they redeem their
shares before a dividend has been declared.
TRUSTEES OF THE TRUST: The affairs of the Trust are supervised by the
Trustees under the laws governing business trusts in the Commonwealth of
Pennsylvania. The Trustees have approved contracts under which, as described
above, certain companies provide essential management, administrative and
shareholder services to the Trust.
INVESTMENT ADVISER: The Investment Adviser to the Fund, Miller Anderson &
Sherrerd, LLP (the Adviser), is a Pennsylvania limited liability partnership
founded in 1969 and is located at One Tower Bridge, West Conshohocken, PA
19428. Miller Anderson & Sherrerd, LLP is an Equal Opportunity/Affirmative
Action Employer. The Adviser provides investment services to employee benefit
plans, endowment funds, foundations and other institutional investors and as
of the date of this prospectus had in excess of $35 billion in assets under
management. On January 3, 1996, Morgan Stanley Group Inc. acquired Miller
Anderson & Sherrerd, LLP (the "Adviser") in a transaction in which Morgan
Stanley Asset Management Holdings Inc., an indirect wholly owned subsidiary
of Morgan Stanley Group Inc., became the sole general partner of the Adviser.
Morgan Stanley Asset Management Holdings Inc. and two other wholly owned
subsidiaries of Morgan Stanley Group Inc. became the limited partners of the
Adviser. In connection with this transaction, the Adviser entered into a new
Investment Management Agreement ("Agreement") with MAS Funds dated as of
<PAGE>
January 3, 1996, which Agreement was approved by the shareholders of each
Portfolio at a special meeting held on October 6, 1995. The Adviser will retain
its name and remain at its current location, One Tower Bridge, West
Conshohocken, PA 19428. The Adviser will continue to provide investment
counseling services to employee benefit plans, endowments, foundations, and
other institutional investors.
Under the Agreement with the Fund, the Adviser, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the
stated investment objectives and policies of each portfolio of the Fund,
manages the investment and reinvestment of the assets of each portfolio of
the Fund. In this regard, it is the responsibility of the Adviser to make
investment decisions for the Fund's portfolios and to place each portfolio's
purchase and sales orders. As compensation for the services rendered by the
Adviser under the Agreement, each portfolio pays the Adviser an advisory fee
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the portfolio's average daily net assets for the
quarter:
Rate
----
Emerging Markets Portfolio* .750%
Equity Portfolio .500
Growth Portfolio .500
International Equity Portfolio .500
Mid Cap Growth Portfolio .500
Mid Cap Value Portfolio* .750
Small Cap Value Portfolio* .750
Value Portfolio .500
Cash Reserves Portfolio .250
Domestic Fixed Income Portfolio .375
Fixed Income Portfolio .375
Fixed Income Portfolio II .375
Global Fixed Income Portfolio .375
High Yield Portfolio .375
Intermediate Duration Portfolio .375
International Fixed Income Portfolio .375
Limited Duration Portfolio .300
Mortgage-Backed Securities Portfolio .375
Municipal Portfolio .375
PA Municipal Portfolio .375
Special Purpose Fixed Income Portfolio .375
Balanced Portfolio .450
Multi-Asset-Class Portfolio .450
Select Equity Portfolio .500
* Advisory fees in excess of 0.750% of average net assets are considered
higher than normal for most investment companies, but are not unusual for
portfolios that invest primarily in small capitalization stocks or in
countries with emerging market economies.
Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary to keep
Total Operating Expenses actually deducted from portfolio assets for the
Emerging Markets, Mid Cap Value, Cash Reserves, Domestic Fixed Income, Global
Fixed Income, High Yield, Intermediate Duration, International Fixed Income,
Limited Duration, Mortgage-Backed Securities, Municipal, PA Municipal,
Multi-Asset-Class and Select Equity Portfolios from exceeding 1.18%, 0.88%,
0.32%, 0.50%, 0.58%, 0.525%, 0.52%, 0.60%, 0.42%, 0.50%, 0.50%, 0.50%, 0.58%
and 0.61%, respectively.
<PAGE>
For the fiscal year ended September 30, 1995, the Adviser received the
following as compensation for its services:
Rate
----
Emerging Markets Portfolio .460%
Equity Portfolio .500%
International Equity Portfolio .500%
Mid Cap Growth Portfolio .500%
Mid Cap Value Portfolio .000%
Small Cap Value Portfolio .750%
Value Portfolio .500%
Cash Reserves Portfolio .140%
Domestic Fixed Income Portfolio .285%
Fixed Income Portfolio .375%
Fixed Income Portfolio II .375%
Global Fixed Income Portfolio .375%
High Yield Portfolio .375%
Intermediate Duration Portfolio .295%
International Fixed Income Portfolio .375%
Limited Duration Portfolio .280%
Mortgage-Backed Securities Portfolio .365%
Municipal Portfolio .285%
PA Municipal Portfolio .185%
Special Purpose Fixed Income Portfolio .375%
Balanced Portfolio .450%
Multi-Asset-Class Portfolio .310%
Select Equity Portfolio .370%
<PAGE>
PORTFOLIO MANAGEMENT
The investment professionals of MAS who are primarily responsible for the
day-to-day management of the Fund's portfolios are as follows:
Equity and Select Equity Portfolios: Arden C. Armstrong, John D. Connolly,
Timothy G. Connors, Nicholas J. Kovich, Robert J. Marcin, Gary G. Schlarbaum
and A. Morris Williams, Jr.;
Value Portfolio: Robert J. Marcin and A. Morris Williams, Jr.;
Small Cap Value and Mid Cap Value Portfolios: Bradley S. Daniels, Gary D.
Haubold and Gary G. Schlarbaum;
Mid Cap Growth Portfolio: Arden C. Armstrong and John D. Connolly;
Growth Portfolio: Arden C. Armstrong, John D. Connolly and Timothy G.
Connors;
Fixed Income, Domestic Fixed Income, Special Purpose Fixed Income, and Fixed
Income II Portfolios: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley;
Mortgage-Backed Securities Portfolio: Kenneth B. Dunn and Scott F. Richard;
High Yield Portfolio: Thomas L. Bennett and Stephen F. Esser;
Cash Reserves Portfolio: Ellen D. Harvey;
Limited Duration and Intermediate Duration Portfolios: Ellen D. Harvey, Scott
F. Richard and Christian G. Roth;
Municipal and PA Municipal Portfolios: Kenneth B. Dunn, Steven K. Kreider and
Scott F. Richard;
Balanced Portfolio: Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum
and Richard B. Worley;
Multi-Asset-Class Portfolio: Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras, Dean Williams and Richard
B. Worley;
International Equity and Emerging Markets Portfolios: Horacio A. Valeiras and
Dean Williams;
Global Fixed Income and International Fixed Income Portfolios: J. David
Germany and Richard B. Worley.
A description of their business experience during the past five years is as
follows:
Arden C. Armstrong, Portfolio Manager, joined MAS in 1986. She assumed
responsibility for the Mid Cap Growth Portfolio in 1990, the Growth Portfolio
in 1993 and the Equity and Select Equity Portfolios in 1994.
Thomas L. Bennett, Portfolio Manager, joined MAS in 1984. He assumed
responsibility for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio 1987, the High Yield Portfolio in 1985, the Fixed Income
Portfolio II in 1990, the Special Purpose Fixed Income and Balanced
Portfolios in 1992 and the Multi-Asset-Class Portfolio in 1994.
<PAGE>
Timothy G. Connors, Portfolio Manager, joined MAS in 1994. Mr. Connors served
as Vice President and Managing Director of CoreStates Investment Advisers
from 1986 to 1994. He assumed responsibility for the Equity, Select Equity
and Growth Portfolios in 1994.
John D. Connolly, Portfolio Manager, joined MAS in 1990. Mr. Connolly served
as Senior Vice President and Chief Investment Strategist at Dean Witter
Reynolds from 1984 to 1990. He assumed responsibility for the Equity, Select
Equity and Mid Cap Growth Portfolios in 1990, the Balanced Portfolio in 1992,
the Growth Portfolio in 1993 and the Multi-Asset-Class Portfolio in 1994.
Bradley S. Daniels, Portfolio Manager, joined MAS in 1985. He assumed
responsibility for the Small Cap Value Portfolio in 1986 and the Mid Cap
Value Portfolio in 1994.
Kenneth B. Dunn, Portfolio Manager, joined MAS in 1987. He assumed
responsibility for the Fixed Income and the Domestic Fixed Income Portfolios
in 1987, the Fixed Income II Portfolio in 1990, the Mortgage-Backed
Securities and Special Purpose Fixed Income Portfolios in 1992, and the
Municipal and PA Municipal Portfolios in 1994.
Stephen F. Esser, Portfolio Manager, joined MAS in 1988. He assumed
responsibility for the High Yield Portfolio in 1989.
J. David Germany, Portfolio Manager, joined MAS in 1991. He served as Vice
President & Senior Economist for Morgan Stanley & Co. from 1989 to 1991. He
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993 and the Multi-Asset-Class Portfolio in 1994.
Ellen D. Harvey, Portfolio Manager, joined MAS in 1984. She assumed
responsibility for the Cash Reserves Portfolio in 1990, the Limited Duration
Portfolio in 1992 and the Intermediate Duration Portfolio in 1994.
Gary D. Haubold, Portfolio Manager, joined MAS in 1993. Mr. Haubold served as
Senior Vice President at Wood, Struthers & Winthrop in 1993. He assumed
responsibility for the Small Cap Value Portfolio in 1993 and the Mid Cap
Value Portfolio in 1994.
Nicholas J. Kovich, Portfolio Manager, joined MAS in 1988. He assumed
responsibility for the Equity and Select Equity Portfolios in 1994.
Steven K. Kreider, Portfolio Manager, joined MAS in 1988. He assumed
responsibility for the Municipal and the PA Municipal Portfolios in 1992.
Robert J. Marcin, Portfolio Manager, joined MAS in 1988. He assumed
responsibility for the Value Portfolio in 1990 and the Equity and Select
Equity Portfolios in 1994.
Scott F. Richard, Portfolio Manager, joined MAS in 1992. He served as Vice
President, Head of Fixed Income Research & Model Development for Goldman,
Sachs & Co. from 1987 to 1991 and as Head of Mortgage Research in 1992. He
assumed responsibility for the Mortgage-Backed Securities Portfolio in 1992
and the Limited Duration, Intermediate Duration, Municipal and PA Municipal
Portfolios in 1994.
Christian G. Roth, Portfolio Manager, joined MAS in 1991. He served as Senior
Associate, Dean Witter Capital Corporation from 1987 to 1991. He assumed
responsibility for the Limited Duration and Intermediate Duration Portfolios
in 1994.
Gary G. Schlarbaum, Portfolio Manager, joined MAS in 1987. He assumed
responsibility for the Equity and Small Cap Value Portfolios in 1987, the
Select Equity Portfolio in 1988, the Balanced Portfolio in 1992 and the
Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
<PAGE>
Horacio A. Valeiras, Portfolio Manager, joined MAS in 1992. He served as an
International Strategist from 1989 through 1992 for Credit Suisse First
Boston and as Director-Equity Research in 1992. He assumed responsibility for
the International Equity Portfolio in 1992, the Emerging Markets Portfolio in
1993 and the Multi-Asset-Class Portfolio in 1994.
A. Morris Williams, Jr., Portfolio Manager, joined MAS in 1973. He assumed
responsibility for the Equity Portfolio in 1984, the Select Equity Portfolio
in 1988 and the Value Portfolio in 1984.
Dean Williams, Portfolio Manager, joined MAS in 1988. He assumed
responsibility for the International Equity Portfolio in 1988 and the
Emerging Markets and Multi-Asset-Class Portfolios in 1994.
Richard B. Worley, Portfolio Manager, joined MAS in 1978. He assumed
responsibility for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio in 1987, the Fixed Income Portfolio II in 1990, the Balanced
and Special Purpose Fixed Income Portfolios in 1992, the Global Fixed Income
and International Fixed Income Portfolios in 1993 and the Multi-Asset-Class
Portfolio in 1994.
ADMINISTRATIVE SERVICES: MAS serves as Administrator to the Fund pursuant to
an Administration Agreement dated as of November 18, 1993. Under its
Administration Agreement with the Fund, MAS receives an annual fee, accrued
daily and payable monthly, of 0.08% of the Fund's average daily net assets,
and is responsible for all fees payable under any sub-administration
agreements. Chase Global Funds Services Company, a subsidiary of The Chase
Manhattan Bank, N.A., 73 Tremont Street, Boston MA 02108-3913, serves as
Transfer Agent to the Fund pursuant to an agreement also dated as of November
18, 1993, and provides fund accounting and other services pursuant to a
sub-administration agreement with MAS as Administrator.
GENERAL DISTRIBUTION AGENT: Shares of the Fund are distributed exclusively
through MAS Fund Distribution, Inc., a wholly-owned subsidiary of the
Adviser.
PORTFOLIO TRANSACTIONS: The investment advisory agreement authorizes the
Adviser to select the brokers or dealers that will execute the purchases and
sales of investment securities for each of the Fund's portfolios and directs
the Adviser to use its best efforts to obtain the best execution with respect
to all transactions for the portfolios. In doing so, a portfolio may pay
higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers
or dealers. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in
the purchase of shares of the portfolios for their clients.
Some securities considered for investment by each of the Fund's portfolios
may also be appropriate for other clients served by the Adviser. If purchase
or sale of securities consistent with the investment policies of a portfolio
and one or more of these other clients served by the Adviser is considered at
or about the same time, transactions in such securities will be allocated
among the portfolio and clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees. MAS may use its broker dealer affiliates, including Morgan Stanley
& Co., a wholly owned subsidiary of Morgan Stanley Group Inc., the parent of
MAS's general partner and limited partner, to carry out the Fund's
transactions, provided the Fund receives brokerage services and commission
rates comparable to those of other broker dealers.
OTHER INFORMATION: Description of Shares and Voting Rights: The Fund was
established under Pennsylvania law by a Declaration of Trust dated February
15, 1984, as amended and restated as of November 18, 1993. The Fund is
authorized to issue an unlimited number of shares of beneficial interest,
without par value, from an unlimited number of series (portfolios) of shares.
Currently the Fund consists of twenty-six portfolios.
<PAGE>
The shares of each portfolio of the Fund are fully paid and non-assessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each portfolio of the Fund have no preemptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they choose to do so. Shareholders
are entitled to one vote for each full share held (and a fractional vote for
each fractional share held), then standing in their name on the books of the
Fund.
Meetings of shareholders will not be held except as required by the
Investment Company Act of 1940, as amended, and other applicable law. A
meeting will be held to vote on the removal of a Trustee or Trustees of the
Fund if requested in writing by the holders of not less than 10% of the
outstanding shares of the Fund. The Fund will assist in shareholder
communication in such matters to the extent required by law.
As of January 25, 1996, AT&T Savings Plans Group Trust II (Berkley Heights,
NJ) owned controlling interests (as that term is defined in the Investment
Company Act of 1940, as amended) of the Select Equity Portfolio; Forbes
Health System (Philadelphia, PA) c/o Saxon & Company, owned a controlling
interest of the Domestic Fixed Income Portfolio; Sun Company, Inc.
(Philadelphia, PA) c/o Bankers Trust Company, owned a controlling interest of
the Cash Reserves Portfolio; Inglis House Foundation (Philadelphia, PA) and
Northwestern University (Evanston, IL) owned controlling interests of the
Mortgage Backed Securities Portfolio; Ministers & Missionaries Benefit Board
(New York, NY) owned a controlling interest of the Emerging Markets Portfolio
and R. & S. Roberts (Philadelphia, PA) owned a controlling interest of the
Pennsylvania Municipal Portfolio.
Custodians: The Chase Manhattan Bank N.A., New York, NY and Morgan Stanley
Trust Company (NY), Brooklyn, NY serve as custodians for the Fund. The
custodians hold cash, securities and other assets as required by the 1940
Act.
Transfer and Dividend Disbursing Agent: Chase Global Funds Services Company,
a subsidiary of The Chase Manhattan Bank, N.A., 73 Tremont Street, Boston, MA
02108-3913.
Reports: Shareholders receive semiannual and annual financial statements.
Annual financial statements are audited by Price Waterhouse LLP, independent
accountants.
Litigation: The Fund is not involved in any litigation.
Closed Holidays: Currently, the weekdays on which the Fund is closed for
business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,
the Fixed Income, Special Purpose Fixed Income, Fixed Income Portfolio II,
Limited Duration, Cash Reserves, High Yield, Mortgage-Backed Securities,
Intermediate Duration, International Fixed Income, Global Fixed Income,
Domestic Fixed Income, Municipal, and PA Municipal Portfolios will be closed
on Martin Luther King Day, Columbus Day, and Veteran's Day.
<PAGE>
TRUSTEES AND OFFICERS
The following is a list of the Trustees and the principal executive
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years:
Thomas L. Bennett,* Chairman of the Board of Trustees; Portfolio Manager,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.
David P. Eastburn, Trustee; Retired; formerly: Director (Trustee) of each
of the investment companies in The Vanguard Group, except Vanguard
Specialized Portfolios; Director of Penn Mutual Life Insurance Company and
General Accident Insurance; President, Federal Reserve Bank of Philadelphia.
Joseph P. Healey, Trustee; Headmaster, Haverford School; formerly Dean,
Hobart College; Associate Dean, William & Mary College.
Joseph J. Kearns, Trustee; Vice President and Treasurer, The J. Paul Getty
Trust.
C. Oscar Morong, Jr., Trustee; Managing Director, Morong Capital
Management; Director, Ministers and Missionaries Benefit Board of American
Baptist Churches, The Indonesia Fund, The Landmark Funds; formerly Senior
Vice President and Investment Manager for CREF, TIAA-CREF Investment
Management, Inc.
*Trustee Bennett is deemed to be an "interested person" of the Fund as
that term is defined in the Investment Company Act of 1940, as amended.
- -------------------------------------------------------------------------------
James D. Schmid, President; Head of Mutual Funds, Miller Anderson &
Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Chairman of the Board
of Directors, The Minerva Fund, Inc.; formerly Vice President, Chase
Manhattan Bank.
Lorraine Truten, CFA, Vice President; Head of Mutual Fund Administration,
Miller Anderson & Sherrerd, LLP; President, MAS Fund Distribution, Inc.
Douglas W. Kugler, Treasurer; Manager of Mutual Fund Administration,
Miller Anderson & Sherrerd, LLP; formerly Assistant Vice President, Provident
Financial Processing Corporation.
John H. Grady, Jr., Secretary; Partner, Morgan, Lewis & Bockius, LLP;
formerly Attorney, Ropes & Gray.
<PAGE>
(This page intentionally left blank)
<PAGE>
MAS LOGO ACCOUNT REGISTRATION FORM
- --------
MAS FUNDS MAS Fund Distribution, Inc.
General Distribution Agent
- -----------------------------------------------------------------------------
/1/
REGISTRATION/PRIMARY MAILING ADDRESS
Confirmations and month-end statements will be mailed to this address.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Attention
---------------------------------------------------------------------
Street or P.O. Box
------------------------------------------------------------
City State Zip -
-------------------------------- ---------------- -------- --------
Telephone No. - -
-------- ---------- -----------------
Type of Account: / / Defined Benefit Plan / / Defined Contribution Plan
/ / Profit Sharing/Thrift Plan
/ / Other Employee Benefit Plan
------------------------------------------------------
/ / Endowment / / Foundation / / Taxable / / Other (Specify)
------------------------------------------------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien, Indicate
Country of Residence
----------------------------
================================================================================
/2/
INTERESTED PARTY OPTION
In addition to the account statement sent to the above registered address,
the Fund is authorized to mail duplicate statements to the name and address
provided at right.
For additional interested party mailings, please attach a separate sheet.
