<PAGE>
LOGO----------------------------------------------------------------PROSPECTUS
January 31, 1997
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Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
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MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, twenty-three of which are described in this Prospectus. Each
portfolio in this Prospectus operates as a separate diversified investment
company except the Global Fixed Income and International Fixed Income 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 Small Cap Value Portfolio is 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.
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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.
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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.
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PORTFOLIO PAGE REFERENCE
How to Use This Fixed Income: Balanced: 35
Prospectus: 3 Cash Reserves 22 Multi-Asset-Class: 36
Portfolio Summaries: Domestic Fixed Income 23 Balanced Plus: 37
Equity: Fixed Income 24 Prospectus Glossary:
Equity 19 Fixed Income II 25 Strategies 38
Growth 19 Global Fixed Income 26 Investments 43
International High Yield 27 General Shareholder
Equity 20 Intermediate Duration 28 Information: 53
Mid Cap Growth 20 International Fixed Table of
Mid Cap Value 21 Income 29 Contents: Back Cover
Small Cap Value 21 Limited Duration 30
Value 22 Mortgage-Backed
Securities 31
Municipal 32
PA Municipal 33
Special Purpose Fixed
Income 34
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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 31, 1997 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.
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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
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<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, 1996, 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
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
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Equity 0.500% 0.102% 0.602%
Growth 0.500 0.100 0.600
International Equity 0.500 0.190 0.690
Mid Cap Growth 0.500 0.104 0.604
Mid Cap Value 0.564* 0.318 0.882
Small Cap Value 0.750 0.112 0.862
Value 0.500 0.108 0.608
Cash Reserves 0.155* 0.172 0.327
Domestic Fixed Income 0.362* 0.155 0.517
Fixed Income 0.375 0.108 0.483
Fixed Income II 0.375 0.122 0.497
Global Fixed Income 0.375 0.221 0.596
High Yield 0.375 0.116 0.491
Intermediate Duration 0.244* 0.314 0.558
International Fixed Income 0.375 0.159 0.534
Limited Duration 0.300* 0.126 0.426
Mortgage-Backed Securities 0.335* 0.165 0.500
Municipal 0.288* 0.221 0.509
PA Municipal 0.228* 0.278 0.506
Special Purpose Fixed Income 0.375 0.116 0.491
Balanced 0.450 0.124 0.574
Multi-Asset-Class 0.570*+ 0.210 0.780
Balanced Plus 0.550 0.150 0.700
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 Mid Cap
Value, Cash Reserves, Domestic Fixed Income, Intermediate Duration, Limited
Duration, Mortgage-Backed Securities, Municipal, PA Municipal and
Multi-Asset-Class Portfolios from exceeding 0.88%, 0.32%, 0.50%, 0.52%, 0.42%,
0.50%, 0.50%, 0.50% and 0.780%, respectively. Absent fee waivers and
reimbursements by the Adviser, Total Operating Expenses would be 1.068%,
.422%, .530%, .689%, .540%, .596%, .653% and .860%, for the Mid Cap Value,
Cash Reserves, Domestic Fixed Income, Intermediate Duration, Mortgage-Backed
Securities, Municipal, PA Municipal and Multi-Asset-Class Portfolios,
respectively.
+ On November 21, 1996 shareholders of the Multi-Asset-Class Portfolio approved
an increase in the Advisory Fee from 0.45% to 0.65% of average daily net
assets. The Investment Advisory Fees and Total Operating Expenses have been
adjusted to reflect this change.
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MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<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.
Portfolio 1 year 3 year 5 year 10 year
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Equity $6 $19 $34 $ 75
Growth 6 19 -- --
International Equity 7 22 38 86
Mid Cap Growth 6 19 34 76
Mid Cap Value 9 28 49 109
Small Cap Value 9 28 48 106
Value 6 19 34 76
Cash Reserves 3 11 18 41
Domestic Fixed Income 5 17 29 65
Fixed Income 5 16 27 61
Fixed Income II 5 16 28 62
Global Fixed Income 6 19 33 75
High Yield 5 16 27 62
Intermediate Duration 6 18 31 70
International Fixed Income 5 17 30 67
Limited Duration 4 14 24 54
Mortgage-Backed Securities 5 16 28 63
Municipal 5 16 28 64
PA Municipal 5 16 28 64
Special Purpose Fixed Income 5 16 27 62
Balanced 6 18 32 72
Multi-Asset-Class 8 25 43 97
Balanced Plus 7 22 -- --
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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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
PROSPECTUS SUMMARY
EQUITY PORTFOLIOS
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.
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MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<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 five and ten 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 five and ten 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, Cor-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
porates, 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.
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 Plus Portfolio - seeks to achieve above average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of Common Stocks of domestic and foreign
issuers and Fixed-Income Securities.
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 that may be acquired by the Portfolios 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;
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 Each portfolio (except the Cash Reserves Portfolio) may invest in certain
instruments such as Forwards, certain types of Futures & Options, certain
types of Mortgage Securities and When-Issued Securities which
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MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
require the portfolio to segregate some or all of its cash or liquid
securities to cover its obligations pursuant to such instruments. As asset
segregation reaches certain levels, a portfolio may lose flexibility in
managing its investments properly, responding to shareholder redemption
requests, or meeting other obligations and may be forced to sell other
securities that it wanted to retain or to realize unintended gains or
losses;
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 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 or
the Fund's Distributor, 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 $40.9 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, serves as Transfer Agent
to the Fund. See Administrative Services.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<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, 1996 have been examined by
Price Waterhouse LLP whose opinion thereon (which was unqualified) is also
incorporated by reference in the Statement of Additional Information.
As of the fiscal year ended September 30, 1996, the Growth and Balanced Plus
Portfolios had not commenced operations.
(Adjusted to reflect at 2.5 for 1 share split as of August 13, 1993 except
for the Mid Cap Value, Cash Reserves, Global Fixed Income,
Intermediate Duration, International Fixed Income and Multi-Asset-Class
Portfolios)
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
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<S> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Operations 11/14/84)##
1996 $24.43 $0.50 $ 3.26 $ 3.76 ($ 0.50) ($ 2.02) --
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) --
International Equity Portfolio (Commencement of Operations 11/25/88)##
1996 $12.51 $0.31 $ 0.77 $ 1.08 ($ 0.29) ($ 0.06) --
1995 14.52 0.19 (0.75) (0.56) -- (1.35) ($0.10)+
1994 13.18 0.12 1.63 1.75 (0.16) (0.25) --
1993 11.03 0.21 2.14 2.35 (0.20) -- --
1992 11.56 0.36 (0.33) 0.03 (0.56) -- --
1991 9.83 0.22 1.83 2.05 (0.23) (0.09) --
1990 11.86 0.26 (1.90) (1.64) (0.31) (0.08) --
1989 10.00 0.26 1.75 2.01 (0.15) -- --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Operations 11/14/84)##
1996 ($ 2.52) $25.67 16.48% $1,442,261 0.60% 1.95% 67% $0.0557
1995 (1.69) 24.43 26.15 1,597,632 0.61 2.39 67
1994 (2.62) 21.05 4.11 1,193,017 0.60 2.10 41
1993 (1.58) 22.82 11.05 1,098,003 0.59 1.86 51
1992 (1.03) 22.04 11.55 918,989 0.59 2.03 21
1991 (1.16) 20.78 40.18 675,487 0.60 2.36 33
1990 (0.70) 15.86 (11.67) 473,261 0.59 2.66 44
1989 (0.49) 18.65 32.95 602,261 0.59 3.29 29
1988 (1.13) 14.48 (8.41) 385,864 0.62 2.99 51
1987 (1.05) 17.14 30.89 322,803 0.66 2.88 66
International Equity Portfolio (Commencement of Operations 11/25/88)##
1996 ($ 0.35) $13.24 8.87% $ 635,706 0.69% 1.88% 78% $0.0093
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>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
## For the years ended September 30, 1995 and September 30, 1996, 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 for the fiscal year ended September 30, 1995 and 0.60%
and 0.65%, respectively for the fiscal year ended September 30, 1996.
### For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate paid for trades on which
commissions were charged.
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MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
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<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
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<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1996 $18.60 $0.01 $ 4.70 $ 4.71 ($ 0.03) ($ 2.75) --
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)##
1996 $13.45 $0.11 $ 2.52 $ 2.63 ($ 0.55) ($ 1.04) --
1995 10.00 0.55o 2.90 3.45 -- -- --
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1996 $18.28 $0.18 $ 3.62 $ 3.80 ($ 0.20) ($ 2.24) --
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) -- --
Value Portfolio (Commencement of Operations 11/05/84)##
1996 $14.89 $0.30 $ 2.20 $ 2.50 ($ 0.32) ($ 1.46) --
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) --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1996 ($ 2.78) $20.53 28.81% $ 403,281 0.60% 0.04% 141% $0.0491
1995 (1.93) 18.60 30.56 373,547 0.61 0.21 129
1994 (1.71) 16.29 (3.28) 302,995 0.60 0.12 55
1993 (0.76) 18.56 33.92 309,459 0.59 0.07 69
1992 (0.86) 14.51 2.87 192,817 0.60 0.05 39
1991 (0.03) 14.92 66.26 171,163 0.60 0.29 46
1990 (0.01) 9.00 (9.98) 76,398 0.64* 0.34* 23
Mid Cap Value Portfolio (Commencement of Operations 12/30/94)##
1996 ($ 1.59) $14.49 22.30% $ 50,449 0.88%++ 1.61% 377% $0.0462
1995 -- 13.45 34.50 4,507 0.93*++ 10.13*o 639o
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1996 ($ 2.44) $19.64 24.00% $ 585,457 0.86% 0.99% 145% $0.0498
1995 (2.07) 18.28 18.39 430,368 0.87 1.20 119
1994 (1.18) 17.67 8.04 308,156 0.88 0.91 162
1993 (0.11) 17.55 37.72 175,029 0.88 1.33 93
1992 (0.19) 12.84 14.12 105,886 0.86 1.06 50
1991 (0.19) 11.45 63.07 52,182 0.88 1.70 53
1990 (0.45) 7.20 (27.63) 100,848 0.85 1.77 59
1989 (0.20) 10.42 24.85 189,223 0.85 3.48 36
1988 (0.46) 8.54 (11.50) 202,500 0.86 2.32 41
1987 (0.08) 10.24 10.53 201,621 0.92 1.67 38
Value Portfolio (Commencement of Operations 11/05/84)##
1996 ($ 1.78) $15.61 18.41% $1,844,740 0.61% 2.07% 53% $0.0572
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
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
++ For the periods indicated, the Adviser 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%* and 0.18% for the periods ended September 30, 1995 and
September 30, 1996, respectively.