Attention
----------------------------------------------------------------------
Company
(If Applicable)
----------------------------------------------------------------
Street or P.O. Box
-------------------------------------------------------------
City State Zip -
------------------------ ------------------- -------------- ---------
Telephone No. - -
----------- ---------- -----------
===============================================================================
/3/ INVESTMENT
For Purchase of:
<TABLE>
<S> <C> <C>
/ / Equity Portfolio / / Fixed Income Portfolio / / International Equity Portfolio
/ / Value Portfolio / / Fixed Income Portfolio II / / Emerging Markets Portfolio
/ / Growth Portfolio / / Special Purpose Fixed Income Portfolio / / International Fixed Income Portfolio
/ / Mid Cap Growth Portfolio / / High Yield Portfolio / / Global Fixed Income Portfolio
/ / Mid Cap Value Portfolio / / Limited Duration Fixed Income Portfolio / / Municipal Portfolio
/ / Balanced Portfolio / / Intermediate Duration Portfolio / / PA Municipal Portfolio
/ / Multi-Asset-Class Portfolio / / Mortgage-Backed Securities Portfolio
/ / Balanced Investing-- / / Cash Reserves Portfolio
Indicate Portfolios / / Domestic Fixed Income Portfolio
</TABLE>
===============================================================================
<PAGE>
/4/
TAXPAYER IDENTIFICATION NUMBER
Part 1.
Social Security Number
-- --
------- --------- --------
or
Employer Identification Number
-
----- --------------
Part 2. BACKUP WITHHOLDING
/ / Check the box if the account is subject to
Backup Withholding under the provisions of
Section 3406(a)(1)(C) of the Internal Revenue Code.
- -------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
taxpayer identification number. Accounts that have a missing or incorrect
taxpayer identification number will be subject to backup withholding at a 31%
rate on ordinary income and capital gains distribution as well as redemptions.
Backup withholding is not an additional tax; the tax liability of person subject
to backup withholding will be reduced by the amount of tax withheld.
You may be notified that you are subject to backup withholding under section
3406(a)(1)(C) because you have underreported interest or dividends or you were
required to, but failed to, file a return which would have included a reportable
interest or dividend payment. If you have been so notified, check the box in
PART 2 at left.
===============================================================================
MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
SIDE ONE OF TWO
<PAGE>
MAS LOGO
- --------
MAS FUNDS
===============================================================================
/5/ TELEPHONE REDEMPTION OPTION
Please sign below if you wish to redeem or exchange shares by telephone.
Redemption proceeds requested by phone may only be mailed to the account's
primary registration address or wired according to bank instructions
provided in writing. A signature guarantee is required if the bank account
listed below is not registered identically to your Fund Account.
The Fund and its agents shall not be liable for reliance on phone
instructions reasonably believed to be genuine. The Fund will maintain
procedures designed to authenticate telephone instructions received.
Telephone requests for redemptions or exchanges will not be honored unless
signature appears below.
(X)
---------------------------------------------------------------------------
Signature Date
===============================================================================
/6/ WIRING INSTRUCTIONS -- The instructions provided below may only be changed
by written notification.
Please check appropriate box(es):
/ / Wire redemption proceeds
/ / Wire distribution proceeds (please complete box /7/ below)
-------------------------------------------------- ----------------------
Name of Commercial Bank (Net Savings Bank) Bank Account No.
--------------------------------------------------------------------------
Name(s) in which your Bank Account is Established
--------------------------------------------------------------------------
Bank's Street Address
-------------------------------------------- ----------------------------
City State Zip Routing/ABA Number
===============================================================================
/7/ DISTRIBUTION OPTION -- Income dividends and capital gains distributions
(if any) will be reinvested in additional shares unless either box below
in checked.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
If cash option is chosen, please indicate instructions below:
/ / Mail distribution check to the name and address in which account is
registered.
/ / Wire distribution to the same commercial bank indicated in Section 6
above.
===============================================================================
<PAGE>
/8/ WIRING INSTRUCTIONS
For purchasing Shares by wire, please send a Fedwire payment to:
Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds
Ref. (Portfolio name, your Account number, your Account name)
===============================================================================
SIGNATURE(S) OF ALL HOLDERS AND TAXPAYER CERTIFICATION
The undersigned certify that I/we have full authority and legal capacity to
purchase shares of the Fund and affirm that I/we have received a current MAS
Funds Prospectus and agree to be bound by its terms. Under penalties of
perjury I/we certify that the information provided in Section 4 above is
true, correct and complete.
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
- --------------------------
FOR INTERNAL USE ONLY
(X)
- --------------------------
Signature Date
- --------------------------
O / / F / / OR / / S / /
- --------------------------
===============================================================================
MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
SIDE TWO OF TWO
<PAGE>
(This page intentionally left blank)
<PAGE>
MAS LOGO PROSPECTUS
- --------
MAS FUNDS
January 30, 1996
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds Services Company
One Tower Bridge 73 Tremont Street
West Conshohocken, Boston, Massachusetts 02108-0913
Pennsylvania 19428-2899
General Distribution Agent:
MAS Fund Distribution, Inc.
One Tower Bridge
P.O. Box 868
West Conshohocken,
Pennsylvania 19428-0868
- -------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Fund Expenses 2 General Shareholder Information
Prospectus Summary 4 Purchase of Shares 53
Financial Highlights 8 Redemption of Shares 54
Yield and Total Return 15 Shareholder Services 55
Investment Suitability 16 Valuation of Shares 56
Investment Limitations 17 Dividends, Capital Gains Distributions
Portfolio Summaries 19 and Taxes 58
Equity Investments 19 Investment Adviser 60
Fixed-Income Investments 23 Portfolio Management 63
Prospectus Glossary: Administrative Services 65
Strategies 38 General Distribution Agent 65
Investments 43 Portfolio Transactions 65
Other Information 65
Trustees and Officers 67
</TABLE>
MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MAS PROSPECTUS
- ---------
MAS FUNDS
January 30, 1996
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, two of which are described in this prospectus. The Advisory
Foreign Fixed Income and the Advisory Mortgage Portfolios are available only
to private advisory clients of Miller Anderson & Sherrerd, LLP ("MAS" or "the
Adviser") Adviser to MAS Funds. The Advisory Mortgage Portfolio is a
diversified investment company and the Advisory Foreign Fixed Income
Portfolio is a non-diversified investment company. The investment objective
of each portfolio is described with its investment policies as referenced
below.
PORTFOLIO OBJECTIVES PAGE REFERENCE
-------------------- --------------
Advisory Foreign Fixed Income 9
Advisory Mortgage 9
This Prospectus, which should be retained for future reference, sets forth
concisely information that you should know before you invest. A Statement of
Additional Information containing additional information about the Fund has
been filed with the Securities and Exchange Commission. Such Statement is
dated January 30, 1996 as revised from time to time, and has been
incorporated by reference into this Prospectus. A copy of the Statement may
be obtained, without charge, by writing to the Fund or by calling the Client
Services Group at the telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- --------------------------------------------------------------------------------
<PAGE>
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
expenses and fees set forth below are based on each portfolio's operations
during the fiscal year ended September 30, 1995.
Shareholder Transaction Expenses:
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested
Dividends None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses:
(as a percentage of average net assets
after fee waivers)
12b-1 Fees None
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- -------------- ------------ ---------- -----------
<S> <C> <C> <C>
Advisory Foreign Fixed Income... 0.000%* 0.16% 0.16%
Advisory Mortgage ............. 0.000* 0.10 0.10
</TABLE>
* Where applicable as described in Financial Highlights, the Total Operating
Expense ratios reflected in the table above are higher than the ratio of
expenses actually deducted from portfolio assets because of the effect of
expense offset arrangements. The result of such arrangements is to offset
expense that otherwise would be deducted from portfolio assets. Until further
notice, the Adviser has voluntarily agreed to waive its advisory fees and
reimburse certain expenses to the extent necessary to keep Total Operating
Expenses actually deducted from portfolio assets from exceeding 0.15% and
0.08% for the Advisory Foreign Fixed Income and Advisory Mortgage Portfolios,
respectively. Absent these fee waivers by the Adviser, Total Operating
Expenses would be 0.54% and 0.59% for the Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios, respectively.
EXAMPLE
The purpose of this table is to assist in understanding the various expenses
that a shareholder in a portfolio will bear directly or indirectly. The
following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period. The example should
not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Portfolio 1 year 3 year 5 year 10 year
- -------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Advisory Foreign Fixed Income.. $2 $5 $9 $20
Advisory Mortgage ............ 1 3 6 13
</TABLE>
<PAGE>
HOW TO USE THIS PROSPECTUS
A PROSPECTUS SUMMARY begins on page 3;
FINANCIAL HIGHLIGHTS and a description of YIELD AND TOTAL RETURN begin on
page 5;
GENERAL INFORMATION and the INVESTMENT LIMITATIONS pertinent to the
portfolios begin on page 6;
A SUMMARY PAGE of each portfolio's Objective, Policies and Strategies can be
found on page 9;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 10;
GENERAL INFORMATION begins on page 19.
A TABLE OF CONTENTS is presented on the last page of this Prospectus.
PROSPECTUS SUMMARY
The Advisory Foreign Fixed Income Portfolio seeks to achieve above-average
total return over a market cycle of three to five years, consistent with
reasonable risk, by investing primarily in high-grade Foreign Bonds and
Derivatives. The portfolio is available only to private advisory clients of
Miller Anderson & Sherrerd, LLP.
The Advisory Mortgage Portfolio seeks to achieve returns consistent with
returns generated by the market for Mortgage Securities by investing
primarily (at least 65% of its assets under normal circumstances) in mortgage
securities. The portfolio's average weighted maturity will ordinarily be
greater than seven years. The portfolio is available only to private advisory
clients of Miller Anderson & Sherrerd, LLP.
RISK FACTORS: Prospective investors in the Portfolios should consider the
following factors as they apply to each Portfolio's allowable investment
policies. See the Prospectus Glossary for more information on terms printed
in bold type.
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the
security which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which
entails a risk of loss should the borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest
rates resulting in increases or decreases in the value of the obligations
held by a portfolio. The value of fixed-income securities can be expected
to vary inversely to changes in prevailing interest rates, i.e., as
interest rates decline, market value tends to increase and vice versa;
o Each portfolio may purchase securities on a When-Issued basis. Securities
purchased on a when-issued basis may decline or appreciate in market value
prior to their actual delivery to the portfolio;
o Each portfolio may invest a portion of its assets in Derivatives
securities including Futures & Options. Futures contracts, options and
options on futures contracts entail certain costs and risks, including
imperfect correlation between the value of the securities held by the
portfolio and the value of the particular derivative instrument, and the
risk that a portfolio could not close out a futures or options position
when it would be most advantageous to do so;
<PAGE>
o Investments in floating rate (Floaters) and inverse floating rate
securities (Inverse Floaters) and Mortgage-Backed Securities (Mortgage
Securities) including principal-only and interest-only Stripped
Mortgage-Backed Securities (SMBS), may be highly sensitive to interest
rate changes, and highly sensitive to the rate of principal payments
(including prepayments on underlying mortgage assets);
o Investments in foreign securities involves certain special considerations
which are not typically associated with investing in U.S. companies. See
Foreign Investing. A portfolio investing in foreign securities may also
engage in foreign currency exchange transactions; and,
o The Advisory Foreign Fixed Income Portfolio is Non-Diversified for
purposes of the Investment Company Act of 1940, as amended, meaning that
it may invest a greater percentage of assets in the securities of one
issuer than the other portfolios.
HOW TO INVEST: Shares of each portfolio are offered directly to investors
without a sales commission at the net asset value of the portfolio next
determined after receipt of the order. Investment is available only to
advisory clients of MAS.
HOW TO REDEEM: Shares of each portfolio may be redeemed at any time at the
net asset value of the portfolio next determined after receipt of the
redemption request. The redemption price may be more or less than the
purchase price.
THE FUND'S INVESTMENT ADVISER: Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser") is a Pennsylvania limited liability partnership founded in 1969,
wholly owned by indirect subsidiaries of Morgan Stanley Group, Inc., and is
located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser is an
Equal Opportunity/Affirmative Action Employer. The Adviser provides
investment counseling services to employee benefit plans, endowment funds,
foundations and other institutional investors, and as of the date of this
Prospectus had in excess of $35 billion in assets under management.
THE FUND'S DISTRIBUTOR -- MAS Fund Distribution, Inc. (the "Distributor")
provides distribution services to the Fund.
ADMINISTRATIVE SERVICES: The Adviser provides the Fund directly, or through
third parties, with fund administration services. Chase Global Funds Services
Company, a subsidiary of The Chase Manhattan Bank, N.A. serves as Transfer
Agent to the Fund. See Administrative Services.
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratios for a share
outstanding throughout each period
The following information provides selected per share data and ratios for the
shares outstanding of the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios throughout the period presented and is part of the Portfolios'
audited Annual Report to Shareholders for the period ended September 30, 1995
which is incorporated by reference in the Statement of Additional
Information. The following should be read in conjunction with the Fund's
financial statements which are included in the Annual Report to Shareholders
and including the notes thereto. The Portfolio's financial statements for the
year ended September 30, 1995 have been examined by Price Waterhouse LLP
whose opinion thereon (which was unqualified) is also incorporated by
reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Net Asset Net Assets- Ratio of
Value- Net on Securities Total from (net Value- End of Expenses
Beginning Investment (realized and Investment investment Total End of Total Period to Average
of Period Income unrealized) Activities income) Distributions Period Return** (thousands) Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)##
1995 $10.00 $0.74 $0.44 $1.18 ($0.38) ($0.38) $10.80 12.12% $ 537,133 0.16%*++
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)##
1995 $10.00 $0.25 $0.35 $0.60 ($0.19) ($0.19) $10.41 6.03% $1,443,038 0.10%*++
</TABLE>
<TABLE>
<CAPTION>
Ratio of
Net Income Portfolio
to Average Turnover
Net Assets Rate
- --------------------------------------------------------------------------------
<S> <C> <C>
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)##
1995 7.44%* 96%
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)##
1995 6.72%* 110%
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
++ The Adviser has voluntarily agreed to waive its advisory fees and
reimburse certain expenses to the extent necessary, if any, to keep the
total annual operating expenses for the Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios from exceeding 0.15% and 0.08%, respectively.
Voluntarily waived fees and reimbursed expenses totalled 0.38%* and 0.49%*
for the period ended September 30, 1995.
## For the period ended September 30, 1995, the Ratio of Expenses to Average
Net Assets for the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would be 0.15%* and
0.08%*, respectively.
<PAGE>
YIELD AND TOTAL RETURN
From time to time each portfolio of the Fund advertises its yield and total
return. Both yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The average annual total
return reflects changes in the price of a portfolio's shares and assumes that
any income dividends and/or capital gain distributions made by the portfolio
during the period were reinvested in additional shares of the portfolio.
Figures will be given for one-, five- and ten-year periods as well (such as
from commencement of the portfolio's operations). When considering average
total return figures for periods longer than one year, it is important to
note that a portfolio's annual total return for any one year in the period
might have been greater or less than the average for the entire period.
In addition to average annual total return, a portfolio may also quote an
aggregate total return for various periods representing the cumulative change
in value of an investment in a portfolio for a specific period. Aggregate
total returns may be shown by means of schedules, charts or graphs and may
include subtotals of the various components of total return (e.g. income
dividends or returns for specific types of securities such as industry or
country types).
The yield of a portfolio is computed by dividing the net investment income
per share (using the average number of shares entitled to receive dividends)
earned during the 30-day period stated in the advertisement by the closing
price per share on the last day of the period. For the purpose of determining
net investment income, the calculation includes as expenses of the portfolio
all recurring fees that are charged to all shareholder accounts and any non
recurring charges for the period stated. The yield formula provides for
semiannual compounding, which assumes that net investment income is earned
and reinvested at a constant rate and annualized at the end of a six-month
period. Methods used to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ from the
accounting methods used by the portfolio to maintain its books and records,
therefore the advertised 30-day yield may not reflect the income paid to your
own account or the yield reported in the portfolio's reports to shareholders.
A portfolio may also advertise or quote a yield which is gross of expenses.
The performance of a portfolio may be compared to data prepared by
independent services which monitor the performance of investment companies,
data reported in financial and industry publications, and various indices,
all as further described in the Statement of Additional Information. The
Annual Report to Shareholders of the Fund for the Fund's most recent fiscal
year-end contains additional performance information that includes
comparisons with appropriate indices. The Annual Report will be provided
without charge upon request by writing to the Fund or calling the Client
Services Group at the telephone number shown on the front cover of this
Prospectus.
GENERAL INFORMATION
The following information relates to each portfolio of the Fund and should be
read in conjunction with the specific information about each portfolio.
Objectives: Each portfolio seeks to achieve its investment objective relative
to the universe of securities in which it is authorized to invest and,
accordingly, the total return or current income achieved by a portfolio may
not be as great as that achieved by another portfolio that can invest in a
broader range of securities. Both portfolios will seek to produce total
return by actively trading portfolio securities. The achievement of any
portfolio's objective cannot be assured.
Suitability: The portfolios are designed for advisory clients of MAS who are
investing in the Fund as part of a larger investment and who, as long-term
investors, can accept the risks entailed in investing in the bond market.
<PAGE>
Securities Lending: Each portfolio may lend its securities to qualified brokers,
dealers, banks and other financial institutions for the purpose of realizing
additional income. Loans of securities will be collateralized by cash, letters
of credit, or securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current market value of
the loaned securities. In addition, a portfolio will not loan its portfolio
securities to the extent that greater than one-third of its total assets, at
fair market value, would be committed to loans at that time.
Illiquid Securities/Restricted Securities: Each of the portfolios may invest
up to 15% of its net assets in securities that are illiquid by virtue of the
absence of a readily available market, or because of legal or contractual
restrictions on resale. This policy does not limit the acquisition of (i)
restricted securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial
paper issued pursuant to Section 4(2) under the Securities Act of 1933, that
are determined to be liquid in accordance with guidelines established by the
Fund's Board of Trustees.
Turnover: The Adviser manages the portfolios generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the portfolios
will not trade for short-term profits, but when circumstances warrant,
investments may be sold without regard to the length of time held.
With respect to the portfolios, the annual turnover rate will ordinarily
exceed 100% due to changes in portfolio duration, yield curve strategy or
commitments to forward delivery mortgage-backed securities. For fiscal 1995
the annual turnover rate for the Advisory Mortgage Portfolio was 110%. High
rates of portfolio turnover necessarily result in correspondingly heavier
brokerage and portfolio trading costs which are paid by a portfolio. Trading
in Fixed-Income Securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. In
addition to portfolio trading costs, higher rates of portfolio turnover may
result in the realization of capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes.
Cash Equivalents/Temporary Defensive Investing: Although each portfolio
intends to remain substantially fully invested, a small percentage of a
portfolio's assets are generally held in the form of Cash Equivalents in
order to meet redemption requests and otherwise manage the daily affairs of
each portfolio. Any portfolio may, when the Adviser deems that market
conditions are such that a temporary defensive approach is desirable, invest
in cash equivalents or in any of the Fixed-Income Securities listed for that
portfolio without limit. In addition, the Adviser may, for temporary
defensive purposes, decrease the average weighted maturity or duration of a
portfolio without regard to that portfolio's usual average weighted maturity.
Concentration: Concentration is defined as investment of 25% or more of a
portfolio's total assets in the securities of issuers operating in any one
industry. Except as provided in a portfolio's specific investment policies, a
portfolio will not concentrate investments in any one industry.
Investment Limitations: Each portfolio is subject to certain limitations
designed to reduce its exposure to specific situations. Some of these
limitations are:
(a) with respect to 75% of its assets, a portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the portfolio's
total assets taken at market value would be invested in the securities of any
single issuer except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. This limitation is not applicable to the Advisory Foreign
Fixed Income Portfolio. However, both Portfolios will comply with the
diversification requirements imposed by Sub-Chapter M of the Internal Revenue
Code;
<PAGE>
(b) with respect to 75% of its assets, a Portfolio will not purchase a
security if, as a result, the portfolio would hold more than 10% of the
outstanding voting securities of any issuer. This limitation is not
applicable to the Advisory Foreign Fixed Income Portfolio. However, both
Portfolios will comply with the diversification requirements imposed by
Sub-Chapter M of the Internal Revenue Code;
(c) a portfolio will not invest more than 5% of its total assets in the
securities of issuers (other than securities issued or guaranteed by U.S. or
foreign governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years of continuous operation;
(d) a portfolio will not acquire any securities of companies within one
industry, if, as a result of such acquisition, more than 25% of the value of
the portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that (1) there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or instruments issued by U.S.
banks when any such portfolio adopts a temporary defensive position; (2)
asset-backed securities will be classified according to the underlying assets
securing such securities; and (3) the Advisory Mortgage Portfolio will
concentrate in Mortgage Securities.
(e) a portfolio will not make loans except (i) by purchasing debt securities
in accordance with its investment objectives and policies, or entering into
Repurchase Agreements, (ii) by lending its portfolio securities and (iii) by
lending portfolio assets to other portfolios of the Fund, so long as such
loans are not inconsistent with the Investment Company Act of 1940, as
amended or the Rules and Regulations, or interpretations or orders of the
Securities and Exchange Commission thereunder;
(f) a portfolio will not borrow money, except (i) as a temporary measure for
extraordinary or emergency purposes or (ii) in connection with reverse
repurchase agreements provided that (i) and (ii) in combination do not exceed
33 1/3% of the portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings);
(g) a portfolio will not pledge, mortgage, or hypothecate any of its assets
to an extent greater than 50% of its total assets at fair market value;
(h) a portfolio will not invest its assets in securities of any Investment
Company, except by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by the Investment
Company Act of 1940, as amended.
Limitations (a), (b), (d), (e), and (f), and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a majority of the shares
of each portfolio. The other investment limitations described here and in the
Statement of Additional Information are not fundamental policies meaning that
the Board of Trustees may change them without shareholder approval.
Investment limitations (a) and (b) are not fundamental policies for the
Advisory Foreign Fixed Income Portfolio. If a percentage limitation on
investment or utilization of assets as set forth above is adhered to at the
time an investment is made, a later change in percentage resulting from
changes in the value or total cost of the portfolio's assets will not be
considered a violation of the restriction, and the sale of securities will
not be required.
<PAGE>
Advisory Foreign Fixed Income Portfolio -
(a non-diversified portfolio available only to advisory clients of MAS)
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing primarily in investment grade fixed-income
securities of foreign issuers.
Approach: The Portfolio is available only to the Adviser's private
advisory clients.
Policies: Generally at least 65% invested in Fixed-Income Securities of
issuers in at least 3 countries located outside of the U.S.
Derivatives may be used to represent country investments, or
otherwise pursue portfolio strategy. May invest all or a
portion of assets in U.S. securities as a defensive strategy.
Quality 100% Investment Grade Securities
Specifications: Individual Securities Rated A or higher
Maturity and Average weighted maturity generally greater than 5 years
Duration:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable: Foreign Bonds Foreign Currency Forwards Eastern European Issuers
Investments: Convertibles U.S. Governments Zero Coupons Agencies
Corporates Mortgage Securities CMOs SMBS
Asset-Backeds When Issued Securities Brady Bonds Floaters
Inverse Floaters Structured Notes Futures & Options Swaps
Cash Equivalents Repurchase Agreements Municipals Preferred Stock
Investment Companies
</TABLE>
Benchmark Index: Salomon Broad Investment Grade
Strategies: Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Foreign Investing
Non-Diversified Status
Mortgage Investing
<PAGE>
Advisory Mortgage Portfolio - (available only to advisory clients of MAS)
Objective: To achieve returns consistent with returns generated by the
market for mortgage securities by investing primarily (at least
65% of its assets under normal circumstances) in mortgage
securities.
Approach: The Portfolio is available only to the Adviser's private
advisory clients
Policies: Generally at least 65% invested in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Securities not guaranteed by the U.S. Government or a private
Specifications: organization will be Investment Grade Securities
Maturity and Average weighted maturity generally greater than 7 years
Duration: Duration generally between 2 and 7 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Mortgage Securities CMOs Asset-Backeds SMBS
Investments: U.S. Governments Zero Coupons Agencies When Issued Securities
Floaters Inverse Floaters Structured Notes Futures & Options
Cash Equivalents Repurchase Agreements Investment Companies Swaps
</TABLE>
Benchmark Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
Foreign Fixed Income Investing: The Adviser invests in Foreign Bonds and
other Fixed-Income Securities denominated in foreign currencies, where, in
the opinion of the Adviser, the combination of current yield and currency
value offer attractive expected returns. When the total return opportunities
in a foreign bond market appear attractive in local currency terms, but where
in the Adviser's judgment unacceptable currency risk exists, currency Futures
& Options, Forwards and Swaps may be used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in Foreign Bonds
involves certain special considerations which are not typically associated
with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, there may be less publicly available
information about certain foreign securities than about U.S. securities.
Foreign Bonds may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those
countries. Additionally, there may be difficulty in obtaining and enforcing
judgments against foreign issuers.
Foreign Bonds may be denominated in foreign currencies, and since a portfolio
may temporarily hold uninvested reserves in bank deposits of foreign
currencies prior to reinvestment or conversion to U.S. dollars, a portfolio
may be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with
conversions between various currencies.
Although a portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions
on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses
for custodial arrangements of a portfolio's foreign securities will be
greater than the expenses for the custodial arrangements for handling U.S.
securities of equal value. Certain foreign governments levy withholding taxes
against dividend and interest income. Although in some countries a portion of
these taxes is recoverable, the non-recovered portion of foreign withholding
taxes will reduce the income a portfolio receives from the companies
comprising the portfolio's investments.
Maturity and Duration Management: One of two primary components of the
Adviser's fixed-income investment strategy is maturity and duration
management. The maturity and duration structure of a portfolio investing in
Fixed-Income Securities is actively managed in anticipation of cyclical
interest rate changes. Adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented
in anticipation of longer term shifts in the levels of interest rates.
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for maturity and duration strategy lies in analysis of the U.S.
and global economies, focusing on levels of real interest rates, monetary and
fiscal policy actions, and cyclical indicators. See Value Investing for a
description of the second primary component of MAS's fixed-income strategy.
<PAGE>
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations also
have call provisions. Depending on the relative magnitude of these payments and
the nature of the call provisions, the market values of debt obligations may
respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security that
was developed as a more precise alternative to the concept of
term-to-maturity. Duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration is one
of the fundamental tools used by the Adviser in the selection of fixed-income
securities. Duration is a measure of the expected life of a fixed-income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other factors being the same, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a fixed- income security, the shorter the duration
of the security.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other
similar situations, the Adviser will use sophisticated analytical techniques
that incorporate the economic life of a security into the determination of
its interest rate exposure.
Mortgage Investing: The Advisory Mortgage Portfolio will be primarily (at
least 65% of the time under normal circumstances) invested in
mortgage-related securities. These include mortgage-backed securities which
represent interests in pools of mortgage loans made by lenders such as
commercial banks, savings and loan associations, mortgage bankers and others.
The pools are assembled by various organizations, including the Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), other government
agencies, and private issuers. It is expected that a portfolio's primary
emphasis will be in mortgage-backed securities issued by the various
Government-related organizations. However, a portfolio may invest, without
limit, in mortgage-backed securities issued by private issuers when the
Adviser deems that the quality of the investment, the quality of the issuer,
and market conditions warrant such investments. Securities issued by private
issuers will be rated investment grade by Moody's or Standard & Poor's or be
deemed by the Adviser to be of comparable investment quality.
Non-Diversified Status: A portfolio may be classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended.
Non-diversified portfolios may invest more than 25% of assets in securities
of individual issuers representing greater than 5% each of a portfolio's
total assets, whereas diversified investment companies may only invest up to
25% of assets in positions of greater than 5%. Both diversified and non-
diversified portfolios are subject to diversification specifications under
the Internal Revenue Code of 1986, as amended, which require that, as of the
close of each fiscal quarter, (i) no more than 25% of a portfolio's total
assets may be invested in the securities of a single issuer (except for U.S.
Government securities) and (ii) with respect to 50% of its total assets, no
more than 5% of such assets may be invested in the securities of a single
issuer (except for U.S. Government securities) or invested in more than 10%
of the outstanding voting securities of a single issuer. Because of its
non-diversified status, a portfolio may be subject to greater credit and
other risks than a diversified investment company.
Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing, whereby MAS seeks to identify undervalued
sectors and securities through analysis of credit quality, option
characteristics and liquidity. Quantitative models are used in conjunction
with judgment and experience to evaluate and select securities with embedded
put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit a portfolio to benefit from the
price appreciation of individual securities during periods when interest
rates are unchanged. See Maturity and Duration Management for a description
of the other key component of MAS's fixed-income investment strategy.
<PAGE>
INVESTMENTS
Each portfolio may invest in the securities defined below in accordance with
their listing of Allowable Investments and any quality or policy constraints.
Agencies: are securities which are not guaranteed by the U.S. Government, but
which are issued, sponsored or guaranteed by a federal agency or federally
sponsored agency such as the Student Loan Marketing Association, Resolution
Funding Corporation, or any of several other agencies.
Asset-Backeds: are securities collateralized by shorter term loans such as
automobile loans, home equity loans, computer leases, or credit card
receivables. The payments from the collateral are passed through to the
security holder. The collateral behind asset-backed securities tends to have
prepayment rates that do not vary with interest rates. In addition the
short-term nature of the loans reduces the impact of any change in prepayment
level. Due to amortization, the average life for these securities is also the
conventional proxy for maturity.
Possible Risks: Due to the possibility that prepayments (on automobile loans
and other collateral) will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity date or
average life. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the security. In selecting these securities, the Adviser will
look for those securities that offer a higher yield to compensate for any
variation in average maturity.
Brady Bonds: are debt obligations which are created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds
have been issued only recently, and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. For further information on
these securities, see the Statement of Additional Information. Portfolios
will only invest in Brady Bonds consistent with quality specifications.
Cash Equivalents: are short-term fixed-income instruments comprising:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time
at a stated interest rate. Certificates of deposit are negotiable short-term
obligations issued by commercial banks or savings and loan associations
against funds deposited in the issuing institution. Variable rate
certificates of deposit are certificates of deposit on which the interest
rate is periodically adjusted prior to their stated maturity based upon a
specified market rate. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage of
goods).
A portfolio may invest in obligations of U.S. banks, foreign branches of U.S.
banks (Eurodollars), and U.S. branches of foreign banks (Yankee dollars).
Euro and Yankee dollar investments will involve some of the same risks of
investing in international securities that are discussed in the Foreign
Investing section of this Prospectus.
Portfolios will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the
case of U.S. banks, it is a member of the Federal Deposit Insurance
Corporation, and (iii) in the case of foreign branches of U.S. banks, the
security is deemed by the Adviser to be of an investment quality comparable
with other debt securities which may be purchased by the portfolio.
<PAGE>
(2) Each portfolio may invest in commercial paper rated at time of purchase
by one or more NRSRO in one of their two highest categories, (e.g., A-l or
A-2 by Standard & Poor's or Prime 1 or Prime 2 by Moody's), or, if not rated,
issued by a corporation having an outstanding unsecured debt issue rated
high-grade by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or
Fitch);
(3) Short-term corporate obligations rated high-grade at the time of purchase
by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Federal
National Mortgage Association, Federal Financing Bank, the Tennessee Valley
Authority, and others; and
(6) Repurchase agreements collateralized by securities listed above.
CMOs--Collateralized Mortgage Obligations: are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a
"tranche" is essentially a separate security) in a predetermined, specified
order. Each tranche has a stated maturity - the latest date by which the
tranche can be completely repaid, assuming no prepayments - and has an
average life - the average of the time to receipt of a principal payment
weighted by the size of the principal payment. The average life is typically
used as a proxy for maturity because the debt is amortized (repaid a portion
at a time), rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
Possible Risks: Due to the possibility that prepayments (on home mortgages
and other collateral) will alter the cash flow on CMOs, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement
could be and to calculate the effect that it will have on the price of the
security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in
average maturity.
Prepayment risk has two important effects. First, like bonds in general,
mortgage-backed securities will generally decline in price when interest
rates rise. However, when interest rates fall, mortgages may not enjoy as
large a gain in market value due to prepayment risk. Second, when interest
rates fall, additional mortgage prepayments must be reinvested at lower
interest rates. In part to compensate for these risks, mortgages will
generally offer higher yields than comparable bonds.
Convertibles: are convertible bond or shares of convertible Preferred Stock
which may be exchanged for a fixed number of shares of common stock at the
purchaser's option.
Corporates--corporate bonds: are debt instruments issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets
for the principal and interest due to the bondholder. A portfolio will buy
Corporates subject to any quality constraints. If a security held by a
portfolio is down-graded, the portfolio may retain the security if the
Adviser deems retention of the Security to be in the best interests of the
portfolio.
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Derivatives: A financial instrument whose value and performance are based on the
value and performance of another security or financial instrument. The Adviser
will use derivatives only in circumstances where they offer the most economic
means of improving the risk/reward profile of the portfolio. The Adviser will
not use derivatives to increase portfolio risk above the level that could be
achieved in the portfolio using only traditional investment securities. In
addition, the Adviser will not use derivatives to acquire exposure to changes in
the value of assets or indexes that are not listed in the applicable Allowable
Investments for the portfolio. Any applicable limitations are described under
each investment definition. Each of the Portfolios covered by this Prospectus
may enter into over-the-counter Derivatives transactions (Swaps, Caps, Floors,
Puts, etc., but excluding CMOs, Forwards, Futures and Options, and SMBS) with
counterparties approved by MAS in accordance with guidelines established by the
Board of Trustees. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA. Derivatives include, but are not limited
to CMOs, Forwards, Futures and Options, SMBS, Structured Investments, Structured
Notes and Swaps. See each individual portfolio's listing of Investments to
determine which of these the Portfolio may hold.
Eastern European Issuers: The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment
associated with the transition to market economics. Unstable economic and
political conditions may adversely affect security values. Upon the accession
to power of Communist regimes approximately 40 years ago, the governments of
a number of Eastern European countries expropriated a large amount of
property. The claims of many property owners against those governments were
never finally settled. In the event of the return to power of the Communist
Party, there can be no assurance that the portfolio's investments in Eastern
Europe would not be expropriated, nationalized or otherwise confiscated.
Fixed-Income Securities: Commonly include but are not limited to U.S.
Governments, Zero Coupons, Agencies, Corporates, Mortgage Securities, SMBS,
CMOs, Asset-Backeds, Convertibles, Brady Bonds, Floaters, Inverse Floaters,
Cash Equivalents, Repurchase Agreements, Preferred Stock, and Foreign Bonds.
See each individual portfolio listing of Allowable Investments to determine
which securities a portfolio may hold. Preferred Stock is contained in the
definition of Fixed-Income Securities since it exhibits some characteristics
commonly associated with that type of security.
Floaters--Floating and Variable Rate Obligations: are debt obligations with a
floating or variable rate of interest, i.e. the rate of interest varies with
changes in specified market rates or indices, such as the prime rate, or at
specified intervals. Certain floating or variable rate obligations may carry
a demand feature that permits the holder to tender them back to the issuer of
the underlying instrument, or to a third party, at par value prior to
maturity. When the demand feature of certain floating or variable rate
obligations represents an obligation of a foreign entity, the demand feature
will be subject to certain risks discussed under Foreign Investing.
Foreign Currency: Portfolios investing in foreign securities will regularly
transact security purchases and sales in foreign currencies. These portfolios
may hold foreign currency or purchase or sell currencies on a forward basis
(see Forwards).
Foreign Bonds: are Fixed-Income Securities denominated in foreign currency
and issued and traded primarily outside of the U.S., including: (1)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) debt securities
issued, guaranteed or sponsored by supranational organizations established or
supported by several national governments, including the World Bank, the
European Community, the Asian Development Bank and others; (3) non-government
foreign corporate debt securities; and (4) foreign Mortgage Securities and
various other mortgage and asset-backed securities.
<PAGE>
Forwards--Forward Foreign Currency Exchange Contracts: are Derivatives which
are used to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract is an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Such contracts, which
protect the value of a portfolio's investment securities against a decline in
the value of a currency, do not eliminate fluctuations caused by changes in
the local currency prices of the securities, but rather, they simply
establish an exchange rate at a future date. Also, although such contracts
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they limit any potential gain that might be
realized.
A portfolio may use currency exchange contracts in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies (transaction hedge) or to lock in the U.S.
dollar value of portfolio positions (position hedge). In addition the portfolios
may cross-hedge currencies by entering into a transaction to purchase or sell
one or more currencies that are expected to decline in value relative to other
currencies to which a portfolio has or expects to have portfolio exposure.
Portfolios may also engage in proxy hedging which is defined as entering into
positions in one currency to hedge investments denominated in another currency,
where the two currencies are economically linked. A portfolio's entry into
forward contracts, as well as any use of Cross or Proxy hedging techniques will
generally require the portfolio to hold high-grade, liquid securities or cash
equal to the portfolio's obligations in a segregated account throughout the
duration of the contract.
A portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and
currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, a portfolio
may purchase a U.S. dollar-denominated security and at the same time enter
into a forward contract to exchange U.S. dollars for the contract's
underlying currency at a future date. By matching the amount of U.S. dollars
to be exchanged with the anticipated value of the U.S. dollar-denominated
security, a portfolio may be able to lock in the foreign currency value of
the security and adopt a synthetic investment position reflecting the credit
quality of the U.S. dollar-denominated security. There is a risk in adopting
a synthetic investment position to the extent that the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly
matched with a portfolio's obligation under the forward contract. On the date
of maturity, a portfolio may be exposed to some risk of loss from
fluctuations in that currency. Although the Adviser will attempt to hold such
mismatching to a minimum, there can be no assurance that the Adviser will be
able to do so. When a portfolio enters into a forward contract for purposes
of creating a synthetic security, it will generally be required to hold
high-grade, liquid securities or cash in a segregated account with a daily
value at least equal to its obligation under the forward contract.
Futures & Options--Futures Contracts, Options on Futures Contracts and
Options: are Derivatives. Futures contracts provide for the sale by one party
and purchase by another party of a specified amount of a specific security,
at a specified future time and price. An option is a legal contract that
gives the holder the right to buy or sell a specified amount of the
underlying security or futures contract at a fixed or determinable price upon
the exercise of the option. A call option conveys the right to buy and a put
option conveys the right to sell a specified quantity of the underlying
security.
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets. It will maintain assets
sufficient to meet its obligations under such contracts in a segregated
account with the custodian bank or will otherwise comply with the SEC's
position on asset coverage.
Possible Risks: The primary risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
the securities held by a portfolio and the prices of futures and options
relating to the stocks, bonds or futures contracts purchased or sold by a
portfolio; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on a portfolio's ability to execute futures and
options strategies. Additional risks associated with options transactions are
(i) the risk that an option will expire worthless; (ii) the risk that the
issuer of an over-the-counter option will be unable to fulfill its
obligation to the portfolio due to bankruptcy or related circumstances; (iii)
the risk that options may exhibit greater short-term price volatility than
the underlying security; and (iv) the risk that a portfolio may be forced to
forego participation in the appreciation of the value of underlying
securities, futures contracts or currency due to the writing of a call
option.
<PAGE>
Inverse Floaters--Inverse Floating Rate Obligations: are Fixed-Income
Securities, which have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop
in the reference rate of an inverse floater causes an increase in the coupon
rate. Inverse floaters may exhibit substantially greater price volatility
than fixed rate obligations having similar credit quality, redemption
provisions and maturity, and inverse floater CMOs exhibit greater price
volatility than the majority of mortgage pass-through securities or CMOs. In
addition, some inverse floater CMOs exhibit extreme sensitivity to changes in
prepayments. As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.