# Formerly Emerging Growth Portfolio (through May 17, 1995) and Small
Capitalization Value Portfolio (through December 23, 1994)
## For the periods ended September 30, 1995 and 1996, 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 0.60%,
respectively, for the Mid Cap Growth Portfolio and 0.88%* and 0.88%,
respectively, for the Mid Cap Value Portfolio. For the periods ended
September 30, 1995 and 1996, 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 periods ended September 30,
1995 and 1996, 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 be 0.60% and
0.60% respectively. 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. ### For fiscal years beginning on or
after September 1, 1995, a fund is required to disclose the average
commission rate paid for trades on which commissions were charged.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<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)##
1996 $1.000 $.052 -- $.052 ($.052) -- --
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)#, ##
1996 $11.03 $0.56 ($0.09) $0.47 ($0.57) -- ($0.04)+
1995 9.87 0.52 0.87 1.39 (0.23) -- --
1994 11.99 0.94 (1.23) (0.29) (0.95) ($0.73) (0.15)+
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) --
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) --
1991 10.26 0.92 1.10 2.02 (0.94) -- --
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) --
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) --
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) --
1987 10.00 -- (0.01) (0.01) -- -- --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio (Commencement of Operations 8/29/90)##
1996 ($.052) $1.000 5.35% $78,497 0.33%++ 5.19% N/A
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)#, ##
1996 ($0.61) $10.89 4.41% $95,362 0.52%++ 5.73% 168%
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.
++ For the periods indicated, the Adviser 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. Voluntarily waived fees and reimbursed expenses totalled
0.08%, 0.24%, 0.14%. 0.11% and 0.09% for the years ended September 30,
1992, 1993, 1994, 1995 and 1996, respectively, for the Cash Reserves
Portfolio. For 1994, 1995 and 1996, such fees and expenses were 0.03%,
0.09% and 0.01%, respectively, for the Domestic Fixed Income Portfolio.
# Formerly Select Fixed Income Portfolio (through December 23, 1994)
## For the years ended September 30, 1995 and 1996, 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
0.32%, respectively, for the Cash Reserves Portfolio and 0.50% and 0.50%,
respectively, for the Domestic Fixed Income Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Operations 11/14/84)##
1996 $11.82 $0.78 $ 0.08 $ 0.86 ($ 0.79) ($ 0.06) --
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) --
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1996 $11.33 $0.70 ($ 0.03) $ 0.67 ($ 0.66) ($ 0.08) ($ 0.03)+
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)##
1996 $11.05 $0.63 $ 0.09 $ 0.72 ($ 0.71) ($ 0.05) --
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>
<PAGE>
(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)##
1996 ($ 0.85) $11.83 7.63% $1,790,146 0.48% 6.77% 162%
1995 (0.60) 11.82 14.19 1,487,409 0.49 7.28 140
1994 (1.42) 10.93 (4.43) 1,194,957 0.49 6.79 100
1993 (1.44) 12.86 14.26 909,738 0.47 7.06 144
1992 (1.17) 12.67 14.35 859,712 0.47 7.50 137
1991 (0.93) 12.20 21.12 831,547 0.47 8.25 143
1990 (1.13) 10.94 3.79 666,736 0.46 8.43 209
1989 (0.77) 11.64 9.25 559,995 0.47 8.36 100
1988 (0.86) 11.40 13.43 405,385 0.49 8.91 168
1987 (1.41) 10.86 2.55 290,824 0.52 8.54 202
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1996 ($ 0.77) $11.23 6.12% $ 191,740 0.50% 6.06% 165%
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)##
1996 ($ 0.76) $11.01 6.83% $ 67,282 0.60% 5.25% 133%
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.
++ For the periods indicated, the Adviser 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 years ended September 30, 1995 and September 30, 1996, 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% and 0.48%, respectively, for the Fixed Income Portfolio;
0.49% and 0.49%, respectively, for the Fixed Income Portfolio II, and 0.56%
and 0.58%, respectively, for the Global Fixed Income Portfolio.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Operations 2/28/89)#, ##
1996 $ 9.08 $0.88 $ 0.28 $1.16 ($0.92) -- --
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)#, ##
1996 $10.68 $0.60 $ 0.03 $0.63 ($0.65) ($0.38) --
1995 10.00 0.69 0.42 1.11 (0.43) -- --
International Fixed Income Portfolio (Commencement of Operations 4/29/94)##
1996 $11.01 $0.52 $ 0.12 $0.64 ($0.80) ($0.08) --
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)#, ##
1996 $10.41 $0.58 ($ 0.03) $0.55 ($0.58) -- --
1995 10.19 0.56 0.22 0.78 (0.55) -- ($ 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>
<PAGE>
(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)#, ##
1996 ($0.92) $ 9.32 13.83% $289,810 0.49% 10.04% 115%
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)#, ##
1996 ($1.03) $10.28 6.27% $ 12,017 0.56%++ 6.17% 251%
1995 (0.43) 10.68 11.39 19,237 0.52*++ 6.56* 168
International Fixed Income Portfolio (Commencement of Operations 4/29/94)##
1996 ($0.88) $10.77 6.13% $143,137 0.53% 5.39% 124%
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)#, ##
1996 ($0.58) $10.38 5.47% $123,227 0.43%++ 5.65% 174%
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.
++ For the periods indicated, the Adviser 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%* and 0.13% for the
periods ended September 30, 1995 and 1996 for the Intermediate Duration
Portfolio; 0.11%* in 1994 for the International Fixed Income Portfolio; and
0.03% and 0.02% for the Limited Duration Portfolio 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 periods ended September 30, 1995 and September 30, 1996, 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 be 0.52% for the Intermediate Duration Portfolio and would
not significantly differ for the International Fixed Income Portfolio. For
the years ended September 30, 1995 and September 30, 1996, 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
0.48%, respectively, for the High Yield Portfolio and 0.42% and 0.42%,
respectively, for the Limited Duration Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1996 $10.49 $0.68 ($0.07) $0.61 ($ 0.68) -- --
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 10/1/92)#, ##
1996 $10.75 $0.51 $0.49 $1.00 ($ 0.52) -- --
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 10/1/92)#, ##
1996 $10.91 $0.51 $0.46 $0.97 ($ 0.51) -- --
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) ##
1996 $12.53 $0.83 $0.08 $0.91 ($ 0.88) ($0.30) --
1995 11.52 0.91 0.75 1.66 (0.65) -- --
1994 13.40 0.80 (1.28) (0.48) (0.78) (0.53) ($0.09)+
1993 12.72 0.88 0.92 1.80 (0.82) (0.30) --
1992 11.80 0.39 0.72 1.11 (0.19) -- --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1996 ($ 0.68) $10.42 6.10% $ 50,925 0.50%++ 6.46% 116%
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 10/1/92)#, ##
1996 ($ 0.52) $11.23 9.46% $ 54,536 0.51%++ 4.66% 78%
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 10/1/92)#, ##
1996 ($ 0.51) $11.37 9.03% $ 28,488 0.51%++ 4.58% 51%
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) ##
1996 ($ 1.18) $12.26 7.74% $447,646 0.49% 6.75% 151%
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.
++ For the periods indicated, the Adviser 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. Voluntarily waived fees and reimbursed
expenses totalled 0.30%*, 0.06%, 0.01%, 0.01% and 0.04% for the period
ended September 30, 1992, and the years ended 1993, 1994, 1995 and 1996,
respectively, for the Mortgage-Backed Securities Portfolio; 0.20%*, 0.06%,
0.09% and 0.09% in 1993, 1994, 1995 and 1996 for the Municipal Portfolio;
and 0.25%*, 0.09%, 0.19% and 0.15% for 1993, 1994, 1995 and 1996,
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 periods ended September 30, 1995 and September 30, 1996, the Ratio
of Expenses to Average Net Assets for the Mortgage-Backed Securities,
Municipal and Special Purpose 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
Mortgage-Backed Securities Portfolio; would be 0.50% and 0.50%,
respectively, for the Municipal Portfolio; and would be 0.48% and 0.49%,
respectively, for the Special Purpose Fixed Income Portfolio. For the year
ended September 30, 1996, the Ratio of Expenses to Average Net Assets for
the PA Municipal Portfolio excludes the effect of expense offsets. If
expense offsets were included, the Ratio of Expenses to Average Net Assets
would be 0.50%. There were no such offsets for the PA Municipal Portfolio
during 1995.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Operations 12/31/92)##
1996 $13.06 $0.53 $1.15 $1.68 ($ 0.50) ($ 0.43) --
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)#, ##
1996 $11.34 $0.46 $1.05 $1.51 ($ 0.42) ($ 0.15) --
1995 9.97 0.44 1.33 1.77 (0.40) -- --
1994 10.00 0.07 (0.10) (0.03) -- -- --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
- --------------------------------------------------------------------------------------------------------------
Balanced Portfolio (Commencement of Operations 12/31/92)##
1996 ($ 0.93) $13.81 13.47% $300,868 0.57% 3.85% 110% $0.0521
1995 (0.54) 13.06 21.37 334,630 0.58 4.55 95
1994 (0.58) 11.28 0.19 309,596 0.58 4.06 75
1993 (0.13) 11.84 8.31 291,762 0.58* 3.99* 62
Multi-Asset-Class Portfolio (Commencement of Operations 7/29/94)#, ##
1996 ($ 0.57) $12.28 13.75% $129,558 0.58%++ 3.82% 122% $0.0225
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
</TABLE>
- ------------
* Annualized
** Total return figures for partial years are not annualized.
++ For the periods indicated, the Adviser 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
Portfolio from exceeding 0.58%. Voluntarily waived fees for 1994, 1995 and
1996 were 0.26%*, 0.14% and 0.08%, respectively.
# Formerly known as Global Balanced Portfolio (through December 23, 1994).
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Balanced Portfolio excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be 0.57% and 0.57%, respectively. For the years
ended September 30, 1995 and September 30, 1996, 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 fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate paid for trades on which
commissions were charged.
- --------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<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.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<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.
With respect to the Fixed Income Portfolios and the fixed-income portion of
the Balanced, Multi-Asset-Class and Balanced Plus 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.
The Balanced Plus Portfolio's annual turnover rate is not expected to exceed
100% with respect to Equity Secur- ities. The annual turnover rate with
respect to the fixed income portion of the portfolio will ordinarily exceed
100% due to changes in portfolio duration, yield curve strategy or
commitments to forward delivery mortgage-backed securities.
- --------------------------------------------------------------------------------
MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Portfolio turnover rates for certain portfolios are as follows: Mid Cap
Growth - 141%, Mid Cap Value - 377%, Small Cap Value - 145%, Domestic Fixed
Income - 168%, Fixed Income - 162%, Fixed Income II - 165%, Global Fixed
Income - 133%, High Yield - 115%, Intermediate Duration - 251%, International
Fixed Income - 124%, Limited Duration - 174%, Mortgage-Backed Securities -
116%, Special Purpose Fixed Income - 151%, Balanced - 110% and
Multi-Asset-Class - 122%.
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,
or as detailed in Investment Limitations, 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 Global Fixed
Income and International Fixed Income 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 and International Fixed Income
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 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.
(d) 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 Invest-
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<PAGE>
ment Company Act of 1940, as amended or the Rules and Regulations, or
interpretations or orders of the Securities and Exchange Commission
thereunder;
(e) 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);
(f) Each portfolio may pledge, mortgage or hypothecate assets in an amount up
to 50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff.
(g) a portfolio will not invest its assets in securities of any Investment
Company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), 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.
- --------------------------------------------------------------------------------
MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Growth Stock Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Eastern European Issuers Investment Companies Structured Notes
Investments: Agencies Emerging Markets Issuers Investment Funds Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
Corporates Futures & Options Structured Investments
</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: The Adviser uses a four-part process combining
quantitative, fundamental, and valuation
analysis with a strict sales discipline.
Stocks that pass an initial screen based on
estimate revisions undergo detailed
fundamental research. Valuation analysis is
used to eliminate the most overvalued
securities. Holdings are sold when their
estimate-revision scores fall to unacceptable
levels, when fundamental research uncovers
unfavorable trends, or when their valuations
exceed the level that the Adviser believes is
reasonable given their growth prospects.
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
- --------------------------------------------------------------------------------
MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 $6 billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Equities Preferred Stock Warrants
Common Stock Foreign Currency Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</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 $1
billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: Russell 2000 Index
Strategies: Value Stock Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Cash Equivalents Floaters U.S. Governments
Asset-Backeds Corporates Investment Companies Zero Coupons
Repurchase Agreements
</TABLE>
Comparative Index: Lipper Money Market Index
Strategy: Money Market Investing
- --------------------------------------------------------------------------------
MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Mortgage Securities Structured Notes
Asset-Backeds Floaters Municipals Swaps
Cash Equivalents Futures & Options Preferred Stock U.S. Governments
CMOs Inverse Floaters Repurchase Agreements When Issued
Convertibles Investment Companies SMBS Zero Coupons
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</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
- --------------------------------------------------------------------------------
MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals U.S. Governments
CMOs Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
</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
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers Inverse Floaters SMBS
Investments: Asset-Backeds Emerging Markets Issuers Investment Companies Structured Notes
Brady Bonds Floaters Mortgage Securities Swaps
Cash Equivalents Foreign Bonds Municipals U.S. Governments
CMOs Foreign Currency Preferred Stock When Issued
Convertibles Forwards Repurchase Agreements Zero Coupons
Corporates Futures & Options
</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
- --------------------------------------------------------------------------------
MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<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 by earning a
high rate of 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Emerging Markets High Yield Repurchase Agreements
Investments: Asset-Backeds Issuers Inverse Floaters SMBS
Brady Bonds Floaters Investment Companies Structured Notes
Cash Equivalents Foreign Bonds Loan Participations Swaps
CMOs Foreign Currency Mortgage Securities U.S. Governments
Convertibles Foreign Equities Municipals When Issued
Corporates Forwards Preferred Stock Zero Coupons
Eastern European Issuers Futures & Options
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
Emerging Markets Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals U.S. Governments
CMOs Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: Lehman Brothers Intermediate
Government/Corporate Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
MAS Funds - 28 Terms in bold type are defined in the Prospectus Glossary
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers Inverse Floaters SMBS
Investments: Asset-Backeds Emerging Markets Issuers Investment Companies Structured Notes
Brady Bonds Floaters Mortgage Securities Swaps
Cash Equivalents Foreign Bonds Municipals U.S. Governments
CMOs Foreign Currency Preferred Stock When Issued
Convertibles Forwards Repurchase Agreements Zero Coupons
Corporates Futures & Options
</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
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies CMOs Futures & Options Swaps
Investments: Asset-Backeds Convertibles Investment Companies U.S. Governments
Brady Bonds Corporates Mortgage Securities When Issued
Cash Equivalents Floaters Repurchase Agreements Zero Coupons
Structured Notes
</TABLE>
Comparative Index: Salomon 1-3 Year Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Futures & Options Municipals Swaps
Asset-Backeds Inverse Floaters Repurchase Agreements U.S. Governments
Cash Equivalents Investment Companies SMBS When Issued
CMOs Mortgage Securities Structured Notes Zero Coupons
Floaters
</TABLE>
Comparative Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<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 fixed-income
securities.
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 5
and 10 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers High Yield SMBS
Investments: Asset-Backeds Emerging Markets Issuers Inverse Floaters Structured Notes
Brady Bonds Floaters Investment Companies Swaps
Cash Equivalents Foreign Bonds Mortgage Securities Taxable Investments
CMOs Foreign Currency Municipals U.S. Governments
Convertibles Forwards Preferred Stock When Issued
Corporates Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled
by the Adviser using:
50% Lehman 5-Year Municipal Bond Index
50% Lehman 10-Year Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 32 Terms in bold type are defined in the Prospectus Glossary
<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
primarily in a diversified portfolio of
fixed-income securities.
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 5
and 10 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Emerging Markets Issuers Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals Taxable Investments
CMOs Forwards PA Municipals U.S. Governments
Convertibles Futures & Options Preferred Stock When Issued
Corporates High Yield Repurchase Agreements Zero Coupons
Eastern European Issuers
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled
by the Adviser using:
50% Lehman 5-Year Municipal Bond Index
50% Lehman 10-Year Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 33
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</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
- --------------------------------------------------------------------------------
MAS Funds - 34 Terms in bold type are defined in the Prospectus Glossary
<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 determines
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters Rights
Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Investment Funds Structured Notes
Brady Bonds Foreign Currency Loan Participations Swaps
Cash Equivalents Foreign Equities Mortgage Securities U.S. Governments
CMOs Forwards Municipals Warrants
Common Stock Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates
</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
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 35
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters SMBS
Agencies Emerging Markets Issuers Investment Companies Structured Investments
Asset-Backeds Floaters Investment Funds Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalent Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stock Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates High Yield Rights
</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 Government Bond Index Ex U.S.
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 Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Balanced Plus 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 of
domestic and foreign issuers and fixed-income
securities.
Approach: The Adviser determines the mix of investments
in domestic and foreign equity and
fixed-income 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. When the Adviser
believes it to be in the best interests of the
fund, opportunistic investments in both the
high yield and international fixed-income
markets will be made.
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
At least 25% invested in senior Fixed-Income
Securities
Domestic Equity
Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater
than 5 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters SMBS
Agencies Emerging Markets Issuers Investment Companies Structured Investments
Asset-Backeds Floaters Investment Funds Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalent Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stock Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates High Yield Rights
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled
by the Adviser using:
54% S&P 500 Index
40% Salomon Broad Investment Grade Index
6% MSCI World Ex U.S. Index
Strategies: Asset Allocation Management
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Investing
Mortgage Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 37
<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, Balanced Plus 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 Secur-
ities. 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.
- --------------------------------------------------------------------------------
MAS Funds - 38 Terms in bold type are defined in the Prospectus Glossary
<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 value or dispose of such securities. Also, there
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 39
<PAGE>
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.
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 as of September 30, 1996 (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. The Balanced Plus Portfolio had not
commenced operations as of September 30, 1996.
High Yield Portfolio Fixed Income Portfolio
QUALITY QUALITY
TSY, AGY, AAA 5.28% TSY, AGY, AAA 71.29%
AA 0.00% AA 7.83%
A 0.00% A 5.83%
BAA 3.97% BAA 4.62%
BA 30.28% BA 5.66%
B 47.43% B 2.84%
CAA 5.91% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 7.13% Not Available 1.93%
TOTAL 100.00% TOTAL 100.00%
Special Purpose Fixed Income
Portfolio PA Municipal Portfolio
QUALITY QUALITY
TSY, AGY, AAA 66.33% TSY, AGY, AAA 79.70%
AA 10.95% AA 1.65%
A 6.96% A 5.16%
BAA 4.52% BAA 5.28%
BA 5.62% BA 0.99%
B 3.20% B 1.85%
CAA 0.00% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 2.42% Not Available 5.37%
TOTAL 100.00% TOTAL 100.00%
Multi-Asset-Class Portfolio
QUALITY
TSY, AGY, AAA 26.63%
AA 1.73%
A 1.16%
BAA 1.19%
BA 3.43%
B 4.61%
CAA 0.42%
CA OR BELOW 0.00%
Not Available 1.10%
TOTAL 40.27%
- --------------------------------------------------------------------------------
MAS Funds - 40 Terms in bold type are defined in the Prospectus Glossary
<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-
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 41
<PAGE>
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.