Investment Companies: The portfolios are permitted to invest in shares of
other open-end or closed-end investment companies. The Investment Company Act
of 1940, as amended, generally prohibits the portfolios from acquiring more
than 3% of the outstanding voting shares of an investment company and limits
such investments to no more than 5% of the portfolio's total assets in any
one investment company and no more than 10% in any combination of investment
companies. The 1940 Act also prohibits the portfolios from acquiring in the
aggregate more than 10% of the outstanding voting shares of any registered
closed-end investment company.
Investment Grade Securities: are those rated by one or more nationally
recognized statistical rating organization (NRSRO) in one of the four highest
rating categories at the time of purchase (e.g. AAA, AA, A or BBB by Standard
& Poor's Corporation (Standard & Poor's) or Fitch Investors Service, Inc.,
(Fitch) or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. (Moody's).
Securities rated BBB or Baa represent the lowest of four levels of investment
grade securities and are regarded as borderline between definitely sound
obligations and those in which the speculative element begins to predominate.
Mortgage-backed securities, including mortgage pass-throughs and
collateralized mortgage obligations (CMOs), deemed investment grade by the
Adviser, will either carry a guarantee from an agency of the U.S. Government
or a private issuer of the timely payment of principal and interest (such
guarantees do not extend to the market value of such securities or the net
asset value per share of the portfolio) or, in the case of unrated
securities, be sufficiently seasoned that they are considered by the Adviser
to be investment grade quality. The Adviser may retain securities if their
ratings falls below investment grade if it deems retention of the security to
be in the best interests of the portfolio. Any portfolio permitted to hold
Investment Grade Securities may hold unrated securities if the Adviser
considers the risks involved in owning that security to be equivalent to the
risks involved in holding an Investment Grade Security.
Mortgage Securities--Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her
lending institution are passed through to investors such as the portfolio.
Most issuers or poolers provide guarantees of payments, regardless of whether
the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit, collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance
purchased by the issuer. The pools are assembled by various Governmental,
Government-related and private organizations. Portfolios may invest in
securities issued or guaranteed by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA), non-agency issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. Mortgage-backed securities issued by private
issuers, whether or not such securities are subject to guarantees, may entail
greater risk. If there is no guarantee provided by the issuer, mortgage-
backed securities purchased by the portfolio will be those which at time of
purchase are rated investment grade by one or more NRSRO, or, if unrated, are
deemed by the Adviser to be of investment grade quality.
Due to the possibility that prepayments on home mortgages will alter cash
flow on mortgage securities, it is not possible to determine in advance the
actual final maturity date or average life. Faster prepayment will shorten
the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
<PAGE>
There are two methods of trading mortgage-backed securities. A specified pool
transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This
is in contrast with the typical mortgage security transaction, called a TBA
(to be announced) transaction, in which the type of mortgage securities to be
delivered is specified at the time of trade but the actual pool numbers of
the securities that will be delivered are not known at the time of the trade.
The pool numbers of the pools to be delivered at settlement will be announced
shortly before settlement takes place. The terms of the TBA trade may be made
more specific if desired. Generally, agency pass-through mortgage-backed
securities are traded on a TBA basis.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. The bondholder has a first priority perfected security
interest in collateral consisting usually of agency mortgage pass-through
securities, although other assets including U.S. Treasuries (including Zero
Coupon Treasury Bonds), agencies, cash equivalent securities, whole loans and
corporate bonds may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type.
Municipals--Municipal Securities: are debt obligations issued by local, state
and regional governments that provide interest income which is exempt from
federal income taxes. Municipal securities include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those with maturities of less than five years). Municipal bonds are issued
for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation,
streets, water and sewer works; to obtain funds for operating expenses; to
refund outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewage works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not
the public issuer.
General obligation municipal bonds are secured by the issuer's pledge of full
faith, credit and taxing power. Revenue or special tax bonds are payable from
the revenues derived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax revenue.
Municipal notes are issued to meet the short-term funding requirements of
local, regional and state governments. Municipal notes include bond
anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. These are short-term debt obligations issued by state and
local governments to aid cash flows while waiting for taxes or revenue to be
collected, at which time the debt is retired. Other types of municipal notes
in which the portfolio may invest are construction loan notes, short-term
discount notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the portfolio) to
demand from the issuer payment of principal plus accrued interest upon a
specified number of days' notice. The portfolios eligible to purchase
municipal bonds may also purchase AMT bonds. AMT bonds are tax-exempt private
activity bonds issued after August 7, 1986, the proceeds of which are
directed, at least in part, to private, for-profit organizations. While the
income from AMT bonds is exempt from regular federal income tax, it is a tax
preference item in the calculation of the alternative minimum tax. The
alternative minimum tax is a special separate tax that applies to a limited
number of taxpayers who have certain adjustments to income or tax preference
items.
Preferred Stock: are non-voting ownership shares in a corporation which pay a
fixed or variable stream of dividends.
<PAGE>
Repurchase Agreements: are transactions by which a portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or date of maturity of the purchased security. Such
agreements permit the portfolio to keep all its assets at work while
retaining overnight flexibility in pursuit of investments of a longer term
nature. The Adviser will continually monitor the value of the underlying
collateral to ensure that their value, including accrued interest, always
equals or exceeds the repurchase price.
Pursuant to an order issued by the Securities and Exchange Commission, the
Fund's portfolios may pool their daily uninvested cash balances in order to
invest in repurchase agreements on a joint basis. By entering into repurchase
agreements on a joint basis, it is expected that the portfolios will incur
lower transaction costs and potentially obtain higher rates of interest on
such repurchase agreements. Each portfolio's participation in the income from
jointly purchased repurchase agreements will be based on that portfolio's
percentage share in the total purchase agreement.
SMBS--Stripped Mortgage-Backed Securities: are Derivatives in the form of
multi-class mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class
will receive most of the interest and the remainder of the principal. In some
cases, one class will receive all of the interest (the IO class), while the
other class will receive all of the principal (the principal-only or PO
class). The yield to maturity on IOs and POs is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on a portfolio yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, a
portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, certain of these securities
may be deemed illiquid and subject to a portfolio's limitations on investment
in illiquid securities.
Structured Notes: are Derivatives on which the amount of principal repayment
and or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices
such as the S&P 500 Index. In some cases, the impact of the movements of
these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
<PAGE>
Swaps--Swap Contracts: are Derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term specified index includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well
as amounts derived from arithmetic operations on these indices). For example,
a portfolio may agree to swap the return generated by a fixed-income index
for the return generated by a second fixed-income index. The currency swaps
in which the portfolios may enter will generally involve an agreement to pay
interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon
national amount.
A portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with a portfolio receiving or paying, as
the case may be, only the net amount of the two returns. A portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the portfolio) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government securities, or high grade debt
obligations. A portfolio will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Trustees.
Possible Risks: Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal. Accordingly, the
risk of loss with respect to interest rate and total rate of return swaps is
limited to the net amount of interest payments that a portfolio is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, a portfolio's risk of loss consists of the net amount of
interest payments that a portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the portfolios would be less favorable than it would have been
if this investment technique were not used.
U.S. Governments--U.S. Treasury securities: are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the
payment of both principal and interest.
When-Issued Securities: are securities purchased at a certain price even
though the securities may not be delivered for up to 90 days. No payment or
delivery is made by a portfolio in a when-issued transaction until the
portfolio receives payment or delivery from the other party to the
transaction. Although a portfolio receives no income from the above described
securities prior to delivery, the market value of such securities is still
subject to change. As a consequence, it is possible that the market price of
the securities at the time of delivery may be higher or lower than the
purchase price. A portfolio will maintain with the custodian a separate
account with a segregated portfolio of liquid, high-grade debt securities or
cash in an amount at least equal to these commitments.
Zero Coupons--Zero Coupon Obligations: are Fixed-Income Securities that do
not make regular interest payments. Instead, zero coupon obligations are sold
at substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until
maturity. Zero coupon obligations may offer investors the opportunity to earn
higher yields than those available on ordinary interest-paying obligations of
similar credit quality and maturity. However, zero coupon obligation prices
may also exhibit greater price volatility than ordinary fixed-income
securities because of the manner in which their principal and interest are
returned to the investor.
<PAGE>
GENERAL INFORMATION
PURCHASE OF SHARES
The Advisory Foreign Fixed Income and the Advisory Mortgage Portfolios are
available only to private advisory clients of Miller Anderson & Sherrerd,
LLP, Adviser to MAS Funds.
Shares of each portfolio may be purchased at the net asset value per share
next determined after receipt of the purchase order. The portfolios determine
net asset value as described under General Information-Valuation of Shares
each day that the portfolios are open. See Other Information-Closed Holidays.
Other Purchase Information: The Fund reserves the right, in its sole
discretion, to suspend the offering of shares of any of its portfolios or to
reject any purchase orders when, in the judgment of management, such
suspension or rejection is in the best interest of the Fund.
Purchases of a portfolio's shares will be made in full and fractional shares
of the portfolio calculated to three decimal places. In the interest of
economy and convenience, certificates for shares will not be issued except at
the written request of the shareholder. Certificates for fractional shares,
however, will not be issued.
REDEMPTION OF SHARES
Shares of each portfolio may be redeemed by mail, or, if authorized, by
telephone. No charge is made for redemptions. The value of shares redeemed
may be more or less than the purchase price, depending on the net asset value
at the time of redemption which is based on the market value of the
investment securities held by the portfolio. See Other Information-Closed
Holidays and Valuation of Shares.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order
to confirm that telephone instructions in connection with redemptions are
genuine, the Fund and Distributor will provide written confirmation of
transactions initiated by telephone.
Payment of the redemption proceeds will ordinarily be made within three
business days after receipt of an order for a redemption. The Fund may
suspend the right of redemption or postpone the date of redemption at times
when the NYSE, the Custodian, or the Fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as
determined by the Securities and Exchange Commission.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in-kind of readily marketable securities held by a
portfolio in lieu of cash in conformity with applicable rules of the
Securities and Exchange Commission. Investors may incur brokerage charges on
the sale of portfolio securities received in such payments of redemptions.
<PAGE>
VALUATION OF SHARES
Net asset value per share is computed by dividing the total value of the
investments and other assets of the portfolio, less any liabilities, by the
total outstanding shares of the portfolio. The net asset value per share is
determined as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day the portfolio is open for business (See Other
Information-Closed Holidays). Bonds and other fixed-income securities listed
on a foreign exchange are valued at the latest quoted sales price available
before the time when assets are valued. For purposes of net asset value per
share, all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at the bid price of such currencies
against U.S. dollars.
Net asset value includes interest on bonds and other Fixed-Income Securities
which is accrued daily. Bonds and other fixed-income securities which are
traded over the counter and on a stock exchange will be valued according to
the broadest and most representative market, and it is expected that for
bonds and other fixed-income securities this ordinarily will be the
over-the-counter market.
However, bonds and other fixed-income securities may be valued on the basis
of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices but
take into account institutional size trading in similar groups of securities
and any developments related to specific securities. Bonds and other
fixed-income securities not priced in this manner are valued at the most
recent quoted bid price, or when stock exchange valuations are used, at the
latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost
when the Board of Trustees determines that amortized cost reflects fair
value. In the event that amortized cost does not approximate market, market
prices as determined above will be used. Other assets and securities, for
which no quotations are readily available (including restricted securities),
will be valued in good faith at fair value using methods approved by the
Board of Trustees.
<PAGE>
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Dividends and Capital Gains Distributions: The Advisory Foreign Fixed Income
Portfolio and the Advisory Mortgage Portfolio will normally distribute
substantially all of their net investment income to shareholders in the form
of quarterly and monthly dividends, respectively.
Certain mortgage-backed securities may provide for periodic or unscheduled
payments of principal and interest as the mortgages underlying the securities
are paid or prepaid. However, such principal payments (not otherwise
characterized as ordinary discount income or bond premium expense) will not
normally be considered as income to the portfolio and therefore will not be
distributed as dividends. Rather, these payments on mortgage-backed
securities will be reinvested on behalf of the shareholders by the portfolio
in accordance with its investment objectives and policies.
For the purpose of calculating dividends, net income shall consist of
interest earned, including any discount or premium ratably amortized to the
date of maturity, minus estimated expenses of the portfolio.
If any portfolio does not have income available to distribute, as determined
in compliance with the appropriate tax laws, no distribution will be made.
If any net capital gains are realized from the sale of underlying securities,
the portfolios normally distribute such gains with the last dividend for the
calendar year.
All dividends and capital gains distributions are automatically paid in
additional shares of the portfolio unless the shareholder elects otherwise.
Such election must be made in writing to the Fund and may be made on the
Account Registration Form.
Federal Taxes: The Advisory Portfolios intend to qualify for taxation as a
regulated investment company under the Code so that each portfolio will not
be subject to Federal income tax to the extent it distributes its income to
its shareholders. Dividends, either in cash or reinvested in shares, paid by
a portfolio from net investment income will be taxable to shareholders as
ordinary income. The Fund will send each shareholder a statement each year
indicating the amount of the dividend income which qualifies for such
treatment.
Whether paid in cash or additional shares of a portfolio, and regardless of
the length of time the shares in such portfolio have been owned by the
shareholder, distributions from long-term capital gains are taxable to
shareholders as such, but are not eligible for the dividends received
deduction for corporations. Shareholders are notified annually by the Fund as
to Federal tax status of dividends and distributions paid by a portfolio.
Such dividends and distributions may also be subject to state and local
taxes.
Exchanges and redemptions of shares in a portfolio are taxable events for
Federal income tax purposes. Individual shareholders may also be subject to
state and municipal taxes on such exchanges and redemptions.
Each portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so,
each portfolio expects to distribute an amount at least equal to (i) 98% of
its calendar year ordinary income, (ii) 98% of its capital gains net income
(the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st, and (iii) 100% of
any undistributed ordinary and capital gain net income from the prior year.
Dividends declared in December by a portfolio will be deemed to have been
paid by such portfolio and received by shareholders on the record date
provided that the dividends are paid before February 1 of the following year.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions, and redemptions)
paid to shareholders who have not complied with IRS regulations.
<PAGE>
Foreign Income Taxes: Investment income received by the portfolios from
sources within foreign countries may be subject to foreign income taxes
withheld at the source. The U.S. has entered into Tax Treaties with many
foreign countries which entitle these portfolios to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the portfolios'
assets to be invested within various countries is not known. The portfolios
intend to operate so as to qualify for treaty reduced rates of tax where
applicable.
Since the Advisory Foreign Fixed Income Portfolio is treated as a single
entity for Federal income tax purposes, it may file an election with the
Internal Revenue Service to pass through to the portfolio's shareholders the
amount of foreign income taxes paid by the portfolio, but may do so only if
more than 50% of the value of the total assets of the portfolio at the end of
the fiscal year is represented by foreign securities. This portfolio will
make such an election only if they deem it to be in the best interests of
their shareholders. The Federal income tax status of the portfolio will not
be affected by the election.
If this election is made, shareholders of the portfolio will be required to:
(i) include in gross income, even though not actually received, their
respective pro rata share of foreign taxes paid by the portfolio; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either
deduct their pro rata share of foreign taxes in computing their taxable
income or use it within the limitations set forth in the Internal Revenue
Code as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions.
Each shareholder of the portfolio will be notified within 60 days after the
close of each taxable (fiscal) year of the Fund if the foreign taxes paid by
the portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the portfolio's gross income from foreign sources. Shareholders who are
not liable for Federal income taxes, such as retirement plans qualified under
Section 401 of the Internal Revenue Code, will not be affected by any such
"pass through" of foreign tax credits.
State and Local Taxes: The Fund is formed as a Pennsylvania Business Trust
and therefore is not liable, under current law, for any corporate income or
franchise tax of the Commonwealth of Pennsylvania. The Fund will provide
Pennsylvania taxable values on a per share basis.
TRUSTEES OF THE TRUST: The affairs of the Trust are supervised by the
Trustees under the laws governing business trusts in the Commonwealth of
Pennsylvania. The Trustees have approved contracts under which, as described
below, certain companies provide essential management, administrative and
shareholder services to the Trust.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP is a
Pennsylvania limited partnership founded in 1969, wholly owned by indirect
subsidiaries of Morgan Stanley Group, Inc., and is located at One Tower
Bridge, West Conshohocken, PA 19428. Miller Anderson & Sherrerd, LLP is an
Equal Opportunity/Affirmative Action Employer. The Adviser provides
investment services to employee benefit plans, endowment funds, foundations
and other institutional investors and as of the date of this prospectus had
in excess of $35 billion in assets under management. On January 3, 1996,
Morgan Stanley Group Inc. acquired Miller Anderson & Sherrerd, LLP (the
"Adviser") in a transaction in which Morgan Stanley Asset Management Holdings
Inc., an indirect wholly owned subsidiary of Morgan Stanley Group Inc.,
became the sole general partner of the Adviser. Morgan Stanley Asset
Management Holdings Inc. and two other wholly owned subsidiaries of Morgan
Stanley Group Inc. became the limited partners of the Adviser. In connection
with this transaction, the Adviser entered into a new Investment Management
Agreement ("Agreement") with the MAS Funds dated as of January 3, 1996, which
Agreement was approved by the shareholders of each Portfolio at a special
meeting held on October 6, 1995. The Adviser will retain its name and remain
at its current location, One Tower Bridge, West Conshohocken, PA 19428. The
Adviser will continue to provide investment counseling services to employee
benefit plans, endowments, foundations, and other institutional investors.
<PAGE>
Under the Investment Management Agreement with the Fund, the Adviser, subject
to the control and supervision of the Fund's Board of Trustees and in
conformance with the stated investment objectives and policies of each
portfolio of the Fund, manages the investment and reinvestment of the assets
of each portfolio of the Fund. In this regard, it is the responsibility of
the Adviser to make investment decisions for the Fund's portfolios and to
place each portfolio's purchase and sales orders. As compensation for the
services rendered by the Adviser under the Agreement, each portfolio pays the
Adviser an advisory fee calculated by applying a quarterly rate, based on the
following annual percentage rates, to the portfolios average daily net assets
for the quarter:
Rate
------
Advisory Foreign Fixed Income 0.375%*
Advisory Mortgage 0.375**
* Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees. In addition, the Adviser has voluntarily agreed to reimburse
certain expenses to the extent necessary to keep Total Operating Expenses
actually deducted from each Portfolio's assets for the Advisory Foreign
Fixed Income and Advisory Mortgage Portfolios from exceeding 0.15% and
0.08%, respectively. Absent these fee waivers and reimbursements by the
Adviser, Total Operating Expenses would be 0.540% and 0.59% for the
Advisory Foreign Fixed Income and Advisory Mortgage Portfolios,
respectively.
For the fiscal year ended September 30, 1995, the Adviser received no
compensation for its services under the Investment Advisory Agent.
PORTFOLIO MANAGEMENT
The investment professionals of MAS who are primarily responsible for the
day-to-day management of the Fund's portfolios are as follows:
Advisory Foreign Fixed Income Portfolio - J. David Germany and Richard B.
Worley.
Advisory Mortgage Portfolio - Kenneth B. Dunn and Scott F. Richard;
A description of their business experience during the past five years is as
follows:
Kenneth B. Dunn, Portfolio Manager, joined MAS in 1987. He assumed
responsibility for the Advisory Mortgage Portfolio in 1995.
J. David Germany, Portfolio Manager, joined MAS in 1991. He served as Vice
President & Senior Economist for Morgan Stanley & Co. from 1989 to 1991. He
assumed responsibility for the Advisory Foreign Fixed Income Portfolio in
1994.
Scott F. Richard, Portfolio Manager, joined MAS in 1992. He served as Vice
President, Head of Fixed Income Research & Model Development for Goldman,
Sachs & Co. from 1987 to 1991 and as Head of Mortgage Research in 1992. He
assumed responsibility for the Advisory Mortgage Portfolio in 1995.