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.
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.
- --------------------------------------------------------------------------------
MAS Funds - 42 Terms in bold type are defined in the Prospectus Glossary
<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.
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.
ADRs also include American Depository Shares.
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 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 princi-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 43
<PAGE>
pal 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 Nationally Recognized Statistical
Rating Organizations ("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) 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;
(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.
Like bonds in general, mortgage-backed securities will generally decline in
price when interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. In part to compensate for these
risks, mortgages will generally offer higher yields than comparable bonds.
However, when interest rates fall, mortgages may not enjoy as large a gain in
market value due to prepayment risk because additional mortgage prepayments
must be reinvested at lower interest rates.
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MAS Funds - 44 Terms in bold type are defined in the Prospectus Glossary
<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.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar types of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or
pool of securities by a foreign or U.S. corporation. Depositary Receipts may
be sponsored or unsponsored. The depositary of unsponsored Depositary
Receipts may provide less information to receipt holders.
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 during the 1940's, 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 45
<PAGE>
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,
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 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.
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. Foreign Equities also include Depositary Receipts.
Investing in foreign companies involves certain special considerations which
are not typically associated with investing in U.S. companies (see Foreign
Investing).
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 do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date.
Also, although such contracts can 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 liquid securities or cash equal to the portfolio's
obligations in a segregated account throughout the duration of the contract.
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MAS Funds - 46 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 transaction hedge or position hedge to the
extent that the value of a security denominated in 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. For proxy hedges, cross-hedges or a synthetic position, there
is an additional risk in that these transactions create residual foreign
currency exposure. When a portfolio enters into a forward contract for
purposes of creating a position hedge, transaction hedge, cross hedge or a
synthetic security, it will generally be required to hold 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 47
<PAGE>
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."
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 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.
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MAS Funds - 48 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 49
<PAGE>
Possible Risks: 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. Like bonds in
general, mortgage-backed securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. However, when interest rates fall,
mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the 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.
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.
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
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MAS Funds - 50 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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 repurchase 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 interest-only or 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 51
<PAGE>
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
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
notional 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 or liquid securities. 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 may 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 may be 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.
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MAS Funds - 52 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 segregated
account consisting of cash or liquid securities 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.
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 or the Fund's Distributor, 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 completing and signing an Account Registration Form (provided at
the end of the prospectus) and mailing it to MAS Funds c/o Miller Anderson &
Sherrerd, LLP, One Tower Bridge, West Conshohocken, Pennsylvania 19428-0868
together with a check ($5,000,000 minimum) payable to MAS Funds.
The portfolios requested should be designated on the Account Registration
Form. 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 53
<PAGE>
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 (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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
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 Purchase 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, 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. 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
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MAS Funds - 54 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Miller Anderson & Sherrerd,
LLP, One Tower Bridge, West Conshohocken, PA 19428-0868.
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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 55
<PAGE>
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 offering Institutional
Class Shares based on the respective net asset values of the shares involved.
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 Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868.
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. The sale of shares may result in a capital gain or loss 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 Miller Anderson & Sherrerd, LLP, One Tower
Bridge, West Conshohocken, PA 19428-0868. As in the case of redemptions, the
written request must be received in good order as defined above. Unless
shares are being transferred to an existing account, requests for transfer
must be accompanied by a completed Account Registration Form for the
receiving party.
VALUATION OF SHARES
Equity, Growth, International Equity, Mid Cap Growth, Mid Cap Value, Small
Cap Value and Value Portfolios:
Net asset value per share 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.
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MAS Funds - 56 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Domestic Fixed Income, Fixed Income, Fixed Income Portfolio II, Global Fixed
Income, High Yield, Intermediate Duration, International Fixed Income,
Limited Duration, Mortgage-Backed Securities, Municipal, PA Municipal and
Special Purpose Fixed Income 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.
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, Multi-Asset-Class and Balanced Plus 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,
Multi-Asset-Class and Balanced Plus Portfolios is determined as of the later
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 57
<PAGE>
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.
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, Domestic Fixed Income and
Balanced Plus 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 and Mid Cap
Growth 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.
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MAS Funds - 58 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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: The following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. No attempt has been made to
present a detailed explanation of the federal income tax treatment of the
portfolio or its shareholders. In addition, state and local tax consequences
of an investment in the portfolio may differ from the Federal income tax
consequences described below. Accordingly, shareholders are urged to consult
their tax advisers regarding specific questions as to federal, state and
local taxes.
Each portfolio of the Fund intends to qualify for taxation as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code") so
that each portfolio will not be subject to Federal income tax to the extent
it distributes investment company taxable income and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) to
shareholders. Each Portfolio is treated as a separate entity for Federal
income tax purposes and is not combined with any of the Funds' other
portfolios. Dividends, either in cash or reinvested in shares, paid by a
portfolio, except for the Municipal and PA Municipal Portfolios (see Special
Tax Considerations for the Municipal and PA Municipal Portfolios) from net
investment income will be taxable to shareholders as ordinary income. In the
case of the Equity, Value, Small Cap Value, Mid Cap Growth, Growth, Balanced,
Balanced Plus, Multi-Asset-Class and Mid Cap Value Portfolios, such dividends
paid to corporate shareholders will generally qualify in part for the
dividends received deduction for corporations to the extent attributable to
dividends received by such portfolios from domestic corporations. 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, and 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 undistrib-
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 59
<PAGE>
uted ordinary and capital gain net income from the prior year. Dividends
declared in October, November or December by a portfolio will be deemed to
have been paid by such portfolio and received by shareholders on December
31st of the declared year 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, Global Fixed Income and International Fixed Income
Multi-Asset-Class and Balanced Plus 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. The other portfolios will not be able to make this
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).
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 upon request.
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 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.
- --------------------------------------------------------------------------------
MAS Funds - 60 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 corporations and individuals and the Federal environmental
tax for corporations only. Exempt-interest dividends from such private
activity securities issued after August 7, 1986, will generally be an item of
tax preference and therefore potentially subject to the alternative minimum
tax environmental tax. A shareholder may lose the tax exempt status of the
accrued income of these portfolios if they redeem their shares before a
dividend has been declared.
The Municipal and PA Municipal Portfolios may not be appropriate investments
for persons who are "substantial users" (or persons related to "substantial
users") of facilities financed by industrial development bonds or private
activity bonds. Such persons should consult their tax advisers before
purchasing shares.
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, wholly owned by indirect subsidiaries of the 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 $40.9 billion in assets under
management.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 61
<PAGE>
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
-------
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 .650
Balanced Plus Portfolio .550
* 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 Mid
Cap Value, Cash Reserves, Domestic Fixed Income, Intermediate Duration,
Limited Duration, Mortgage-Backed Securities, Municipal, PA Municipal and
Multi-Asset-Class Portfolios from exceeding 0.88%, 0.32%, 0.50%, 0.52%,
0.42%, 0.50%, 0.50%, 0.50% and 0.78%, respectively.
- --------------------------------------------------------------------------------
MAS Funds - 62 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
For the fiscal year ended September 30, 1996, the Adviser received the
following as compensation for its services:
Rate
---------
Equity Portfolio .500%
International Equity Portfolio .500%
Mid Cap Growth Portfolio .500%
Mid Cap Value Portfolio .564%
Small Cap Value Portfolio .750%
Value Portfolio .500%
Cash Reserves Portfolio .155%
Domestic Fixed Income Portfolio .362%
Fixed Income Portfolio .375%
Fixed Income Portfolio II .375%
Global Fixed Income Portfolio .375%
High Yield Portfolio .375%
Intermediate Duration Portfolio .244%
International Fixed Income Portfolio .375%
Limited Duration Portfolio .300%
Mortgage-Backed Securities Portfolio .335%
Municipal Portfolio .288%
PA Municipal Portfolio .228%
Special Purpose Fixed Income Portfolio .375%
Balanced Portfolio .450%
Multi-Asset-Class Portfolio .372%
N/A
Balanced Plus Portfolio
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 63
<PAGE>
PORTFOLIO MANAGEMENT
The investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios are as follows:
Equity Portfolio: Arden C. Armstrong, Kurt A. Feuerman, Timothy G. Connors,
Nicholas J. Kovich, Robert J. Marcin and Gary G. Schlarbaum;
Value Portfolio: Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich;
Small Cap Value and Mid Cap Value Portfolios: Gary G. Schlarbaum, Bradley S.
Daniels and William B. Gerlach;
Mid Cap Growth Portfolio: Arden C. Armstrong and Abhi Y. Kanitkar;
Growth Portfolio: Arden C. Armstrong 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: Stephen F. Esser, Thomas L. Bennett and Robert E.
Angevine;
Cash Reserves Portfolio: Abigail Jones Feder and Ellen D. Harvey;
Limited Duration and Intermediate Duration Portfolios: Ellen D. Harvey, Scott
F. Richard and Christian G. Roth;
Municipal and PA Municipal Portfolios: Steven K. Kreider, Kenneth B. Dunn and
Scott F. Richard;
Balanced Portfolio: Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley;
Multi-Asset-Class Portfolio: Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley;
International Equity Portfolio: Horacio A. Valerias and Hassan Elmasry;
Global Fixed Income and International Fixed Income Portfolios: J. David
Germany, Michael Kushma, Paul F. O'Brien and Richard B. Worley;
Balanced Plus Portfolio: Thomas L. Bennett, John D. Connolly, Gary G.
Schlarbaum, Horacio A. Valeiras, Richard B. Worley and J. David Germany.
A description of their business experience during the past five years is as
follows:
- --------------------------------------------------------------------------------
MAS Funds - 64 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He assumed responsibility for the High Yield Portfolio in
1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986.
She assumed responsibility for the Mid Cap Growth Portfolio in 1990, the
Growth Portfolio in 1993 and the Equity Portfolio in 1994.
Richard M. Behler, Principal, Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management
and as Senior Vice President for Merrill Lynch Economics from 1987 through
1992. He assumed responsibility for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, 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.
John D. Connolly, Principal, Morgan Stanley, joined MAS in 1990. He assumed
responsibility for the Balanced Portfolio in 1992 and the Multi-Asset-Class
Portfolio in 1994.
Timothy G. Connors, Principal, Morgan Stanley, 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 and Growth Portfolios in 1994.
Bradley S. Daniels, Vice President, Morgan Stanley, 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, Managing Director, Morgan Stanley, 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.
Hassan Elmasry, Principal, Morgan Stanley, joined MAS in 1995. He served as
First Vice President & International Equity Portfolio Manager from 1987
through 1995 for Mitchell Hutchins Asset Management. He assumed
responsibility for the International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the High Yield Portfolio in 1989.
Abigail Jones Feder, Principal, Morgan Stanley, joined Morgan Stanley in
1985. She assumed responsibility for the Cash Reserves Portfolio in 1996.
Kurt Feuerman, Managing Director, Morgan Stanley, joined Morgan Stanley in
1990. He assumed responsibility for the Equity Portfolio in 1996.
William B. Gerlach, Vice President, Morgan Stanley, joined MAS in 1991. He
assumed responsibility for the Small Cap Value and Mid Cap Value Portfolios
in 1996.
J. David Germany, Managing Director, Morgan Stanley, 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.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 65
<PAGE>
Ellen D. Harvey, Principal, Morgan Stanley, 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.
Abhi Y. Kanitkar, Vice President, Morgan Stanley, joined MAS in 1994. He
served as an Investment Analyst from 1993 through 1994 for Newbold's Asset
Management and as Director & Investment Analyst from 1990 through 1993 for
Kanitkar Investment Services, Inc. He assumed responsibility for the Mid Cap
Growth Portfolio in 1996.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Equity Portfolio in 1994 and the Value
Portfolio in 1997.
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the Municipal and the PA Municipal Portfolios in 1992.
Michael Kushma, Principal, Morgan Stanley, joined Morgan Stanley in 1988. He
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1996.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Value Portfolio in 1990 and the Equity
Portfolio in 1994.
Paul F. O'Brien, Principal, Morgan Stanley, joined MAS in 1996. He served as
Head of European Economics from 1993 through 1995 for JP Morgan and as
Principal Administrator from 1991 through 1992 for the Organization for
Economic Cooperation and Development. He assumed responsibility for the
Global Fixed Income and International Fixed Income Portfolios in 1996.
Scott F. Richard, Managing Director, Morgan Stanley, 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, the Limited Duration, Intermediate Duration, Municipal and
PA Municipal Portfolios in 1994 and the Advisory Mortgage Portfolio in 1995.
Christian G. Roth, Principal, Morgan Stanley, joined MAS in 1991. He assumed
responsibility for the Limited Duration and Intermediate Duration Portfolios
in 1994.
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution, Inc.; joined MAS in 1987. He assumed responsibility for the
Equity and Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992
and the Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
Horacio A. Valeiras, Principal, Morgan Stanley, 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, the Multi-Asset-Class Portfolio in 1994 and the Balanced Portfolio in
1996.
Richard B. Worley, Managing Director, Morgan Stanley, 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
- --------------------------------------------------------------------------------
MAS Funds - 66 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
of The Chase Manhattan Bank, 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.
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 2, 1997, The Northern Trust Co. (Chicago, IL) owned a
controlling interest (as that term is defined by the Investment Company Act
of 1940, as amended) of the Cash Reserves Portfolio; the Inglis House
Foundation (Philadelphia, PA) owned a controlling interest in the
Mortgage-Backed Securities Portfolio; Richard B. Worley (West Conshohocken,
PA) owned a controlling interest in the PA Municipal Portfolio; Wendell & Co.
(New York, NY) owned a controlling interest in the Balanced Portfolio; the
Charles A Dana Foundation (New York, NY) owned a controlling interest in the
Global Fixed Income Portfolio and the Morgan Stanley Group, Inc. (New York,
NY) owned a controlling interest in the Intermediate Duration Portfolio.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 67
<PAGE>
Custodians: The Chase Manhattan Bank, 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Funds' Transfer Agent and dividend disbursing
agent.
Reports: Shareholders receive semi-annual 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 Cash Reserves Portfolio will be closed on Martin Luther King Day,
Columbus Day and Veteran's Day.
- --------------------------------------------------------------------------------
MAS Funds - 68 Terms in bold type are defined in the Prospectus Glossary
<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; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.;
Director, Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.;
Director, Federal National Mortgage Association; Director, Reliance Group
Holdings; Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee, Southern California
Edison Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services,
Inc., Director, Legal and General America, Inc., Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
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, MAS Funds; Principal, Morgan Stanley; 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, The Chase Manhattan Bank.
Lorraine Truten, CFA, Vice President, MAS Funds; Principal, Morgan
Stanley; Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP;
President, MAS Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan
Stanley; Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP;
formerly Assistant Vice President, Provident Financial Processing
Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis &
Bockius, LLP; formerly Attorney, Ropes & Gray.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 69
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Funds - 70 Terms in bold type are defined in the Prospectus Glossary
<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. - -
-------- ---------- -----------------
Form of Business Entity: / / Corporation / / Partnership
/ / Trust / / Other
--------------------------------------------------
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. - -
----------- ---------- -----------
===============================================================================
<PAGE>
/3/ INVESTMENT
For Purchase of:
<TABLE>
<CAPTION>
<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 Portfolio / / Municipal Portfolio
/ / Balanced Portfolio / / Intermediate Duration Portfolio
/ / Multi-Asset-Class Portfolio / / Mortgage-Backed Securities Portfolio
/ / Balanced Plus Portfolio / / Cash Reserves Portfolio
/ / Domestic Fixed Income Portfolio
</TABLE>
===============================================================================
/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 persons
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 if no box is checked below.
The instructions provided below may only be changed by written notification.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
/ / Income dividends and capital gains to be reinvested 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds Subscription Account
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. The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding.
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
This application is separate from the prospectus
- --------------------------
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>
LOGO----------------------------------------------------------------PROSPECTUS
January 31, 1997
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 Shareholder Information
Prospectus Summary 4 Purchase of Shares 53
Financial Highlights 8 Redemption of Shares 55
Yield and Total Return 15 Shareholder Services 56
Investment Suitability 16 Valuation of Shares 56
Investment Limitations 17 Dividends, Capital Gains
Portfolio Summaries 19 Distributions
Equity Investments 19 and Taxes 58
Fixed-Income Investments 22 Investment Adviser 61
Prospectus Glossary: Portfolio Management 64
Strategies 38 Administrative Services 66
Investments 43 General Distribution Agent 67
Portfolio Transactions 67
Other Information 67
Trustees and Officers 69
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- ------------------------------------------------------------------------------
<PAGE>
LOGO-------------------------------------------------INVESTMENT CLASS PROSPECTUS
- --------------------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------------------
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, ten of which are described in this Prospectus. Each portfolio in
this Prospectus operates as a separate diversified investment company. The
investment objective of each portfolio is described with a summary of investment
policies as referenced below. This Prospectus offers the Investment Class Shares
of the Fund. The Fund also offers Adviser Class Shares and Institutional Class
Shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the Cash Reserves Portfolio 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
How to Use This Cash Reserves 17 Prospectus Glossary:
Prospectus: 3 Fixed Income 18 Strategies 23
Portfolio Summaries: High Yield 19 Investments 27
Equity 15 Special Purpose Fixed General Shareholder
International Income 20 Information: 37
Equity 15 Balanced 21 Table of
Mid Cap Value 16 Multi-Asset-Class 22 Contents: Back Cover
Value 16
- --------------------------------------------------------------------------------
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 31, 1997 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 - INVESTMENT CLASS SHARES
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
annual expenses and fees set forth below are estimated based upon the
portfolios attaining certain average asset levels. The Adviser may from time
to time waive fees or reimburse expenses thereby reducing total operating
expenses.
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
Shareholder Servicing Fee 0.15%
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
---------------------------- ------------ ---------- -----------
<S> <C> <C> <C>
Equity 0.500%* 0.150% 0.800%
International Equity 0.500 0.250 0.900
Mid Cap Value 0.564* 0.386 1.100
Value 0.500* 0.150 0.800
Cash Reserves 0.155* 0.245 0.550
Fixed Income 0.375 0.155 0.680
High Yield 0.375* 0.175 0.700
Special Purpose Fixed Income 0.375* 0.155 0.680
Balanced 0.450 0.200 0.800
Multi-Asset-Class 0.570*+ 0.330 1.050
</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
expenses that otherwise would be deducted from portfolio assets.
+ On November 21, 1996 shareholders of the Multi-Asset-Class Portfolio
approved an increase in the Advisory Fee from 0.45% to 0.65% of average
daily net assets. The Investment Advisory Fees and Total Operating Expenses
have been adjusted to reflect this change.
* The Advisor has voluntarily agreed to waive Advisory Fees and/or reimburse
certain other expenses to the extent necessary to keep the Total Operating
Expenses of the Equity, Mid Cap Value, Value, Cash Reserves, High Yield,
Special Purpose Fixed Income and Multi-Asset-Class Portfolios from
exceeding 0.800%, 1.100%, 0.800%, 0.550%, 0.700%, 0.680% and 1.050%,
respectively.
Absent such fee waivers and/or reimbursements the Total Operating Expenses
would be 0.900%, 1.286%, 0.870%, 0.645%, 0.755%, 0.775% and 1.130%, for the
Equity, Mid Cap Value, Value, Cash Reserves, High Yield, Special Purpose
Fixed Income and Multi-Asset-Class Portfolios, respectively.