Richard B. Worley, Portfolio Manager, joined MAS in 1978. He assumed
responsibility for the Advisory Foreign Fixed Income Portfolio in 1994.
<PAGE>
ADMINISTRATIVE SERVICES
MAS serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Under its Administration Agreement
with the Fund, MAS receives an annual fee, accrued daily and payable monthly,
of 0.08% of the Fund's average daily net assets, and is responsible for all
fees payable under any sub-administration agreements. Chase Global Funds
Services Company, a subsidiary of The Chase Manhattan Bank, N.A., 73 Tremont
Street, Boston MA 02108-3913, serves as Transfer Agent to the Fund pursuant
to an agreement also dated as of November 8, 1993, and provides fund
accounting and other services pursuant to a sub-Sadministration agreement
with MAS as Administrator.
GENERAL DISTRIBUTION AGENT
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each of the Fund's portfolios and directs the Adviser to use
its best efforts to obtain the best execution with respect to all
transactions for the portfolios. In doing so, a portfolio may pay higher
commission rates than the lowest available when the Adviser believes it is
reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers
or dealers. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in
the purchase of shares of the portfolios for their clients.
Some securities considered for investment by each of the Fund's portfolios
may also be appropriate for other clients served by the Adviser. If purchase
or sale of securities consistent with the investment policies of a portfolio
and one or more of these other clients served by the Adviser is considered at
or about the same time, transactions in such securities will be allocated
among the portfolio and clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees. MAS may use its broker dealer affiliates, including Morgan Stanley
& Co., a wholly owned subsidiary of Morgan Stanley Group Inc., the parent of
MAS's general partner and limited partner to carry out the Fund's
transactions, provided the Fund receives brokerage services and commission
rates comparable to those of other broker dealers.
OTHER INFORMATION
Description of Shares and Voting Rights: The Fund was established under
Pennsylvania law by a Declaration of Trust dated February 15, 1984, as
amended and restated as of November 18, 1993. The Fund is authorized to issue
an unlimited number of shares of beneficial interest, without par value, from
an unlimited number of series (portfolios) of shares. Currently the Fund
consists of twenty six portfolios.
<PAGE>
The shares of each portfolio of the Fund are fully paid and non-assessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each portfolio of the Fund have no preemptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they choose to do so. Shareholders
are entitled to one vote for each full share held (and a fractional vote for
each fractional share held), then standing in their name on the books of the
Fund.
Meetings of shareholders will not be held except as required by the
Investment Company Act of 1940, as amended, and other applicable law. A
meeting will be held to vote on the removal of a Trustee or Trustees of the
Fund if requested in writing by the holders of not less than 10% of the
outstanding shares of the Fund. The Fund will assist in shareholder
communication in such matters to the extent required by law.
Custodians: The Chase Manhattan Bank, N.A. New York, NY and Morgan Stanley
Trust Company (NY) Brooklyn, NY, serve as custodians for the portfolios. The
custodians hold cash, securities and other assets as required by the 1940
Act.
Transfer and Dividend Disbursing Agent: Chase Global Funds Services Company,
a subsidiary of The Chase Manhattan Bank, N.A., 73 Tremont Street, Boston, MA
02108-3913.
Reports: Shareholders receive semiannual and annual financial statements.
Annual financial statements are audited by Price Waterhouse LLP, independent
accountants.
Litigation: The Fund is not involved in any litigation.
Closed Holidays: Currently, the weekdays on which the Advisory Portfolios are
closed for business are: New Year's Day, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day, and Christmas Day.
<PAGE>
TRUSTEES AND OFFICERS
The following is a list of the Trustees and the principal executive officers
of the Fund and a brief statement of their present positions and principal
occupations during the past five years:
Thomas L. Bennett,* Chairman of the Board of Trustees; Portfolio Manager,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.
David P. Eastburn, Trustee; Retired; formerly: Director (Trustee) of each of
the investment companies in The Vanguard Group, except Vanguard Specialized
Portfolios; Director of Penn Mutual Life Insurance Company and General
Accident Insurance; President, Federal Reserve Bank of Philadelphia.
Joseph P. Healey, Trustee; Headmaster, Haverford School; formerly Dean,
Hobart College; Associate Dean, William & Mary College.
Joseph J. Kearns, Trustee; Vice President and Treasurer, J. Paul Getty Trust.
C. Oscar Morong, Jr., Trustee; Managing Director, Morong Capital Management;
Director, Ministers and Missionaries Benefit Board of American Baptist
Churches, The Indonesia Fund, The Landmark Funds; formerly Senior Vice
President and Investment Manager for CREF, TIAA-CREF Investment Management,
Inc.
* Trustee Bennett is deemed to be an "interested person" of the Fund as that
term is defined in the Investment Company Act of 1940, as amended.
- --------------------------------------------------------------------------------
James D. Schmid, President; Head of Mutual Funds, Miller Anderson & Sherrerd,
LLP; Director, MAS Fund Distribution, Inc.; Chairman of the Board of
Directors, The Minerva Fund, Inc.; formerly Vice President, Chase Manhattan
Bank.
Lorraine Truten, CFA, Vice President; Head of Mutual Fund Administration,
Miller Anderson & Sherrerd, LLP; President, MAS Fund Distribution, Inc.
Douglas W. Kugler, Treasurer; Manager of Mutual Fund Administration, Miller
Anderson & Sherrerd, LLP; formerly Assistant Vice President, Provident
Financial Processing Corporation from May 1989 to March 1993.
John H. Grady, Jr., Secretary; Partner, Morgan, Lewis & Bockius, LLP;
formerly Attorney, Ropes & Gray.
<PAGE>
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<PAGE>
MAS PROSPECTUS
- --------
MAS FUNDS
January 30, 1996
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds Services Company
One Tower Bridge 73 Tremont Street
West Conshohocken, Boston, Massachusetts 02108-0913
Pennsylvania 19428-2899
General Distribution Agent:
MAS Fund Distribution, Inc.
One Tower Bridge
P.O. Box 868
West Conshohocken,
Pennsylvania 19428-0868
- --------------------------------------------------------------------------------
Table of Contents
Page Page
Fund Expenses 2 General Information
Prospectus Summary 3 Purchase of Shares 19
Financial Highlights 5 Redemption of Shares 20
Yield and Total Return 6 Valuation of Shares 20
Investment Suitability 6 Dividends, Capital Gains
Investment Limitations 7 Distributions and Taxes 21
Portfolio Summaries 9 Investment Adviser 22
Prospectus Glossary: Portfolio Management 23
Strategies 10 Administrative Services 24
Investments 12 General Distribution Agent 24
Portfolio Transactions 24
Trustees and Officers 26
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 30, 1996
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-six
portfolios offering a variety of investment alternatives. This Statement of
Additional Information sets forth information about the Fund applicable to each
of the twenty-six portfolios.
This Statement is not a Prospectus but should be read in conjunction with the
Fund's Prospectuses dated January 30, 1996, each as revised from time to time.
To obtain either of these Prospectuses, please call the Client Services Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
Page
Business History 3
Strategies and Investments 3
Repurchase Agreements 3
Securities Lending 3
Foreign Investments 4
Futures Contracts 5
Restrictions on the Use of Futures Contracts 5
Risk Factors in Futures Transactions 6
Options 6
Options on Foreign Currencies 7
Combined Transactions 8
Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies 8
Swap Contracts 9
Foreign Currency Exchange-Related Securities 10
Municipal Bonds 11
Duration 12
Mortgage-Backed Securities 13
Stripped Mortgage-Backed Securities 15
U.S. Government Securities 15
Zero Coupon Bonds 16
Eurodollar and Yankee Obligations 17
Brady Bonds 17
Cash Reserves Portfolio 18
Tax Considerations 18
Purchase of Shares 19
Redemption of Shares 19
Shareholder Services 20
Investment Limitations 20
Management of the Fund 23
Distribution Plans 26
Investment Adviser 26
Administration 28
Distributor for Fund 29
Custodian 29
Portfolio Transactions 30
Portfolio Turnover 31
General Information 31
Performance Information 33
Comparative Indices 38
Financial Statements 42
Appendix-Description of Securities and Ratings 43
Description of Bond Ratings 43
<PAGE>
BUSINESS HISTORY
MAS Funds (formerly MAS Pooled Trust Fund) is an open end management investment
company established under Pennsylvania law as a Pennsylvania business trust
under an Amended and Restated Agreement and Declaration of Trust dated November
18, 1993. The Fund was originally established as The MAS Pooled Trust Fund, a
Pennsylvania business trust, in February, 1984.
STRATEGIES AND INVESTMENTS
The following information supplement the characteristics and risks of strategies
and investments set forth in the Fund's Prospectuses:
REPURCHASE AGREEMENTS
Each of the Fund's Portfolios may invest in repurchase agreements collateralized
by U.S. Government securities, certificates of deposit and certain bankers'
acceptances. Repurchase agreements are transactions by which a Portfolio
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. In these
transactions, the securities purchased by a Portfolio have a total value in
excess of the value of the repurchase agreement and are held by the Portfolio's
custodian bank until repurchased. Such agreements permit a Portfolio to keep all
its assets at work while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. The Adviser and the Fund's Administrator
will continually monitor the value of the underlying securities to ensure that
their value always equals or exceeds the repurchase price.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, a
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of a Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that a Portfolio may not be able to substantiate its interest in the underlying
securities. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through stringent security selection criteria and
careful monitoring procedures.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio. Each Portfolio may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, as amended, or the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder, which currently require that (a) the borrower
pledge and maintain with the Portfolio collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the United States Government having a value at all times
not less than 100% of the value of the securities loaned, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Portfolio at any time, and (d) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Trustees.
<PAGE>
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FOREIGN INVESTMENTS
Investors should recognize that investing in foreign securities involves certain
special considerations which are not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios will
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies. The investment policies of the Portfolios (except
for the Domestic Fixed Income, Limited Duration, Mortgage-Backed Securities,
Advisory Mortgage and Cash Reserves Portfolios) permit them to enter into
forward foreign currency exchange contracts in order to hedge their respective
holdings and commitments against changes in the level of future currency rates.
Such contracts involve an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the contract.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to domestic issuers, there may be less publicly available information about
certain foreign securities than about domestic securities. Securities of some
foreign issuers are generally less liquid and more volatile than securities of
comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers and listed issuers than in the U.S.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Although the Portfolios will endeavor to achieve most favorable execution costs
in its portfolio transactions, fixed commissions on many foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges. In addition,
it is expected that the expenses for custodian arrangements of the Portfolio's
foreign securities will be somewhat greater than the expenses for the custodian
arrangements for handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and interest
income. Although in some countries a portion of these taxes are recoverable, the
non-recovered portion of foreign withholding taxes will reduce the income
received from investments in such countries. However, these foreign withholding
taxes are not expected to have a significant impact on those Portfolios for
which the investment objective is to seek long-term capital appreciation and any
income should be considered incidental.
The International Equity, Emerging Markets, International Fixed Income, Advisory
Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class, High Yield,
Municipal, PA Municipal and Balanced Portfolios may invest in the securities of
issuers in Eastern European and other developing markets. The economies of these
countries are currently suffering both from the stagnation resulting from
centralized economic planning and control and the higher prices and unemployment
associated with the transition to market economies. Unstable economic and
political conditions may adversely affect security values. Upon the accession to
power of Communist regimes approximately 40 years ago, the governments of a
number of Eastern European countries expropriated a large amount of property.
The claims of many property owners against those governments were never finally
settled. In the event of the return to power of the Communist Party, there can
be no assurance that the portfolio's investments in Eastern Europe would not
also be expropriated, nationalized or otherwise confiscated.
<PAGE>
FUTURES CONTRACTS
Each Portfolio, except the Cash Reserves Portfolio, may enter into futures
contracts, options, and options on futures contracts. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts which are standardized as to maturity date and
underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. A Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's Custodian.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets, and will maintain assets
sufficient to meet its obligations under such contracts in a segregated account
with the custodian bank or will otherwise comply with the SEC's position on
asset coverage.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Portfolio would continue to be required
to make daily cash payments to maintain its required margin. In such situations,
if the Portfolio has insufficient cash, it may have to sell portfolio securities
to meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Portfolio may be required to make delivery of the
instruments underlying interest rate futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge. A Portfolio will minimize the risk
that it will be unable to close out a futures contract by only entering into
futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. A Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Most futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
<PAGE>
OPTIONS
Investments in options involve some of the same considerations that are involved
in connection with investments in futures contracts (e.g., the existence of a
liquid secondary market). In addition, the purchase of an option also entails
the risk that changes in the value of the underlying security or contract will
not be fully reflected in the value of the option purchased. Depending on the
pricing of the option compared to either the futures contract or securities, an
option may or may not be less risky than ownership of the futures contract or
actual securities. In general, the market prices of options can be expected to
be more volatile than the market prices on the underlying futures contract or
securities.
OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC Option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolios expect generally to enter into OTC Options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC Option will be
satisfied. The staff of the SEC currently takes the position that OTC Options
purchased by the Portfolios or sold by them (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities.
The Portfolios may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to protect against a decline in the U.S. dollar value
of a currency due to the changes of exchange rates vis a vis the U.S. dollar and
the option is written for a currency other than the currency in which the
security is denominated. In such circumstances, the Portfolios will follow the
coverage requirements as described in the preceding paragraph.
OPTIONS ON FOREIGN CURRENCIES
All Portfolios except the Cash Reserves, Domestic Fixed Income, Limited
Duration, Mortgage-Backed Securities and Advisory Mortgage Portfolios, may
purchase and write options on foreign currencies in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminution in the value of portfolio securities, a
Portfolio may purchase put options on the foreign currency. If the value of the
currency does decline, a Portfolio will have the right to sell such currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Portfolio may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to a Portfolio derived from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Portfolios could sustain losses on transactions in
foreign currency options which would require them to forego a portion or all of
the benefits of advantageous changes in such rates.
The Portfolios may write options on foreign currencies for the same purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolios to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolios would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolios may only write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash,
U.S. Government securities or other high grade liquid debt securities in a
segregated account with the Custodian, or (c) maintains in a segregated account
cash, U.S. Government securities or other high-grade liquid debt securities in
an amount not less than the value of the underlying foreign currency in U.S.
dollars, marked-to-market daily.
The Portfolios may also write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which a Portfolio owns or has the right to acquire
due to an adverse change in the exchange rate and which is denominated in the
currency underlying the option. In such circumstances, the Portfolio will either
"cover" the transaction as described above or collateralize the option by
maintaining in a segregated account with the Custodian, cash or U.S. Government
securities or other high grade liquid debt securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked to market
daily.
<PAGE>
COMBINED TRANSACTIONS
The Portfolios may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions, instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of the Portfolio to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS
AND OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. Moreover, the option writer and a trader of
forward contracts could lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Furthermore, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decision, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
SWAP CONTRACTS
All Portfolios, except the Cash Reserves Portfolio, may enter into Swap
Contracts. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, a Portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the portfolios may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon national amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to a swap defaults, a Portfolio's risk of
loss consists of the net amount of payments that a Portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash,
U.S. Government securities, or high grade debt obligations, to avoid any
potential leveraging of the Portfolio. To the extent that these swaps, caps,
floors, and collars are entered into for hedging purposes, the Adviser believes
such obligations do not constitute "senior securities" under the Investment
Company Act of 1940 and, accordingly, will not treat them as being subject to a
Portfolio's borrowing restrictions. All of the portfolios of MAS Funds except
the Cash Reserves Portfolio may enter into OTC Derivatives transactions (Swaps,
Caps, Floors, Puts, etc., but excluding foreign exchange contracts) with
counterparties that are approved by the Adviser in accordance with guidelines
established by the Board of Trustees. These guidelines provide for a minimum
credit rating for each counterparty and various credit enhancement techniques
(for example, collateralization of amounts due from counterparties) to limit
exposure to counterparties with ratings below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
<PAGE>
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign currency warrants--Foreign currency warrants are warrants which entitle
the holder to receive from their issuer an amount of cash (generally, for
warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the OCC. Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
Principal exchange rate linked securities--Principal exchange rate linked
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based of the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper--Performance indexed paper is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain Funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain Funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues. The Municipal and PA Municipal Portfolios ("the
Portfolios") may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper.
Industrial revenue bonds in most cases are revenue bonds and generally do not
have the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes. Project Notes are instruments issued by the
Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, they are also secured by the full faith and credit of the United
States.
<PAGE>
Note obligations with demand or put options may have a stated maturity in excess
of one year, but permit any holder to demand payment of principal plus accrued
interest upon a specified number of days' notice. Frequently, such obligations
are secured by letters of credit or other credit support arrangements provided
by banks. The issuer of such notes normally has a corresponding right, after a
given period, to repay at its discretion the outstanding principal of the note
plus accrued interest upon a specific number of days' notice to the bondholders.
The interest rate on a demand note may be based upon a known lending rate, such
as the prime lending rate, and be adjusted when such rate changes, or the
interest rate on a demand note may be a market rate that is adjusted at
specified intervals. Each note purchased by the Portfolios will meet the quality
criteria set out in the Prospectus for the Portfolios.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and Standard & Poor's represent their opinions of
the quality of the Municipal Bonds rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, Municipal Bonds with the same maturity, coupon and rating may have
different yields, while Municipal Bonds of the same maturity and coupon, but
with different ratings may have the same yield. It will be the responsibility of
the investment management staff to appraise independently the fundamental
quality of the bonds held by the Portfolios.
Municipal Bonds are sometimes purchased on a "when-issued" basis meaning the
Portfolio has committed to purchase certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Portfolios to achieve
their investment objectives. In that event, the Fund's Trustees and officers
would reevaluate its investment objective and policies and consider recommending
to its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of the Portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate its investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
DURATION
The Limited Duration and Intermediate Duration Portfolios seek to achieve their
objective by investing in the types of fixed income securities described in the
Prospectus and by maintaining an average duration of between one and three years
and two and five years, respectively. Duration is one of the fundamental tools
used by the Adviser in security selection for the Portfolios and any other
Portfolio which invests in fixed income securities.
Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of the "term of
maturity." Duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure.
Most debt obligations provide interest ("coupon") payments in addition to a
final ("par") payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates.
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of the pattern of the security's payments prior to
maturity. Duration is a measure of the expected life of a fixed income security
on a present value basis. Duration takes the length of the time intervals
between the present time and the time that the interest and principal payments
are scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure is not properly captured by duration in
the case of mortgage pass-through securities. The stated final maturity of such
securities is generally 30 years, but current prepayment rates are more critical
in determining the securities' interest rate exposure. In these and other
similar situations, the Adviser will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to investors. Fixed
Income, Domestic Fixed Income, Fixed Income Portfolio II, Special Purpose Fixed
Income, Limited Duration, High Yield, Intermediate Duration Fixed Income,
Mortgage-Backed Securities, Advisory Mortgage, International Fixed Income,
Advisory Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class,
Municipal, PA Municipal, and Balanced Portfolios may invest in Mortgage-Backed
Securities. Most issuers or poolers provide guarantees of payments, regardless
of whether or not the mortgagor actually makes the payment. The guarantees made
by issuers or poolers are individual loan, title, pool and hazard insurance
purchased by the issuer. There can be no assurance that the private issuers can
meet their obligations under the policies. Mortgage-backed securities issued by
private issuers, whether or not such securities are subject to guarantees, may
entail greater risk. If there is no guarantee provided by the issuer,
mortgage-backed securities purchased by the Portfolios will be rated investment
grade by Moody's or Standard & Poor's, or, if unrated, deemed by the Adviser to
be of investment grade quality.