- --------------------------------------------------------------------------------
MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<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.
<TABLE>
<CAPTION>
Portfolio 1 year 3 year 5 year 10 year
--------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Equity $ 8 $26 $44 $ 99
International Equity 9 29 50 111
Mid Cap Value 11 35 61 134
Value 8 26 44 99
Cash Reserves 6 18 31 69
Fixed Income 7 22 38 85
High Yield 7 22 39 87
Special Purpose Fixed
Income 7 22 38 85
Balanced 8 26 44 99
Multi-Asset-Class 11 33 58 128
</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 7;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all
portfolios begins on page 13;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin
on page 15;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 23;
GENERAL SHAREHOLDER INFORMATION begins on page 37.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
PROSPECTUS SUMMARY
EQUITY PORTFOLIOS
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.
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 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.
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.
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.
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.
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.
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 neu-
- --------------------------------------------------------------------------------
MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
tral, 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.
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 that may be acquired by the Portfolios 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;
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 Each portfolio (except the Cash Reserves Portfolio) may invest in certain
instruments such as Forwards, certain types of Futures & Options, certain
types of Mortgage Securities and When-Issued Securities which require the
portfolio to segregate some or all of its cash or liquid securities to
cover its obligations pursuant to such instruments. As asset segregation
reaches certain levels, a portfolio may lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or
meeting other obligations and may be forced to sell other securities that
it wanted to retain or to realize unintended gains or losses;
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 Investments in securities rated below investment grade, generally referred
to as High Yield, high risk and/or junk bonds, carry a high degree of
credit risk and are considered speculative by the major rating agencies;
and,
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
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.
HOW TO INVEST: Investment Class Shares of each portfolio are available to
Shareholders with combined investments of $1,000,000 and Shareholder
Organizations who have a contractual arrangement with the Fund or the Fund's
Distributor, 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 Institutional and Adviser Class Shares which
differ from the Investment 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 $40.9 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, serves as Transfer Agent
to the Fund. See Administrative Services.
- --------------------------------------------------------------------------------
MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratios for a share of each Portfolio 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, 1996 have been
examined by Price Waterhouse LLP whose opinion thereon (which was unqualified)
is also incorporated by reference in the Statement of Additional Information.
The Investment Class shares of the Cash Reserves, Fixed Income and Balanced
Portfolios had not commenced operations as of September 30, 1996, therefore,
Institutional Class share financial information is provided to investors for
informational purposes only and should be referred to as an historical guide
to a Portfolio's operations and expenses. Past performance does not indicate
future results.
<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>
Equity Portfolio (Commencement of Investment Class Operations 04/10/96)##
1996 $24.31 $0.22 $1.24 $1.46 ($ 0.11) -- --
International Equity Portfolio (Commencement of Investment Class Operations 04/10/96)##
1996 $13.02 $0.09 $0.12 $0.21 -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Investment Class Operations 04/10/96)##
1996 ($ 0.11) $25.66 6.02% $113 0.75%* 1.83%* 67% $0.0557
International Equity Portfolio (Commencement of Investment Class Operations 04/10/96)##
1996 -- $13.23 1.61% $235 0.81%* 1.81%* 78% $0.0093
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
## For the period ended September 30, 1996, 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 not significantly differ for the Equity
Portfolio and would be 0.77%* for the International Equity Portfolio.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dividend
Net Gains Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net
Beginning Investment (realized and Investment investment capital Other
of Period Income unrealized) Activities income) gains) Distributions
---- --------- ---------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Value Portfolio (Commencement of Investment Class Operations 5/10/96)##
1996 $13.77 $0.04 $0.67 $0.71 -- -- --
Value Portfolio (Commencement of Investment Class Operations 5/6/96)##
1996 $14.97 $0.12 $0.59 $0.71 ($ 0.08) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Value Portfolio (Commencement of Investment Class Operations 5/10/96)##
1996 -- $14.48 5.16% $ 127 1.03%* 0.86%*++ 377% $0.0462
Value Portfolio (Commencement of Investment Class Operations 5/6/96)##
1996 ($ 0.08) $15.60 4.78% $9,244 0.76%* 2.05%* 53% $0.0572
</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 in order to keep the total annual
operating expenses for the Mid Cap Value Portfolio from exceeding 1.10%.
Voluntarily waived fees for the period ended September 30, 1996 were 0.14%*.
## For the period ended September 30, 1996, the Ratio of Expenses to Average
Net Assets for the Mid 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, 1996, 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 be 0.75%*.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<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 Institutional Class Operations 8/29/90)##
1996 $ 1.000 $ .052 -- $ .052 ($.052) -- --
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) -- --
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)##, +++
1996 $11.82 $0.78 $ 0.08 $0.86 ($0.79) ($ 0.06) --
1995 10.93 0.80 0.69 1.49 (0.60) -- --
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($0.13)+
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) --
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) --
1991 10.94 0.94 1.25 2.19 (0.93) -- --
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) --
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) --
1988 10.86 0.97 0.43 1.40 (0.86) -- --
1987 11.95 0.93 (0.61) 0.32 (0.91) (0.50) --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
---- ------------- --------- -------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Institutional Class Operations 8/29/90)##
1996 ($.052) $ 1.000 5.35% $ 78,497 0.33%++ 5.19% N/A
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
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)##, +++
1996 ($0.85) $11.83 7.63% $1,790,146 0.48% 6.77% 162%
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
</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 Cash Reserves Portfolio from exceeding 0.32%.
Voluntarily waived fees and reimbursed expenses totalled 0.08%, 0.24%,
0.14%, 0.11% and 0.09% for the years 1992, 1993, 1994, 1995 and 1996,
respectively.
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Cash Reserves and 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 0.48%,
respectively.
+++ Adjusted to reflect a 2.5 for 1 share split as of August 13, 1993.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<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 Investment Class Operations 5/21/96)#, ##
1996 $ 9.06 $0.31 $0.16 $0.47 ($0.22) -- --
Special Purpose Fixed Income Portfolio (Commencement of Investment Class Operations 4/10/96)##
1996 $11.89 $0.27 $0.23 $0.50 ($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>
High Yield Portfolio (Commencement of Investment Class Operations 5/21/96)#, ##
1996 ($0.22) $ 9.31 5.34% $5,139 0.62%* 11.06%* 115%
Special Purpose Fixed Income Portfolio (Commencement of Investment Class Operations 4/10/96)##
1996 ($0.15) $12.24 4.25% $ 782 0.63%* 6.32%* 151%
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
# Formerly High Yield Securities Portfolio (through December 23, 1994).
## For the period ended September 30, 1996, the Ratio of Expenses to Average Net
Assets for the High Yield and Special Purpose Fixed Income Portfolios
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would be 0.61%* for the High Yield
Portfolio and would not significantly differ for the Special Purpose Fixed
Income Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<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 Institutional Class Operations 12/31/92)##, +
1996 $13.06 $0.53 $1.15 $1.68 ($0.50) ($ 0.43) --
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 Investment Class Operations 6/10/96)#, ##
1996 $12.17 $0.13 $0.08 $0.21 ($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 Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Institutional Class Operations 12/31/92)##, +
1996 ($0.93) $13.81 13.47% $300,868 0.57% 3.85% 110% $0.0521
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 Investment Class Operations 6/10/96)#, ##
1996 ($0.11) $12.27 1.75% $ 3,074 0.73%*++ 3.68%* 122% $0.0225
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Adjusted to reflect a 2.5 for 1 share split as of August 13, 1993.
++ 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 Portfolio from exceeding 1.05%.
# Formerly known as Global Balanced Portfolio (through December 23, 1994).
## For the periods ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Balanced Portfolio excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would be 0.57%. For the period ended September 30, 1996, 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 Net Assets would not significantly differ.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<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.
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.
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.
- --------------------------------------------------------------------------------
MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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.
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.
With respect to the Fixed Income Portfolios and the fixed-income portion of
the Balanced and Multi-Asset-Class 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.
Portfolio turnover rates for certain portfolios are as follows: Mid Cap Value
- - 377%, Fixed Income - 162%, High Yield - 115%, Special Purpose Fixed Income
- - 151%, Balanced - 110% and Multi-Asset-Class - 122%.
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<PAGE>
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 or
as detailed in Investment Limitations, 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.
(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.
(c) 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; and (5) asset-backed securities will
be classified according to the underlying assets securing such securities;
(d) 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;
(e) 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);
(f) a portfolio may pledge, mortgage or hypothecate assets in an amount up to
50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff.
(g) a portfolio will not invest its assets in securities of any Investment
Company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), 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.
- --------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategies: Core Equity 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Eastern European Issuers Investment Companies Structured Notes
Investments: Agencies Emerging Markets Issuers Investment Funds Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
Corporates Futures & Options Structured Investments
</TABLE>
Comparative Index: MSCI World Ex-U.S. Index
Strategies: International Equity Investing
Emerging Markets Investing
Foreign Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<PAGE>
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 $6 billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
- --------------------------------------------------------------------------------
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
- --------------------------------------------------------------------------------
MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable
Investments: Agencies Corporates Investment Companies U.S. Governments
Asset-Backeds Floaters Repurchase Agreements Zero Coupons
Cash Equivalents
Comparative Index: Lipper Money Market Index
Strategy: Money Market Investing
</TABLE>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Floaters Investment Companies SMBS
Investments: Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</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
- --------------------------------------------------------------------------------
MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<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 by earning a
high rate of 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Emerging Markets Issuers High Yield Repurchase Agreements
Investments: Asset-Backeds Floaters Inverse Floaters SMBS
Brady Bonds Foreign Bonds Investment Companies Structured Notes
Cash Equivalents Foreign Currency Loan Participations Swaps
CMOs Foreign Equities Mortgage Securities U.S. Governments
Convertibles Forwards Municipals When Issued
Corporates Futures & Options Preferred Stock Zero Coupons
Eastern European Issuers
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
Emerging Markets Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<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, 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Floaters Investment Companies SMBS
Investments: Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</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
- --------------------------------------------------------------------------------
MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<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 determines
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters Rights
Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Investment Funds Structured Notes
Brady Bonds Foreign Currency Loan Participations Swaps
Cash Equivalents Foreign Equities Mortgage Securities U.S. Governments
CMOs Forwards Municipals Warrants
Common Stock Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates
</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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Eastern European Issuers Inverse Floaters SMBS
Investments: Agencies Emerging Markets Issuers Investment Companies Structured Investments
Asset-Backeds Floaters Investment Funds Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalents Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stock Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates High Yield Rights
</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 Government Bond Index Ex U.S.
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
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<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 and
Multi-Asset-Class 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<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.
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 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.
- --------------------------------------------------------------------------------
MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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 following table 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 for the fiscal year ended September 30, 1996. (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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
High Yield Portfolio Multi-Asset-Class Portfolio
QUALITY QUALITY
TSY, AGY, AAA 5.28% TSY, AGY, AAA 26.63%
AA 0.00% AA 1.73%
A 0.00% A 1.16%
BAA 3.97% BAA 1.19%
BA 30.28% BA 3.43%
B 47.43% B 4.61%
CAA 5.91% CAA 0.42%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 7.13% Not Available 1.10%
TOTAL 100.00% TOTAL 40.27%
Special Purpose Fixed Income Portfolio Fixed Income Portfolio
QUALITY QUALITY
TSY, AGY, AAA 66.33% TSY, AGY, AAA 71.29%
AA 10.95% AA 7.83%
A 6.96% A 5.83%
BAA 4.52% BAA 4.62%
BA 5.62% BA 5.66%
B 3.20% B 2.84%
CAA 0.00% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 2.42% Not Available 1.93%
TOTAL 100.00% TOTAL 100.00%
</TABLE>
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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<PAGE>
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, 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
- --------------------------------------------------------------------------------
MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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.
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.
ADRs also include American Depositary Shares.
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 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<PAGE>
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.
(2) Each portfolio (except Cash Reserves) may invest in commercial paper
rated at time of purchase by one or more Nationally Recognized Statistical
Rating Organizations ("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) 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;
(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 aver
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MAS Funds - 28 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
age 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.
Like bonds in general, mortgage-backed securities will generally decline in
price when interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. In part to compensate for these
risks, mortgages will generally offer higher yields than comparable bonds.
However, when interest rates fall, mortgages may not enjoy as large a gain in
market value due to prepayment risk because additional mortgage prepayments
must be reinvested at lower interest rates.
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.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar types of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or
pool of securities by a foreign or U.S. corporation. Depositary Receipts may
be sponsored or unsponsored. The depositary of unsponsored Depositary
Receipts may provide less information to receipt holders.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<PAGE>
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 during the 1940's, 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,
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 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.
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. Foreign Equities also include Depositary Receipts.
Investing in foreign companies involves certain special considerations which
are not typically associated with investing in U.S. companies (see Foreign
Investing).
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MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<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 do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date.
Also, although such contracts can 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 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 transaction hedge or position hedge to the
extent that the value of a security denominated in 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. For proxy hedges, cross-hedges, or a synthetic position, there
is an additional risk in that those transactions create residual foreign
currency exposure. When a portfolio enters into a forward contract for
purposes of creating a position hedge, transaction hedge, cross hedge, or a
synthetic security, it will generally be required to hold 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-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<PAGE>
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."
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 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
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MAS Funds - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Organizations ("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.
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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 33
<PAGE>
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.
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.
Possible Risks: 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. Like bonds in
general, mortgage-backed securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. However, when interest rates fall,
mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the 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.
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 pur-
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MAS Funds - 34 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
chase 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.
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 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 repurchase 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 interest-only or 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 35
<PAGE>
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
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
notional 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 or liquid securities. 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 may 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 may be 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.
Warrants: are options issued by a corporation which give the holder the
option to purchase stock.
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MAS Funds - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 segregated
account consisting of cash or liquid securities 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.
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
Investment Class Shares are available to Shareholders with combined
investments of $1,000,000 and Shareholder Organizations who have a
contractual arrangement with the Fund or the Fund's Distributor, including
institutions such as trusts, foundations or broker-dealers purchasing for the
accounts of others.
Investment 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
Wire. Investment 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 MAS Funds' completing and signing an Account Registration Form
(provided at the end of the prospectus) and mailing it to the MAS Funds'
Client Services Group, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge,
West Conshohocken, Pennsylvania 19428-0868 together with a check ($1,000,000
minimum) payable to MAS Funds.
The portfolio(s) requested should be designated on the Account Registration
Form. 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 37
<PAGE>
Initial Purchase by Wire: Subject to acceptance by the Fund, Investment Class
Shares may also be purchased by wiring Federal Funds ($1,000,000 minimum) to
the Fund's Custodian Bank, The Chase Manhattan Bank (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. Investment 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
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 Investment Class Shares 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 Purchase 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
(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. 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 Investment 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 Investment 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.
Investment Class Shares of the Fund's portfolios may be 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 Investment Class Shares though
Shareholder Organizations may receive a fee for providing shareholder
services to their clients who hold Investment Class Shares.
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MAS Funds - 38 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
REDEMPTION OF SHARES
Investment Class Shares of each portfolio may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of
Investment 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 Investment 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 Miller, Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868.
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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 39
<PAGE>
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 Investment Class Shares may be exchanged
for Investment Class Shares of the Fund's other portfolios offering
Investment Class shares based on the respective net asset values of the
shares involved. 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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868.
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. The sale of shares may result in a capital gain or loss 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 Miller Anderson & Sherrerd, LLP, One Tower
Bridge, West Conshohocken, PA 19428-0868. As in the case of redemptions, the
written request must be received in good order as defined above. Unless
shares are being transferred to an existing account, requests for transfer
must be accompanied by a completed Account Registration Form for the
receiving party.
VALUATION OF SHARES
Equity, International Equity, Mid Cap Value and Value Portfolios:
Net asset value per share 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.
Fixed Income, High Yield and Special Purpose Fixed Income 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
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MAS Funds - 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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 later 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 41
<PAGE>
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.
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, Fixed Income, Special Purpose Fixed Income, High Yield,
Balanced and Multi-Asset-Class Portfolios normally distribute
substantially all of their net investment income to shareholders in the
form of quarterly dividends.
o The International Equity and Mid Cap Value Portfolios normally distribute
substantially all of their net investment income in the form of annual
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.
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MAS Funds - 42 Terms in bold type are defined in the Prospectus Glossary
<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: The following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. No attempt has been made to
present a detailed explanation of the federal income tax treatment of the
portfolio or its shareholders. In addition, state and local tax consequences
of an investment in the portfolio may differ from the Federal income tax
consequences described below. Accordingly, shareholders are urged to consult
their tax advisers regarding specific questions as to federal, state and
local taxes.
Each portfolio of the Fund intends to qualify for taxation as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code") so
that each portfolio will not be subject to Federal income tax to the extent
it distributes net investment company taxable income and net capital gains
(the excess of net long-term capital gain over net short-term capital loss)
to shareholders. Each Portfolio is treated as a separate entity for Federal
income tax purposes and is not combined with any of the Funds' other
portfolios. Dividends, either in cash or reinvested in shares, paid by a
portfolio from net investment income will be taxable to shareholders as
ordinary income. In the case of the Equity, Value, Balanced,
Multi-Asset-Class and Mid Cap Value Portfolios, such dividends paid to
corporate shareholders will generally qualify in part for the dividends
received deduction for corporations to the extent attributable to dividends
received by such portfolios from domestic corporations. The Fund will send
each shareholder of such portfolios 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, and 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 October, November or December by a portfolio will be
deemed to have been paid by such portfolio and received by shareholders on
December 31st of the year declared 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 43
<PAGE>
The International Equity Portfolio 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. The portfolio will make
such an election only if it is deemed to be in the best interests of the
shareholders. The other portfolios will not be able to make this election.
If this election is made, shareholders of the International Equity 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 upon request.
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, wholly owned by indirect subsidiaries of the 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 $40.9 billion in assets under
management.
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:
- --------------------------------------------------------------------------------
MAS Funds - 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Rate
-------
Equity Portfolio .500%
International Equity Portfolio .500
Mid Cap Value Portfolio* .750
Value Portfolio .500
Cash Reserves Portfolio .250
Fixed Income Portfolio .375
High Yield Portfolio .375
Special Purpose Fixed Income Portfolio .375
Balanced Portfolio .450
Multi-Asset-Class Portfolio .650
* 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.
Until further notice, the Adviser has voluntarily agreed to waive advisory
fees and/or reimburse certain other expenses to the extent necessary to keep
Total Operating Expenses actually deducted from portfolio assets for the
Investment Class of the Equity, Mid Cap Value, Value, Cash Reserves, High
Yield, Special Purpose Fixed Income and Multi-Asset-Class Portfolios from
exceeding 0.800%, 1.100%, 0.800%, 0.550%, 0.700%, 0.680% and 1.050%,
respectively.
For the fiscal year ended September 30, 1996, the Adviser received the
following as compensation for its services:
Rate
-------
Equity Portfolio .500%
International Equity Portfolio .500
Mid Cap Value Portfolio .564
Value Portfolio .500
Cash Reserves Portfolio .155
Fixed Income Portfolio .375
High Yield Portfolio .375
Special Purpose Fixed Income Portfolio .375
Balanced Portfolio .450
Multi-Asset-Class Portfolio .372
SERVICE PLAN: The Board of Trustees of the Fund has approved a Service Plan
(the "Service Plan"). Pursuant to which the Distributor may compensate
Service Providers for providing shareholder support services to clients who
purchase Investment Class Shares. For this service, such Service Providers
are compensated at an annual rate of .15% of the average net assets of the
Investment Class Shares of each Portfolio. Fees paid pursuant to the Service
Plan are separate fees of the Investment Class Shares of each Portfolio and
will reduce the net investment income and total return of the Investment
Class Shares of these Portfolios.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 45
<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 Portfolio: Arden C. Armstrong, Kurt A. Feuerman, Timothy G. Connors,
Nicholas J. Kovich, Robert J. Marcin and Gary G. Schlarbaum;
Value Portfolio: Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich;
Mid Cap Value Portfolio: Gary G. Schlarbaum, Bradley S. Daniels and William
B. Gerlach;
Fixed Income and Special Purpose Fixed Income Portfolios: Thomas L. Bennett,
Kenneth B. Dunn and Richard B. Worley;
High Yield Portfolio: Stephen F. Esser, Thomas L. Bennett and Robert E.