Underlying Mortgages
Pools consist of whole mortgage loans or participation in loans. The majority of
these loans are made to purchasers of 1-4 family homes. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. For example, in addition to fixed-rate fixed-term
mortgages, the Portfolios may purchase pools of adjustable rate mortgages (ARM),
growing equity mortgages (GEM), graduated payment mortgage (GPM) and other types
where the principal and interest payment procedures vary. ARM's are mortgages
which reset the mortgage's interest rate with changes in open market interest
rates. The Portfolios' interest income will vary with changes in the applicable
interest rate on pools of ARM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Portfolios' net asset values since the prices at which these securities are
valued each day will reflect the payment procedures.
All poolers apply standards for qualifications to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
<PAGE>
Average Life
The average life of pass-through pools varies with the maturities, coupon rates,
and type of the underlying mortgage instruments. In addition, a pool's term may
be shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Returns of Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted based on
a prepayment assumption derived from the coupon and maturity of the underlying
instruments. Actual pre-payment experience may cause the realized return to
differ from the assumed yield. Reinvestment of pre-payments may occur at higher
or lower interest rates than the original investment, thus affecting the
realized returns of the Portfolios. The compounding effect from reinvestment of
monthly payments received by each Portfolio will increase its return to
shareholders, compared to bonds that pay interest semi-annually.
About Mortgage-Backed Securities
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments resulting from the sale of the
underlying residential property, refinancing or foreclosure net of fees or costs
which may be incurred. Some mortgage-backed securities are described as
"modified pass-through." These securities entitle the holders to receive all
interest and principal payments owed on the mortgages in the pool, net of
certain fees, regardless of whether or not the mortgagors actually make payment.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation (FHLMC). FHLMC is a corporate instrumentality of the U.S. Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. FHLMC issues
Participation Certificates ("PC's") which represent interests in mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal.
The Federal National Mortgage Association (FNMA) is a Government-sponsored
corporation owned entirely by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations, mutual savings,
banks, commercial banks and credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
Government National Mortgage Association (GNMA). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
Government and Government-related pools because there are no direct or indirect
Government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance purchased by the issuer. The insurance and guarantees are issued by
Governmental entities, private insurers and the mortgage poolers. There can be
no assurance that the private insurers can meet their obligations under the
policies. Mortgage-backed securities purchased for the Portfolios will, however,
be rated of investment grade quality by Moody's and/or Standard & Poor's or, if
unrated, deemed by the Adviser to be of investment grade quality.
It is expected that Governmental or private entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payment
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Portfolios will, consistent with their investment objective and policies,
consider making investments in such new types of securities.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the "IO" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Portfolio yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Portfolio may fail to fully recoup its initial investment in these securities
even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, certain of these securities may be deemed "illiquid"
and subject to a Portfolio's limitations on investment in illiquid securities.
<PAGE>
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities which
are issued or guaranteed by the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
Government. U.S. Treasury securities are backed by the "full faith and credit"
of the United States.
Agency Securities: Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service its debt. Debt from certain other
agencies and instrumentalities, including the Federal Home Loan Bank and Federal
National Mortgage Association, are not guaranteed by the United States, but
those institutions are protected by the discretionary authority of the U.S.
Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the Federal Home Loan
Mortgage Corporation, are federally chartered institutions under Government
supervision, but their debt securities are backed only by the credit worthiness
of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized under
Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
ZERO COUPON BONDS
Zero Coupon bonds, are a term used to describe notes and bonds which have been
stripped of their unmatured interest coupons, or the coupons themselves, and
also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
these instruments remains guaranteed by the "full faith and credit" of the
United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a substantial
discount to its "face value"--what it will be worth at maturity. The difference
between a security's issue or purchase price and its face value represents the
imputed interest an investor will earn if the security is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by zero coupon bondholders each year. The Fund, which expects to
qualify as a regulated investment company, intends to pass along such interest
as a component of the Portfolio's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields than
those available on U.S. Treasury bonds of similar maturity. However, zero coupon
bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities (CATS), Treasury Receipts (Trs),
Separate Trading of Registered Interest and Principal of Securities (STRIPS) and
Treasury Investment Growth Receipts (TIGERS).
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers. However, Eurodollar and
Yankee obligations held in the Cash Reserves Portfolio will undergo the same
credit analysis as domestic issues in which the Cash Reserves Portfolio invests,
and will have at least the same financial strength as the domestic issuers
approved for the Cash Reserves Portfolio.
<PAGE>
BRADY BONDS
A portion of each of the Fund's fixed-income investments (the Cash Reserves
Portfolio must invest in dollar-denominated Brady Bonds only) may be invested in
certain debt obligations customarily referred to as "Brady Bonds", which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to Collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady bonds are to be viewed as speculative.
Brady Plan debt restructurings totaling approximately $73 billion have been
implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the Philippines,
Uruguay and Venezuela, with the largest proportion of Brady Bonds having been
issued to date by Mexico and Venezuela. Brazil has announced plans to issue
Brady Bonds aggregating approximately $35 billion, based on current estimates.
There can be no assurance that the circumstances regarding the issuance of Brady
Bonds by these countries will not change.
CASH RESERVES PORTFOLIO
A-1 and Prime-1 Commercial Paper Ratings: Commercial paper rated A-1 by Standard
& Poor's has the following characteristics: (1) liquidity ratios are adequate to
meet cash requirements; (2) long-term senior debt is rated "A" or better; (3)
the issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances; (5) typically, the issuer's industry is well established
and the issuer has a strong position within the industry; and (6) the
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
A-1, A-2, or A-3. The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
TAX CONSIDERATIONS
In order for a Portfolio to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or foreign currencies, or other income derived with respect to its business of
investing in such securities or currencies. In addition, gains realized on the
sale or other disposition of securities or foreign currencies not directly
related to the company's principal business of investing in securities held for
less than three months must be limited to less than 30% of the Portfolio's
annual gross income. It is anticipated that any net gain realized from the
closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In order to avoid realizing excessive gains on securities held less
than three months, the Portfolio may be required to defer the closing out of
futures contracts beyond the time when it would otherwise be advantageous to do
so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Portfolio's fiscal
year and which are recognized for tax purposes, will not be considered gains on
securities held less than three months for the purpose of the 30% test.
Each Portfolio of the Fund will distribute to shareholders annually any net
capital gains which have been recognized for Federal income tax purposes
including unrealized gains at the end of the Portfolio's fiscal year on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised of the nature of the payments.
The 30% limit on gains from the disposition of certain options, futures, forward
contracts, and swap contracts held less than three months, and the qualifying
income and diversification requirements applicable to a Portfolio's assets, may
limit the extent to which a Portfolio will be able to engage in these
transactions.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolios may be "Section 1256 contracts." Section 1256
contracts held by a Portfolio at the end of its taxable year (and, for purposes
of the 4% excise tax, on certain other dates as prescribed under the Code) are
"marked to market" with unrealized gains or losses treated as though they were
realized. Any gains or losses, including "marked to market" gains or losses, on
Section 1256 contracts other than forward contracts are generally 60% long-term
and 40% short-term capital gains or losses ("60/40") although all foreign
currency gains and losses from such contracts may be treated as ordinary in
character absent a special election.
Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap contracts undertaken by a Portfolio, may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by a Portfolio. In addition,
losses realized by a Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
a Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
<PAGE>
A Portfolio may make one or more of the elections available under the Code which
are applicable to straddles. If a Portfolio makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a Portfolio that did not engage in such hedging transactions.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares (ii) to reject purchase orders, (iii) to reduce or waive
the minimum for initial and subsequent investments. The Officers of the Fund may
from time to time waive the minimum initial and subsequent investment
requirements in connection with investments in the Fund by employees of the
Adviser.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Portfolio at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Trustees
may deem advisable; however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Fund's Prospectus under "Valuation of Shares" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
No charge is made by a Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
SHAREHOLDER SERVICES
The following supplements the shareholder services set forth in the Fund's
Prospectus:
Exchange Privilege
The exchange privilege is only available with respect to Portfolios that are
registered for sale in a shareholder's state. Exchange requests should be sent
to MAS Funds, c/o Client Services Group, One Tower Bridge, Suite 1150, P.O. Box
868, West Conshohocken, PA 19428-0868. Any such exchange will be based on the
respective net asset values of the shares involved. Before making an exchange, a
shareholder should consider the investment objectives of the Portfolio to be
purchased. Exchange requests may be made either by mail or telephone. Telephone
exchanges (referred to as "expedited exchanges") will be accepted only if the
certificates for the shares to be exchanged are held by the Fund for the account
of the shareholder and the registration of the two accounts are identical.
Requests for expedited exchanges received prior to 12:00 p.m. for the Cash
Reserves Portfolio and prior to 4:00 p.m. (Eastern time) for all other
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Expedited exchanges may also be subject to limitations as to amounts or
frequency, and to other restrictions established by the Board of Trustees to
assure that such exchanges do not disadvantage the Fund and its shareholders.
The officers of the Fund reserve the right not to accept any request for an
exchange when, in their opinion, the exchange privilege is being used as a tool
for market timing.
For Federal income tax purposes, an exchange between Portfolios of the Fund is a
taxable event, and, accordingly, a capital gain or loss may be realized. In a
revenue ruling relating to circumstances similar to the Fund's, an exchange
between a series of a Fund was also deemed to be a taxable event. It is likely,
therefore, that a capital gain or loss would be realized on an exchange between
Portfolios; you may want to consult your tax adviser for further information in
this regard. The exchange privilege may be modified or terminated at any time.
Transfer of Shares
Shareholders may transfer shares of the Fund's Portfolios to another person by
written request to the Client Services Group at the address noted above. The
request should clearly identify the account and number of shares to be
transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or any stock power must be guaranteed
in the same manner as described under "Redemption of Shares." As in the case of
redemptions, the written request must be received in good order before any
transfer can be made.
<PAGE>
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio.
As a matter of fundamental policy, each Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subjects to the limitations described in (h), below, (ii) by lending its
portfolio securities, and (iii) by lending portfolio assets to other Portfolios
of the Fund, so long as such loans are not inconsistent with the Investment
Company Act of 1940, as amended (the "1940 Act"), or the Rules and Regulations,
or interpretations or orders of the Securities and Exchange Commission
thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a result, it
would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer (this restriction is not applicable
to the Global Fixed Income, International Fixed Income, Advisory Foreign Fixed
Income or the Emerging Markets Portfolios);
(5) with respect to 75% of its assets, purchase securities of any issuer if, as
a result, more than 5% of the Portfolio's total assets, taken at market value at
the time of such investment, would be invested in the securities of such issuer
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (this restriction
does not apply to the Global Fixed Income, International Fixed Income, Advisory
Foreign Fixed Income or the Emerging Markets Portfolios);
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes, and (ii) in connection with reverse repurchase agreements,
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent that the
fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in connection with the disposition of restricted securities);
(8) acquire any securities of companies within one industry, other than
mortgage-backed securities in the case of the Mortgage-Backed Securities and
Advisory Mortgage Portfolios, if as a result of such acquisition, more than 25%
of the value of the Portfolio's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, when any such Portfolio adopts a
temporary defensive position. Additionally, the Cash Reserves Portfolio may
invest without limitation in obligations of the U.S. Government or its agencies
and instrumentalities or certificates of deposit or bankers' acceptance of
domestic banks;
(9) the Select Equity Portfolio may not invest in the securities of companies
listed by the Investor Responsibility Research Center as having direct
investment or employees in South Africa prior to August 31, 1993.
Each Portfolio is also subject to the following restrictions which may be
changed by the Board of Trustees without shareholder approval.
As a matter of non-fundamental policy, each Portfolio will not:
(a) enter into futures contracts to the extent that its outstanding obligations
to purchase securities under these contracts in combination with its outstanding
obligations with respect to options transactions would exceed 50% of its total
assets, and will maintain assets sufficient to meet its obligations under such
contracts in a segregated account with the custodian bank or will otherwise
comply with the SEC's position on asset coverage.
(b) invest in puts, calls, straddles or spreads except as described above in
(a);
(c) invest in warrants, valued at the lower of cost or market, in excess of 5%
of the value of its total assets. Included within that amount, but not to exceed
2% of the value of the Portfolio's net assets, may be warrants that are not
listed on the New York or American Stock Exchanges. Warrants attached to
securities are not subject to this limitation.
<PAGE>
(d) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make margin
deposits in connection with transactions in options, futures, and options on
futures; or sell short unless, by virtue of its ownership of other securities,
it has the right to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon the same
conditions. Transactions in futures contracts and options are not deemed to
constitute selling securities short;
(e) purchase or retain securities of an issuer if those Officers and Trustees of
the Fund or its investment adviser owning more than 1/2 of 1% of such securities
together own more than 5% of such securities;
(f) borrow money other than from banks or other Portfolios of the Fund, provided
such borrowing is not inconsistent with the 1940 Act, as amended, or the Rules
and Regulations or interpretations or orders of the Securities and Exchange
Commission thereunder; or purchase additional securities when borrowings exceed
5% of total (gross) assets;
(g) pledge, mortgage, or hypothecate any of its assets to an extent greater than
50% of its total assets at fair market value;
(h) invest more than an aggregate of 15% of the net assets of the Portfolio
(except that the Cash Reserves Portfolio may not invest more than an aggregate
of 10% of its total assets), determined at the time of investment, in securities
subject to legal or contractual restrictions on resale or securities for which
there are no readily available markets, including repurchase agreements having
maturities of more than seven days and OTC options provided that (except for the
Cash Reserves Portfolio) there is no limitation with respect to or arising out
of investment in (i) securities that have legal or contractual restrictions on
resale but have a readily available market, or (ii) securities that are not
registered under the Securities act of 1933, as amended (the "1933 Act") but
which can be sold to qualified institutional investors in accordance with Rule
144A under the 1933 Act;
(i) invest for the purpose of exercising control over management of any company;
(j) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act, as amended;
(k) invest more than 5% of its total assets in securities of issuers (other than
securities issued or guaranteed by U.S. or foreign governments or political
subdivisions thereof) which have (with predecessors) a record of less than three
years' continuous operation;
(l) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases;
(m) (with respect to the Global Fixed Income, International Fixed Income,
Advisory Foreign Fixed Income and Emerging Markets Portfolios) purchase the
securities of any issuer (other than obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities) if, as a result, with
respect to 50% of its total assets, more than 5% of the value of its total
assets would be invested in the securities of any single issuer, or it would
hold more than 10% of the outstanding voting securities of such issuer, or more
than 25% of the value of its total assets would be invested in the securities of
any single issuer.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the value or
total cost of the Portfolio's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
MANAGEMENT OF THE FUND
Trustees and Officers
The Fund's officers, under the supervision of the Board of Trustees, manage the
day-to-day operations of the Fund. The Trustees set broad policies for the Fund
and choose its officers. The following is a list of the Trustees and officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years:
Thomas L. Bennett,* Chairman of the Board of Trustees; Portfolio Manager, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.
David P. Eastburn, Trustee; Retired; formerly Director (Trustee) of each of the
investment companies in The Vanguard Group, except Vanguard Specialized
Portfolios; Director of Penn Mutual Life Insurance Company and General Accident
Insurance; President, Federal Reserve Bank of Philadelphia.
Joseph P. Healey, Trustee; Headmaster, Haverford School; formerly Dean, Hobart
College; Associate Dean, William & Mary College.
Joseph J. Kearns, Trustee; Vice President and Treasurer, The J. Paul Getty
Trust.
<PAGE>
C. Oscar Morong, Jr., Trustee; Managing Director, Morong Capital
Management; Director, Ministers and Missionaries Benefit Board of American
Baptist Churches, The Indonesia Fund, The Landmark Funds; formerly Senior Vice
President and Investment Manager for CREF, TIAA-CREF Investment Management, Inc.
James D. Schmid, President; Head of Mutual Funds, Miller Anderson & Sherrerd,
LLP; Director, MAS Fund Distribution, Inc., Chairman of the Board of Directors,
The Minerva Fund, Inc.; formerly Vice President, Chase Manhattan Bank.
Lorraine Truten, Vice President; Head of Mutual Fund Administration, Miller
Anderson & Sherrerd, LLP; President, MAS Fund Distribution, Inc.
Douglas W. Kugler, Treasurer; Manager of Mutual Fund Administration, Miller
Anderson & Sherrerd, LLP; formerly Assistant Vice President, Provident Financial
Processing Corporation.
John H. Grady, Jr., Secretary; Partner, Morgan, Lewis & Bockius, LLP; formerly,
Attorney, Ropes & Gray.
Ellen P. Watson, Assistant Secretary; Supervisor of State Securities
Registration, Chase Global Funds Services; formerly Assistant Manager, Blue Sky
Department, The Putnam Companies.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
<PAGE>
Remuneration of Trustees and Officers
The Fund pays each Trustee, who is not also an officer or affiliated person, a
fee for each Board of Trustees Meeting attended plus travel and other expenses
incurred in attending such meetings. Trustees who are also officers or
affiliated persons receive no remuneration for their service as Trustees. The
Fund's officers and employees are paid by the Adviser or Sub-Administrator.
During the fiscal year ended September 30, 1995, the Fund paid $89,193 in fees
and expenses to its "non-interested" Trustees.
The aggregate compensation paid by the Fund to each of the Trustees during its
fiscal year ended September 30, 1995 is set forth below.
<TABLE>
<CAPTION>
Estimated
Aggregate Pension or Benefits Annual Total
Compensation Accrued As Part Benefits upon Compensation
Name of Trustee from the Fund of Fund Expenses Retirement from the Fund
- ------------------- ------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Thomas L. Bennett* $ -0- $-0- $-0- $ -0-
David P. Eastburn $20,000 $-0- $-0- $20,000
Joseph P. Healey $20,000 $-0- $-0- $20,000
Joseph J. Kearns $20,000 $-0- $-0- $20,000
C. Oscar Morong, Jr. $20,000 $-0- $-0- $20,000
</TABLE>
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
Principal Holders of Securities
As of January 25, 1996, the following persons owned of record or beneficially 5%
or more of the shares of a Portfolio:
Emerging Markets Portfolio: Ministers & Missionaries Benefit Board, New York,
NY, 59.6%; Smithsonian Institute, New York, NY, c/o Chemical Bank, 23.5%;
Williams College, Williamstown, MA, 8.0%.
International Equity Portfolio: Ministers & Missionaries Benefit Board, New
York, NY, 9.0%; Western Metal Industry, Seattle, WA, 8.1%.
Mid Cap Growth Portfolio: J. Paul Getty Trust, Chicago, IL, c/o The Northern
Trust Company, 18.0%; New York State Common Retirement Fund, Albany, NY, 7.7%;
AT&T Salaried Retirement Plan, Jersey City, NJ, c/o Bankers Trust Company, 5.3%.
Mid Cap Value Portfolio: United Power Association Master Trust, Minneapolis, MN,
c/o Norwest Bank, 21.2%; Automobile Club of Rochester, Inc., Wilmington, DE, c/o
Delaware Charter Guarantee & Trust, 8.6%; American Association of Neurological
Surgeons, Park Ridge, IL, 5.7%.
Small Cap Value Portfolio: J. Paul Getty Trust, Chicago, IL, c/o The Northern
Trust Company, 12.3%; American Red Cross Retirement System, Falls Church, VA,
7.4%; Hearst Foundation, Boston, MA, c/o Fishnet & Company, 6.0%; The Hearst
Corporation, New York, NY, c/o Chemical Bank, 5.1%.
Value Portfolio: Pennsylvania Public Schools Employee Retirement Fund,
Harrisburg, PA, 7.3%; New York State Common Retirement Fund, Albany, NY, 6.5%;
Charles Schwab & Co., Inc., San Francisco, CA, 5.5%.
Cash Reserves Portfolio: Sun Company, Inc., Philadelphia, PA, c/o Bankers Trust
Company, 31.1%; Wolf Revocable Trust, Palo Alto, CA, 14.7%; Roderick D. & Laura
A. Marcoux, Incline Village, NV, 5.3%.
Domestic Fixed Income Portfolio: Forbes Health System, Philadelphia, PA, c/o
Saxon & Company, 29.6%; The Philadelphia Orchestra Endowment, Philadelphia, PA,
17.0%; Fox Chase Cancer Center, Philadelphia, PA, 8.6%; Paintmakers Money
Accumulation, Portland, OR, 7.3%; Delta Dental Plan of NH, Inc., Concord, NH,
6.9%; Hartford Foundation For Public Giving, Hartford, CT, 6.6%.
Fixed Income Portfolio II: Johns Hopkins University Applied Physics Lab,
Baltimore, MD, 15.1%; Sheet Metal Workers #100 Pension Plan, Suitland, MD,
10.7%; Diocese of Camden, Camden, NJ, 8.4%; Northwestern Memorial Hospital,
Chicago, IL, 7.0%; Johns Hopkins University, Baltimore, MD, c/o Bankers Trust
Company, 6.8%; The Tinker Foundation, New York, NY, 5.6%; Sarah Lawrence
College, Bronxville, NY, 5.1%.
Global Fixed Income Portfolio: Family Rosary, Inc., Albany, NY, 18.0%; Pitney
Bowes, Inc., Stamford, CT, 14.5%; Forest Oil Corporation, Boston, MA, c/o State
Street Bank & Trust Company, 13.3%; Rockefeller Family Fund, Inc., New York, NY,
11.7%; San Diego Transit Corporation, San Diego, CA, c/o Union Bank, 7.2%;
American Philosophical Society, Philadelphia, PA, 7.0%; Mid-Maine Medical Center
Pension Plan, Waterville, ME, 5.7%; Mid-Maine Medical Center Endowment,
Waterville, ME, 5.2%.
High Yield Securities Portfolio: Western Metal Industry, Seattle, WA, 10.6%;
Carnegie Corporation of New York, New York, NY, 10.2%; Ministers & Missionaries
Benefit Board, New York, NY, 8.7%; KPMG Peat Marwick, Montvale, NJ, 5.8%;
Williams College, Williamstown, MA, 5.2%.
<PAGE>
Intermediate Duration Portfolio: Connecticut Children's Medical Center,
Newington, CT, 97.0%.
International Fixed Income Portfolio: Armco Master Pension Trust, Pittsburgh,
PA, 21.9%; Western Metal Industry, Seattle, WA, 15.7%; Children's Hospital,
Philadelphia, PA, c/o CoreStates Bank, 14.4%; J. Paul Getty, Chicago, IL, c/o
The Northern Trust Company, 14.2%; Smithsonian Institute, New York, NY, c/o
Chemical Bank, 9.1%; Williams College, Williamstown, MA, 6.1%.
Limited Duration Portfolio: Bankers Trust Company, New York, NY, 21.4%;
Fieldcrest Cannon Hourly Retirement Plan, Chicago, IL, c/o Harris Trust &
Savings Bank, 9.9%; Connecticut Children's Medical Center Foundation, Newington,
CT, 7.5%; Northern California Bakery Drivers, San Francisco, CA 7.2%; Johns
Hopkins University, Baltimore, MD, c/o Bankers Trust Company, 5.7%; Benedictine
Abbey of Newark, Newark, NJ, 5.3%.
Mortgage-Backed Securities Portfolio: Inglis House Foundation, Philadelphia, PA,
29.1%; Northwestern University, Evanston, IL, 26.1%; Cives Corporation, Roswell,
GA, 13.4%; Paper Magic Group, Inc., Scranton, PA, 13.1%; Teamsters Local 641
Pension Plan, Union, NJ, 11.5%.
Municipal Fixed Income Portfolio: Robert A, Fox, Meadowbrook, PA, 13.8%; Jesse
J. Thompson, Charlotte, NC, 13.8%; Union Electric Employees Benefit Trust,
Pittsburgh, PA, c/o Bost & Co., 6.5%; Bankers Trust Company, New York, NY, 6.5%.
PA Municipal Portfolio: R. & S. Roberts, Philadelphia, PA, 25.1%; Kenneth Dunn,
West Conshohocken, PA, 21.7%; John J.F. Sherrerd, West Conshohocken, PA, 13.0%;
A. Morris Williams, West Conshohocken, PA, 10.5%; The Cook Family, West
Conshohocken, PA, 6.6%.
Balanced Portfolio: Fireman's Fund Incentive Savings Plan, New York, NY, c/o The
Bank of New York, 20.8%; Murray Ohio Pension Trust-Salaried, Nashville, TN, c/o
Third National Bank, 10.3%; Murray Ohio Pension Trust-Hourly, Nashville, TN, c/o
Third National Bank, 6.4%; A & P Savings Plan, Chicago, IL, c/o Harris Trust &
Savings, 5.0%.
Multi-Asset-Class Portfolio: KPMG Peat Marwick, Montvale, NJ, 24.8%; Reed Smith
Shaw McClay, Pittsburgh, PA, c/o Mac & Co., 13.8%; Charlotte Newcombe
Foundation, Princeton, NJ, 12.0%; The Library Company of Philadelphia,
Philadelphia, PA, 7.5%; Milbank, Tweed, Hadley & McCloy Retirement, Brooklyn,
NY, c/o Chase Manhattan Bank, 6.7%.
Select Equity Portfolio: AT&T Savings Plans Group Trust II, Berkeley Heights,
NJ, 97.0%
Advisory Foreign Fixed Income Portfolio: Kaiser Foundation, Oakland, CA, 9.4%;
Johns Hopkins University, Baltimore, MD, 7.0%.
Advisory Mortgage Portfolio: Children's Hospital of Philadelphia, Philadelphia,
PA, 8.1%; National Electrical Benefits Fund, Chicago, IL, c/o The Marco
Consulting Group, 5.9%; The Duke Endowment, Charlotte, NC, 5.7%.
The persons listed above as owning 25% or more of the outstanding shares of each
Portfolio may be presumed to "control" (as that term is defined in the
Investment Company Act of 1940, as amended) such Portfolios. As a result, those
persons would have the ability to vote a majority of the shares of the
Portfolios on any matter requiring the approval of shareholders of such
Portfolios.
DISTRIBUTION PLANS
The Fund's Distribution Plan provides that the Adviser Class Shares will pay the
Distributor a fee of .25% of the average daily net assets of each Portfolio
attributable to Adviser Class Shares, which the Distributor can use to
compensate broker/dealers and service providers which provide distribution
services to Adviser Class Shareholders or their customers who beneficially own
Adviser Class Shares.
The Fund has adopted the Distribution Plan in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of the Plan must be approved annually by
a majority of the Trustees of the Fund and the Trustees who are not "interested
persons" of the Fund within the meaning of the Investment Company Act of 1940.
The Plan requires that quarterly written reports of amounts spent under the Plan
and the purposes of such expenditures be furnished to and reviewed by the
Trustees. The Plan may not be amended to increase materially the amount which
may be spent thereunder without approval by a majority of the outstanding
Adviser Class Shares of the Fund. All material amendments of the Plan will
require approval by a majority of the Trustees of the Fund and of the Trustees
who are not "interested persons" of the Fund.
<PAGE>
INVESTMENT ADVISER
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board of Trustees and in
conformance with the stated investment objectives and policies of each Portfolio
of the Fund, manages the investment and reinvestment of the assets of each
Portfolio of the Fund. In this regard, it is the responsibility of the Adviser
to make investment decisions for the Fund's Portfolios and to place each
Portfolio's purchase and sales orders for investment securities.
As compensation for the services rendered by the Adviser under the Agreement and
the assumption by the Adviser of the expenses related thereto (other than the
cost of securities purchased for the Portfolios and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of such
securities), each Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Portfolio's average daily net assets for the quarter:
Rate
Emerging Markets Portfolio ....................................... .750%
Equity Portfolio.................................................. .500
Growth Portfolio ................................................. .500
International Equity Portfolio ................................... .500
Mid Cap Growth Portfolio ......................................... .500
Mid Cap Value Portfolio .......................................... .750
Small Cap Value Portfolio ........................................ .750
Value Portfolio................................................... .500
Cash Reserves Portfolio........................................... .250
Domestic Fixed Income Portfolio .................................. .375
Fixed Income Portfolio ........................................... .375
Fixed Income Portfolio II ........................................ .375
Global Fixed Income Portfolio..................................... .375
High Yield Portfolio ............................................. .375
Intermediate Duration Portfolio .................................. .375
International Fixed Income Portfolio ............................. .375
Limited Duration Portfolio ....................................... .300
Mortgage-Backed Securities Portfolio ............................. .375
Municipal Portfolio............................................... .375
PA Municipal Portfolio............................................ .375
Special Purpose Fixed Income Portfolio ........................... .375
Balanced Portfolio ............................................... .450
Multi-Asset-Class Portfolio ...................................... .450
Select Equity Portfolio .......................................... .500
Advisory Foreign Fixed Income Portfolio .......................... .375
Advisory Mortgage Portfolio....................................... .375
In cases where a shareholder of any of the Portfolios has an investment
counseling relationship with the Adviser, the Adviser may, at its discretion,
reduce the shareholder's investment counseling fees by an amount equal to the
pro-rata advisory fees paid by the Fund. This procedure will be utilized with
clients having contractual relationships based on total assets managed by Miller
Anderson & Sherrerd, LLP to avoid situations where excess advisory fees might be
paid to the Adviser. In no event will a client pay higher total advisory fees as
a result of the client's investment in the Fund. In addition, the Adviser has
voluntarily agreed to waive its advisory fees to the extent necessary, if any,
to keep the Emerging Markets, Mid Cap Value, Cash Reserves, Domestic Fixed
Income, Global Fixed Income, High Yield, Intermediate Duration, International
Fixed Income, Limited Duration, Mortgage-Backed Securities, Municipal, PA
Municipal, Multi-Asset-Class, Select Equity, Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios' total annual operating expenses from exceeding
1.180%, .880%, .320%, .500%, .580%, .525%, .520%, .600%, .420%, .500%, .500%,
.500%, .580%, .610%, .150% and .080% of its average daily net assets,
respectively.
<PAGE>
For the fiscal years ended September 30, 1993 1994 and 1995, the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
1993 1994 1995 1993 1994 1995
Fund (000) (000) (000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio * * 85 * * 52
Equity Portfolio 5,193 5,933 6,840 * 0 0
Growth Portfolio * * * * * *
International Equity Portfolio 3,434 5,412 5,437 0 0 0
Mid Cap Growth Portfolio 1,266 1,593 1,504 * * 0
Mid Cap Value Portfolio * * 0 * * 14
Small Cap Value Portfolio 1,016 1,833 2,683 0 0 0
Value Portfolio 3,091 4,764 5,078 0 0 0
Cash Reserves Portfolio 1 21 51 28 28 39
Domestic Fixed Income Portfolio 354 187 75 0 13 23
Fixed Income Portfolio 3,351 3,997 4,893 0 0 0
Fixed Income II Portfolio 307 457 567 0 0 0
Global Fixed Income Portfolio 17 193 190 15 0 0
High Yield Portfolio 97 503 764 29 0 0
Intermediate Duration Portfolio * * 57 * * 17
International Fixed Income Portfolio * 64 395 * 26 0
Limited Duration Portfolio 137 348 206 14 0 11
Mortgage-Backed Securities Portfolio 99 362 348 21 5 5
Municipal Portfolio 22 112 110 25 22 37
PA Municipal Portfolio 9 62 32 17 19 31
Special Purpose Fixed Income Portfolio 1,062 1,233 1,574 0 0 0
Balanced Portfolio 614 1,388 1,385 0 0 0
Multi-Asset-Class Portfolio * 16 220 * 22 100
Select Equity Portfolio 1,273 885 86 0 12 31
Advisory Foreign Fixed Income Portfolio * * 0 * * 1,631
Advisory Mortgage Portfolio * * 0 * * 1,711
</TABLE>
* Not in operation during the period.
The Agreement continues for successive one year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Trustees, including the
affirmative votes of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as defined in the 1940 Act, as amended) of
any such party in person at a meeting called for the purpose of considering such
approval. In addition, the question of continuance of the Agreement may be
presented to the shareholders of the Fund; in such event, continuance shall be
effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of each Portfolio of the Fund. If the holders of
any Portfolio fail to approve the Agreement, the Adviser may continue to serve
as investment adviser to each Portfolio which approved the Agreement, and to any
Portfolio which did not approve the Agreement until new arrangements have been
made. The Agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) by vote of the
Board of Trustees or by vote of the outstanding voting securities of the
Portfolio (2) or sixty (60) days' written notice to the Adviser, or (3) by the
Adviser upon ninety (90) days' written notice to the Fund.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under Federal and State securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated to
each Portfolio, based on their relative net assets. Each Portfolio bears its own
advisory fees and brokerage commissions and transfer taxes in connection with
the acquisition and disposition of its investment securities.
ADMINISTRATION
MAS also serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Chase Global Funds Services (formerly
Mutual Fund Services Company, or MFSC), an affiliate of Chase Manhattan Bank,
N.A., serves as transfer agent and provides fund accounting and other services
pursuant to a sub-administration agreement.
<PAGE>
or the fiscal years ended September 30, 1993, 1994 and 1995, the Fund paid the
following administrative fees:
Administrative Fees Paid
1993 1994 1995
(000) (000) (000)
---------------------------
Emerging Markets Portfolio * * 14
Equity Portfolio 635 949 1,094
Growth Portfolio * * *
International Equity Portfolio 440 875 870
Mid Cap Growth Portfolio 156 256 241
Mid Cap Value Portfolio * * 1
Small Cap Value Portfolio 92 207 286
Value Portfolio 374 762 812
Cash Reserves Portfolio 8 15 29
Domestic Fixed Income Portfolio 60 43 21
Fixed Income Portfolio 538 843 1,044
Fixed Income II Portfolio 53 99 121
Global Fixed Income Portfolio 5 41 41
High Yield Portfolio 21 108 163
Intermediate Duration Portfolio * * 16
International Fixed Income Portfolio * 27 84
Limited Duration Portfolio 32 93 58
Mortgage-Backed Securities Portfolio 22 80 75
Municipal Portfolio 12 37 31
PA Municipal Portfolio 8 24 13
Special Purpose Fixed Income Portfolio 174 261 336
Balanced Portfolio 90 259 246
Multi-Asset-Class Portfolio * 8 57
Select Equity Portfolio 165 153 19
Advisory Foreign Fixed Income Portfolio * * 357
Advisory Mortgage Portfolio * * 374
* Not in operation during the period.
DISTRIBUTOR FOR FUND
MAS Fund Distribution, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Adviser, with its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428, distributes the shares of the Fund. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. The Distribution Agreement which
continues in effect so long as such continuance is approved at least annually by
the Fund's Board of Trustees, including a majority of those Trustees who are not
parties to such Distribution Agreement nor interested persons of any such party.
The Distribution Agreement provides that the Fund will bear the costs of the
registration of its shares with the SEC and various states and the printing of
its prospectuses, statements of additional information and reports to
shareholders.
CUSTODIAN
The Chase Manhattan Bank N.A., New York, NY and Morgan Stanley Trust Company
(NY), Brooklyn, NY serve as custodians for the Fund. The Custodians hold cash,
securities, and other assets of the Fund as required by the 1940 Act. Morgan
Stanley Trust Company is an affiliated person, as defined in the 1940 Act, of
the Adviser and is compensated for its services as custodian on a per account
basis plus out of pocket expenses.
<PAGE>
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs the Adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
Portfolios. In so doing, the Adviser will consider all matters it deems
relevant, including the following: the Adviser's knowledge of negotiated
commission rates and spreads currently available; the nature of the security or
instrument being traded; the size and type of the transaction; the nature and
character of the markets for the security or instrument to be purchased or sold;
the desired timing of the transaction; the activity existing and expected in the
market for the particular security or instrument; confidentiality; the
execution, clearance, and settlement capabilities of the broker or dealer
selected and other brokers or dealers considered; the reputation and perceived
soundness of the broker or dealer selected and other brokers or dealers
considered; the Adviser's knowledge of any actual or apparent operational
problems of a broker or dealer; and the reasonableness of the commission or its
equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, a Portfolio will not necessarily pay the lowest available commission on
brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be the case with other
transactions requiring more routine services. In addition, a Portfolio may pay
higher commission rates than the lowest available when the Adviser believes it
is reasonable to do so in light of the value of the research, statistical,
pricing, and execution services provided by the broker effecting the
transaction. The Adviser does not attempt to put a specific dollar value on the
research services rendered or to allocate the relative costs or benefits of
those services among its clients, believing that the research it receives will
help the Adviser to fulfill its overall duty to its clients. The Adviser uses
research services obtained in this manner for the benefit of all of its clients,
though each particular research service may not be used to service each client.
As a result, the Fund may pay brokerage commissions that are used, in part, to
purchase research services that are not used to benefit the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the Portfolios for their clients. During the fiscal years
ended September 30, 1993, 1994 and 1995, the Fund paid brokerage commissions of
$6,451,272, $8,785,671 and $13,457,075, respectively.
Some securities considered for investment by each of the Fund's Portfolios may
also be appropriate for other clients served by the Adviser. If purchases or
sales of securities consistent with the investment policies of a Portfolio and
one or more of these other clients serviced by the Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Trustees.
On January 3, 1996, affiliates of Morgan Stanley Group Inc. acquired the
Adviser. As a result of this transaction, the Adviser became affiliated with
certain U.S.-registered broker-dealers and foreign broker-dealers, including
Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International Limited,
Morgan Stanley Securities Ltd., Morgan Stanley Japan Ltd., and Morgan Stanley
Asia Ltd. (collectively, "Morgan Stanley"). The Adviser may, in the exercise of
its discretion under its investment management agreement, effect transactions in
securities or other instruments for the Fund through Morgan Stanley.
<PAGE>
PORTFOLIO TURNOVER
The Portfolio turnover rate for each Portfolio for the past two fiscal years
ended September 30 was as follows:
Portfolio 1994 1995
- --------- ---- ----
Emerging Markets N/A 63%
Equity 41% 67%
Growth N/A N/A
International Equity 69% 112%
Mid Cap Growth 55% 129%
Mid Cap Value N/A 639%
Small Cap Value 62% 119%
Value 54% 56%
Domestic Fixed Income 78% 313%
Fixed Income 100% 140%
Fixed Income II 137% 153%
Global Fixed Income 117% 118%
High Yield 112% 96%
Intermediate Duration N/A 168%
International Fixed Income 31% 140%
Limited Duration 192% 119%
Mortgage-Backed Securities 220% 107%
Municipal 34% 58%
PA Municipal 69% 57%
Special Purpose Fixed Income 100% 143%
Balanced 75% 95%
Multi-Asset-Class 20% 112%
Select Equity 27% 73%
Advisory Mortgage N/A 110%
Advisory Foreign Fixed Income N/A 96%
N/A -- Portfolio has less than one year of operations.
<PAGE>
GENERAL INFORMATION
Description of Shares and Voting Rights
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value, from an unlimited number of
series ("Portfolios") of shares. Currently the Fund is offering shares of
twenty-six Portfolios.
The shares of each Portfolio of the Fund are fully paid and non-assessable,
except as set forth below, and have no preference as to conversion, exchange,
dividends, retirement or other features. The shares of each Portfolio of the
Fund have no preemptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A Shareholder of a Class is entitled to one vote for each full
Class Share held (and a fractional vote for each fractional Class Share held),
therestanding in the Shareholder's name on the books of the Fund. Shareholders
of a Class have exclusive voting rights regarding any matter submitted to
shareholders that relates solely to that Class of Shares (such as a distribution
plan or service agreement relating to that Class), and separate voting rights on
any other matter submitted to shareholders in which the interests of the
shareholders of that Class differ from the interests of holders of any other
Class.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such Portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
Portfolio and distribute such assets ratably among the shareholders of such
Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
Portfolios into a single Portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), and 3) above, that
Portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that Portfolio.
Dividend and Capital Gains Distributions
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed income
and capital gains (see discussion under "Dividends, Capital Gains Distributions
and Taxes" in the Prospectus). The amounts of any income dividends or capital
gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution,
except for the Cash Reserves Portfolio. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gain distributions are automatically received
in additional shares of that Portfolio of the Fund at net asset value (as of the
business day following the record date). This will remain in effect until the
Fund is notified by the shareholder in writing at least three days prior to the
record date that either the Income Option (income dividends in cash and capital
gains distributions in additional shares at net asset value) or the Cash Option
(both income dividends and capital gain distributions in cash) has been elected.
An account statement is sent to shareholders whenever an income dividend or
capital gain distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence, as a
separate "regulated investment company") for federal tax purposes. Any net
capital gains recognized by a Portfolio are distributed to its investors without
need to offset (for federal income tax purposes) such gains against any net
capital losses of another Portfolio.
<PAGE>
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Funds
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed Portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only to
the rights of creditors of the Fund) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act, as amended, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of its Portfolios. Performance quotations by investment
companies are subject to rules adopted by the Securities and Exchange Commission
("SEC"), which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information computed
as required by the SEC. An explanation of the methods for computing performance
follows.
Total Return
A Portfolio's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5, and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5, and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
Average annual total return is calculated according to the following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
<PAGE>
The average annual total return of each Portfolio of the Fund for the periods
noted is set forth below:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Inception
ended ended ended to Inception
9/30/95 9/30/95 9/30/95 9/30/95 Date
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Emerging Markets Portfolio -- -- -- 16.3%* 02/28/95
Equity Portfolio 26.2% 17.9% 16.0% 15.9% 11/14/84
International Equity Portfolio (3.4%) 10.1% -- 7.8% 11/25/88
Mid Cap Growth Portfolio 30.6% 23.7% -- 19.0% 03/30/90
Mid Cap Value Portfolio -- -- -- 34.5%* 12/30/94
Small Cap Value Portfolio 18.4% 26.8% -- 11.4% 07/01/86
Value Portfolio 32.6% 22.9% 17.0% 16.7% 11/05/84
Cash Reserves Portfolio 5.6% 4.5% -- 4.5% 08/29/90
Domestic Fixed Income Portfolio 14.3% 12.1% -- 10.7% 09/30/87
Fixed Income Portfolio 14.2% 11.6% 10.7% 11.2% 11/14/84
Fixed Income Portfolio II 14.1% 10.8% -- 10.8% 08/31/90
Global Fixed Income Portfolio 15.5% -- -- 9.2% 04/30/93
High Yield Portfolio 13.6% 18.8% -- 11.1% 02/28/89
Intermediate Duration Portfolio -- -- -- 11.4%* 10/03/94
International Fixed Income Portfolio 16.4% -- -- 12.0% 04/29/94
Limited Duration Portfolio 8.0% -- -- 5.9% 03/31/92
Mortgage-Backed Securities Portfolio 12.5% -- -- 7.0% 01/31/92
Municipal Portfolio 13.4% -- -- 7.3% 10/01/92
PA Municipal Portfolio 13.7% -- -- 8.1% 10/01/92
Special Purpose Fixed Income Portfolio 15.0% -- -- 9.9% 03/31/92
Balanced Portfolio 21.4% -- -- 10.5% 12/31/92
Multi-Asset-Class Portfolio 18.3% -- -- 15.1% 07/29/94
Select Equity Portfolio 26.2% 18.1% -- 15.4% 02/26/88
Advisory Foreign Fixed Income Portfolio -- -- -- 12.1%* 10/07/94
Advisory Mortgage Portfolio -- -- -- 6.0%* 04/12/95
</TABLE>
* For portfolios which have been in operation for less than 1 year, total
return is not annualized.
The Portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [ ( ERV ) - 1 ]
---
P
The aggregate total return of each Portfolio for the periods noted is set forth
below. One year aggregate total return figures and Portfolio inception dates are
reflected under the annual total return figures provided above.
5 Years
ended Inception to
9/30/95 9/30/95
------- ------------
Emerging Markets Portfolio N/A 16.3%
Equity Portfolio 128.0% 397.8%
International Equity Portfolio 62.1% 67.0%
Mid Cap Growth Portfolio 189.2% 160.4%
Mid Cap Value Portfolio N/A 34.5%
Small Cap Value Portfolio 227.8% 170.8%
Value Portfolio 179.9% 439.3%
Cash Reserves Portfolio 24.3% 25.2%
Domestic Fixed Income Portfolio 76.9% 125.9%
Fixed Income Portfolio 72.7% 218.2%
Fixed Income Portfolio II 66.8% 68.3%
Global Fixed Income Portfolio N/A 23.8%
High Yield Portfolio 136.6% 99.9%
Intermediate Duration Portfolio N/A 11.4%
International Fixed Income Portfolio N/A 17.5%
Limited Duration Portfolio N/A 22.0%
Mortgage-Backed Securities Portfolio N/A 28.2%
Municipal Portfolio N/A 23.5%
PA Municipal Portfolio N/A 26.4%
Special Purpose Fixed Income Portfolio N/A 39.2%
Balanced Portfolio N/A 31.7%
Multi-Asset-Class Portfolio N/A 17.9%
Select Equity Portfolio 130.1% 196.8%
Advisory Foreign Fixed Income Portfolio N/A 12.1%
1
<PAGE>
The Portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Fund's portfolios
are set forth below:
Annualized Since
Inception
Period Ended:
9/30/95
Inception Date MAS EQUITY FUNDS (Gross of Fees)
11/14/84 Equity Portfolio 16.6%
02/26/88 Select Equity Portfolio 16.1%
11/05/84 Value Portfolio 17.5%
07/01/86 Small Cap Value Portfolio 12.3%
03/30/90 Mid Cap Growth Portfolio 19.7%
11/25/88 International Equity Portfolio 8.5%
12/30/94 Mid Cap Value 35.2%
02/28/95 Emerging Markets Portfolio 17.1%
MAS FIXED INCOME FUNDS
11/14/84 Fixed Income Portfolio 11.8%
09/30/87 Domestic Fixed Income Portfolio 11.3%
03/31/92 Special Purpose Income Portfolio 10.4%
03/31/92 Limited Duration Portfolio 6.3%
01/31/92 Mortgage-Backed Portfolio 7.6%
02/28/89 High Yield Portfolio 11.8%
10/01/92 Municipal Portfolio 7.9%
10/01/92 PA Municipal Portfolio 8.6%
04/30/93 Global Fixed Income Portfolio 9.9%
04/29/94 International Fixed Income Portfolio 12.7%
10/07/94 Advisory Foreign Fixed Income Portfolio 19.1%
10/03/94 Intermediate Duration Portfolio 12.1%
04/12/95 Advisory Mortgage Portfolio 6.0%
MAS BALANCED FUNDS
12/31/92 Balanced Portfolio 11.1%
07/29/94 Multi-Asset-Class Portfolio 15.8%
<PAGE>
The Municipal Portfolio and the PA Municipal Portfolio may also calculate a
total return which reflects the cumulative percentage change in value over the
measuring period after the deduction of income taxes. The formula for
calculating the total after tax return can be expressed as follows:
Total After Tax Return = (((((ERV-M)/P) x T) + (M/P)) -1)
M = Portion of ending redeemable value which was derived from tax exempt income.
T = Applicable tax rate.
The after tax returns are as follows for the Municipal Portfolio and the PA
Municipal Portfolio for the period 10/1/92 (inception of the Funds) through
9/30/95:
Pre-tax return Post-tax return
PA Municipal Portfolio 8.1% 7.4%
Municipal Portfolio 7.3 7.2
The tax rates used were 31% federal and 2.8% Pennsylvania. All Municipal
Interest was considered exempt from federal taxes and interest from treasuries
was considered exempt from Pennsylvania.
Yield
In addition to total return, each portfolio of the Fund (except the Cash
Reserves Portfolio) may quote performance in terms of a 30-day yield. The yield
figures provided will be calculated according to a formula prescribed by the
Securities and Exchange Commission and can be expressed as follows:
Yield = [ 2 [ (a-b) + 1)b - 1] ] X cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Portfolio at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations. The 30-day yield figures for each of the Fund's
fixed-income and equity portfolios is set forth below:
Period ending
9/30/95
-------------
Emerging Markets Portfolio 3.08%
Equity Portfolio 2.21%
International Equity Portfolio 1.80%
Mid Cap Growth Portfolio 0.00%
Mid Cap Value Portfolio 1.38%
Small Cap Value Portfolio 1.23%
Value Portfolio 2.39%
Domestic Fixed Income Portfolio 6.33%
Fixed Income Portfolio 7.58%
Fixed Income Portfolio II 6.56%
Global Fixed Income Portfolio 6.05%
High Yield Portfolio 11.33%
Intermediate Duration Portfolio 6.21%
International Fixed Income Portfolio 6.04%
Limited Duration Portfolio 5.64%
Mortgage-Backed Securities Portfolio 7.26%
Municipal Portfolio 5.57%
PA Municipal Portfolio 5.47%
Special Purpose Fixed Income Portfolio 7.88%
Balanced Portfolio 4.29%
Multi-Asset-Class Portfolio 4.10%
Select Equity Portfolio 2.35%
Advisory Foreign Fixed Income Portfolio 6.64%
Advisory Mortgage Portfolio 7.21%
As of the date of this Statement of Additional Information, the Growth
Portfolio, had not commenced operations.
<PAGE>
Yield of the Cash Reserves Portfolio
The current yield of the Cash Reserves Portfolio is calculated daily on a base
period return of a hypothetical account having a beginning balance of one share
for a particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
the value of the account at the beginning of the period and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualizing of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by dividing the base period return by
7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the results.
Set forth below is an example, for purposes of illustration only, of the current
and effective yield calculations for the Cash Reserves Portfolio for the 7 day
base period ending September 30, 1995.
Period ending
9/30/95
-------------
Value at beginning of period 1.00000
Value at end of period 1.00106
Net change in account value 0.00106
Annualized current yield 5.51%
Effective yield 5.66%
The net asset value of the Cash Reserves Portfolio is $1.00 and has remained at
that amount since the initial offering of the Portfolio. The yield of the
Portfolio will fluctuate. The annualizing of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio
invests in, changes in interest rates on instruments, changes in the expenses of
the Fund and other factors. Yields are one basis investors may use to analyze
the Portfolios of the Fund and other investment vehicles; however, yields of
other investment vehicles may not be comparable because of the factors set forth
in the preceding sentence, differences in the time periods compared and
differences in the methods used in valuing portfolio instruments, computing net
asset value and calculating yield.
The performance of a Portfolio, as well as the composite performance of all
Fixed-Income Portfolios and all Equity Portfolios, may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.,
Morningstar, Inc., the Donoghue Organization, Inc. or other independent services
which monitor the performance of investment companies, and may be quoted in
advertising in terms of their rankings in each applicable universe. In addition,
the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal
and USA Today.
COMPARATIVE INDICES
Each portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
Consumer Price Index
The Consumer Price Index is published by the US Department of Labor and is a
measure of inflation.
Financial Times Actuaries World Ex US Index
The FT-A World Ex US Index is a capitalization-weighted price index, expressed
in dollars, after dividend withholding taxes, of foreign stock prices. This
index is calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
Co., and County NatWest/Wood Mackenzie in conjunction with the Institute of
Actuaries and the Faculty of Actuaries.
<PAGE>
First Boston High Yield Index
The First Boston High Yield Index was constructed to mirror the public high
yield debt market. The index is a market weighted, trader priced index, tracked
by the First Boston Corporation. There are approximately 475 securities in the
index with a total market value of approximately $93 billion.
JP Morgan Traded Government Bond Index
The JP Morgan Traded Government Bond Index is designed to provide a
comprehensive measure of total return performance of the domestic Government
bond market of 13 countries. The index is maintained by JP Morgan Securities,
Inc. and includes only liquid issues.
Lehman Brothers Aggregate Index
The Lehman Brothers Aggregate Index is a fixed income market value-weighted
index that combines the Lehman Brothers Government/Corporate Index and the
Lehman Brothers Mortgage-Backed Securities Index. It includes fixed rate issues
of investment grade (BBB) or higher, with maturities of at least one year and
outstanding par values of at least $100 million for U. S. Government issues and
$25 million for others.
Lehman Brothers Government/Corporate Index
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U. S. Treasury, issues of Government agencies, and corporate
debt backed by the U. S. Government. The Corporate Bond Index includes
fixed-rate nonconvertible corporate debt. Also included are Yankee Bonds and
nonconvertible debt issued by or guaranteed by foreign or international
governments and agencies. All issues are investment grade (BBB) or higher, with
maturities of at least one year and an outstanding par value of at least $100
million for U. S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and then
removed. All returns are market value weighted inclusive of accrued income.
Lehman Brothers Intermediate Government/Corporate Index
The Lehman Brothers Intermediate Government/Corporate Index is a combination of
the Government and Corporate Bond Indices. All issues are investment grade (BBB)
or higher, with maturities of one to ten years and an outstanding par value of
at least $100 million for U. S. Government issues and $25 million for others.
The Government Index includes public obligations of the U. S. Treasury, issues
of Government agencies, and corporate debt backed by the U. S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued by or guaranteed by
foreign or international governments and agencies. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
Lehman Brothers Long Municipal Bond Index
The Lehman Brothers Long Municipal Bond Index is a total return for the
long-term, investment-grade tax-exempt bond market for bonds. The index includes
municipal bonds with maturities of 22 years or more.
Lehman Brothers Mortgage-Backed Securities Index
The Lehman Brothers Mortgage-Backed Securities Index includes fixed rate
mortgage securities backed by GNMA, FHLMC, and FNMA. Graduated Payment Mortgages
(GPM's) are included. All issues are AAA, with maturities of at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
Lipper Growth & Income Fund Index
The Lipper Growth & Income Fund Index is a net asset value weighted index of the
30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
Lipper High Current Yield Fund Average
The Lipper High Current Yield Fund Average reports the average return of all the
Funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of Funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
<PAGE>
Salomon World Government Bond Index ex US
The Salomon World Government Bond Index ex US is designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the United States. The index has been
constructed with the aim of choosing "an inclusive" universe of institutionally
traded fixed rate bonds. The selection of security types to be included in the
index is made with the aim of being as comprehensive as possible, while
satisfying the criterion of reasonable availability to domestic and
international institutions and the existence of complete pricing and market
profile data.
International Finance Corporation Emerging Markets Index
The IFC Emerging Markets Index is an index designed to measure the total return
in either US or local currency terms of developing markets as defined by the
World Bank. The selection of stocks is made based on size, liquidity and
industry. The weight given to any stock is determined by its market
capitalization.
Lipper Money Market Average
The Lipper Money Market Average reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market Funds
for any given period. The number of Funds tracked varies. As a result, reported
returns for longer time periods do not always match the linked product of
shorter period returns.
Merrill Lynch Corporate & Government Bond Index
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
Morgan Stanley Capital International World ex USA Index
The Morgan Stanley Capital International World ex USA Index is a
capitalization-weighted price index expressed in dollars. The index reflects the
performance of over 1,100 companies in 19 foreign equity markets. The index
includes dividends, net of foreign withholding taxes.
Morgan Stanley Capital International EAFE Index
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morgan Stanley Capital International EAFE-GDP Weighted Index
The EAFE-GDP index is an arithmetic average of the performance of over 900
securities listed on the stock exchanges of countries in Europe, Australia and
the Far East. The index is weighted by the Grow Domestic Product of the various
countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
The MSCI Emerging Markets Free Index is a capitalization weighted index of over
800 stocks from 17 different emerging market countries.
NASDAQ Industrials Index
The NASDAQ Industrials Index is a measure of all NASDAQ National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive of
warrants, and all domestic common stocks traded in the regular NASDAQ market
which are not part of the NASDAQ National Market System. The NASDAQ Industrials
Index is market value weighted.
Russell 1000
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
<PAGE>
Russell 2000
The Russell 2000 Index consists of the 2,000 smallest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,000 stocks in the Russell 2000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 2500
The Russell 2500 Index consists of the 2,500 smallest of the 3,000 largest
stocks. Market capitalization is typically between $1.7 billion and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,500 stocks in the Russell 2500 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 3000
The Russell 3000 Index is a combination of the Russell 1000 Index and the
Russell 2000 Index.
Salomon 1-3 Year Treasury/Government Sponsored Index
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the index.
Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the index.
Salomon Broad Index
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed income market capitalization-weighted index, including U. S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e. g., U. S. Treasury zeros, CMOs, mortgage
strips). Every issue is trader-priced at month-end and the index is published
monthly.
Salomon High-Yield Market Index
The Salomon High-Yield Market Index includes public, non-convertible corporate
bond issues with at least one year remaining to maturity and $50 million in par
amount outstanding which carry a below investment-grade quality rating from
either Standard & Poor's or Moody's rating services.
<PAGE>
Salomon Mortgage Index
The Salomon Mortgage Index includes agency pass-throughs (GNMA, FHLMC, FNMA) and
FHA and GNMA project loans. Pools with remaining terms shorter than 25 years are
seasoned; pools with longer terms are classified as new. The index is published
monthly.
Salomon One To Three Year Treasury Index
The Salomon One To Three Year Treasury Index includes only U.S. Treasury Notes
and Bonds with maturities one year or greater and less than three years.
Salomon World Government Bond Index
The Salomon World Government Bond Index is designed to provide a comprehensive
measure of total return performance of the domestic Government bond market of
thirteen countries. The index has been constructed with the aim of choosing an
"all inclusive" universe of institutionally traded fixed-rate bonds. The
selection of security types to be included in the index is made with the aim of
being as comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
S&P 500
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the index. The
list is maintained by Standard & Poor's Corporation. It is market capitalization
weighted. Unlike the Russell indices, there are always 500 names in the S&P 500.
Changes are made by Standard & Poor's as needed.
S&P/BARRA Mid Cap 400 Growth Index
The S&P/BARRA Mid Cap 400 Growth Index is constructed by dividing the stocks in
the S&P MidCap 400 Index according to a single attribute: price-to-book ratios.
The MidCap 400 Growth Index is composed of firms with higher price-to-book
ratios. Like the MidCap 400, the MidCap 400 Growth Index is
capitalization-weighted, meaning that each stock is weighted in the appropriate
index in proportion to its market value.
S&P 500 Ex South Africa
The S&P 500 Ex South Africa Index is the same as the S&P 500 Index excluding
companies that are on the Investor Responsibility Research Center (IRRC) list of
companies doing business in South Africa. This index is maintained by Wilshire
Associates.
Wilshire 5000 Equity Index
The Wilshire 5000 Equity Index measures performance of all US headquartered
equity securities with readily available price data. Approximately 6,000
capitalization weighted security returns are used to calculate the index.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1995,
including notes thereto and the report of Price Waterhouse LLP thereon are
incorporated herein by reference. A copy of the 1995 Annual Report will
accompany the delivery of this Statement of Additional Information.
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APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Corporate Bond Ratings:
Aaa: judged to be the best quality; carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; Ba: B: protection of interest and
principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of
protection as to principal and interest; AA: also qualify as high grade
obligations, and in the majority of instances differs from AAA issues only in
small degree; A: regarded as upper medium grade; have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe; BBB: regarded
as borderline between definitely sound obligations and those where the
speculative element begins to predominate; this group is the lowest which
qualifies for commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
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Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA. A: An
issue rated A is backed by a sound capacity to pay the preferred stock
obligations , although it is somewhat more susceptible to the adverse effect of
the changes in circumstances and economic conditions. BBB: An issue rated BBB is
regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameter, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB,B,CCC: Preferred stock rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. Bb indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse conditions. CC: The
rating CC is reserved for a preferred stock in arrears on dividends or sinking
fund payments but that is currently paying. C: A preferred stock rated C is a
non-paying issue. D: A preferred stock rated D is a non-paying issue with the
issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears.
Prospects for future payments are remote.
D: Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