Angevine;
Cash Reserves Portfolio: Abigail Jones Feder and Ellen D. Harvey;
Balanced Portfolio: Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley;
Multi-Asset-Class Portfolio: Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley; and
International Equity Portfolio: Horacio A. Valeiras and Hassan Elmasry.
A description of their business experience during the past five years is as
follows:
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He assumed responsibility for the High Yield Portfolio in
1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986.
She assumed responsibility for the Equity Portfolio in 1994.
Richard M. Behler, Principal, Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management
and as Senior Vice President for Merrill Lynch Economics from 1987 through
1992. He assumed responsibility for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
assumed responsibility for the Fixed Income Portfolio in 1984, the High Yield
Portfolio in 1985, the Special Purpose Fixed Income and Balanced Portfolios
in 1992 and the Multi-Asset-Class Portfolio in 1994.
John D. Connolly, Principal, Morgan Stanley, joined MAS in 1990. He assumed
responsibility for the Balanced Portfolio in 1992 and the Multi-Asset-Class
Portfolio in 1994.
Timothy G. Connors, Principal, Morgan Stanley, 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 Portfolio in 1994.
- --------------------------------------------------------------------------------
MAS Funds - 46 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Bradley S. Daniels, Vice President, Morgan Stanley, joined MAS in 1985. He
assumed responsibility for the Mid Cap Value Portfolio in 1994.
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
assumed responsibility for the Fixed Income Portfolio in 1987 and the Special
Purpose Fixed Income Portfolio in 1992.
Hassan Elmasry, Principal, Morgan Stanley, joined MAS in 1995. He served as
First Vice President & International Equity Portfolio Manager from 1987
through 1995 for Mitchell Hutchins Asset Management. He assumed
responsibility for the International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the High Yield Portfolio in 1989.
Abigail Jones Feder, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1985. She assumed responsibility for the Cash Reserves
Portfolio in 1996.
Kurt A. Feuerman, Managing Director, Morgan Stanley, joined MAS in 1990. He
assumed responsibility for the Equity Portfolio in 1996.
William B. Gerlach, Vice President, Morgan Stanley, joined MAS in 1991. He
assumed responsibility for the Mid Cap Value Portfolio in 1996.
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
served as Vice President & Senior Economist for Morgan Stanley & Co. from
1989 to 1991. He assumed responsibility for the Multi-Asset-Class Portfolio
in 1994.
Ellen D. Harvey, Principal, Morgan Stanley, joined MAS in 1984. She assumed
responsibility for the Cash Reserves Portfolio in 1990.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Equity Portfolio in 1994 and the Value
Portfolio in 1997.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Value Portfolio in 1990 and the Equity
Portfolio in 1994.
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution, Inc.; joined MAS in 1987. He assumed responsibility for the
Equity Portfolio in 1987, the Balanced Portfolio in 1992 and the Multi-
Asset-Class and Mid Cap Value Portfolios in 1994.
Horacio A. Valeiras, Principal, Morgan Stanley, 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 Multi-Asset-Class Portfolio
in 1994 and the Balanced Portfolio in 1996.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
assumed responsibility for the Fixed Income Portfolio in 1984, the Balanced
and Special Purpose Fixed Income Portfolios in 1992 and the Multi-
Asset-Class Portfolio in 1994.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 47
<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, 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.
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 2, 1997, The Northern Trust Co. (Chicago, IL) owned a
controlling interest (as that term is defined by the Investment Company Act
of 1940, as amended) of the Cash Reserves Portfolio; Wendell & Co. (New York,
NY) owned a controlling interest of the Balanced Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 48 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Custodians: The Chase Manhattan Bank, 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Funds' Transfer Agent and dividend disbursing
agent.
Reports: Shareholders receive semi-annual 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 Cash Reserves Portfolio will be closed on Martin Luther King Day,
Columbus Day, and Veteran's Day.
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; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.;
Director, Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.;
Director, Federal National Mortgage Association; Director, Reliance Group
Holdings; Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee, Southern California
Edison Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services,
Inc.; Director, Legal and General America, Inc.; Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 49
<PAGE>
James D. Schmid, President, MAS Funds; Principal, Morgan Stanley; 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, MAS Funds; Principal, Morgan
Stanley; Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP;
President, MAS Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan
Stanley; Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP;
formerly Assistant Vice President, Provident Financial Processing
Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis &
Bockius, LLP; formerly Attorney, Ropes & Gray.
- --------------------------------------------------------------------------------
MAS Funds - 50 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 51
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Funds - 52 Terms in bold type are defined in the Prospectus Glossary
<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. - -
-------- ---------- -----------------
Form of Business Entity: / / Corporation / / Partnership
/ / Trust / / Other
--------------------------------------------------
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. - -
----------- ---------- -----------
===============================================================================
<PAGE>
/3/ INVESTMENT
For Purchase of:
<TABLE>
<CAPTION>
<S> <C>
/ / Equity Portfolio $__________________________
/ / International Equity Portfolio $__________________________
/ / Mid Cap Value Portfolio $__________________________
/ / Value Portfolio $__________________________
/ / Multi-Asset-Class Portfolio $__________________________
/ / Cash Reserves Portfolio $__________________________
/ / Fixed Income Portfolio $__________________________
/ / High Yield Portfolio $__________________________
/ / Special Purpose Fixed Income Portfolio $__________________________
/ / Balanced Portfolio $__________________________
/ / Balanced Portfolio $__________________________
/ / Multi-Asset-Class Portfolio $__________________________
</TABLE>
===============================================================================
/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 persons
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 if no box is checked below.
The instructions provided below may only be changed by written notification.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
/ / Income dividends and capital gains to be reinvested 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds Subscription Account
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. The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding.
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
This application is separate from the prospectus
- --------------------------
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>
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- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 55
<PAGE>
LOGO-------------------------------------------------INVESTMENT CLASS PROSPECTUS
January 31, 1997
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds
One Tower Bridge Services Company
West Conshohocken, 73 Tremont Street
Boston Massachusetts 02108-0913
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 Shareholder Information 37
Prospectus Summary 4 Purchase of Shares 37
Financial Highlights 7 Redemption of Shares 39
Yield and Total Return 12 Shareholder Services 40
Suitability 13 Valuation of Shares 40
Investment Limitations 14 Dividends, Capital Gains
Portfolio Summaries 15 Distributions
Equity Investments 15 and Taxes 42
Fixed-Income Investments 17 Investment Adviser 44
Prospectus Glossary: Portfolio Management 46
Strategies 23 Administrative Services 48
Investments 27 General Distribution Agent 48
Portfolio Transactions 48
Other Information 48
Trustees and Officers 49
MILLER
ANDERSON
& SHERRERD,LLP ONE TOWER BRIDGE o WEST CONSHOCKEN, PA 19428-8185--------------
<PAGE>
LOGO------------------------------------------------------------------PROSPECTUS
January 31, 1997
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Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
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MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, six of which are described in this Prospectus. Each portfolio in
this Prospectus operates as a separate diversified investment company. The
investment objective of each portfolio is described with a summary of investment
policies as referenced below. This Prospectus offers the Adviser Class Shares of
the Fund. The Fund also offers Institutional Class Shares and Investment Class
Shares.
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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.
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PORTFOLIO PAGE REFERENCE
How to Use This Fixed Income 16 Prospectus Glossary:
Prospectus: 3 High Yield 17 Strategies 20
Portfolio Summaries: Limited Duration 18 Investments 24
Mid Cap Growth 14 Balanced 19 General Shareholder
Value 15 Information: 36
Table of Contents: 51
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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 31, 1997 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.
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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
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<PAGE>
EXPENSE SUMMARY - ADVISER CLASS SHARES
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
annual expenses and fees set forth below are estimated based upon the
portfolios attaining certain average asset levels. The Adviser may from time
to time waive fees or reimburse expenses thereby reducing total operating
expenses.
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 0.25%
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
---------------- ------------ ---------- -----------
<S> <C> <C> <C>
Mid Cap Growth 0.500% 0.150% 0.900%
Value 0.500* 0.150 0.900
Fixed Income 0.375 0.155 0.780
High Yield 0.375 0.175 0.800
Limited Duration 0.300* 0.150 0.700
Balanced 0.450 0.200 0.900
</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
expenses that otherwise would be deducted from portfolio assets.
* The Adviser has voluntarily agreed to waive advisory fees and/or reimburse
certain other expenses, to the extent necessary, to keep the Total Operating
Expenses from exceeding, 0.900% and 0.700% for the Value and Limited Duration
Portfolios, respectively. Absent such waivers or reimbursements the Total
Operating Expenses would be 0.940% for the Value Portfolio. There are no such
waivers or reimbursements for the Limited Duration Portfolio.
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MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<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. Long-term shareholders may
eventually pay more than the economic equivalent of the maximum front-end
sales charge otherwise permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
Portfolio 1 year 3 year 5 year 10 year
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<S> <C> <C> <C> <C>
Mid Cap Growth $9 $29 $50 $111
Value 9 29 50 111
Fixed Income 8 25 43 97
High Yield 8 26 44 99
Limited Duration 7 22 39 87
Balanced 9 29 50 111
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</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 7;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all
portfolios begins on page 11;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies
begin on page 14;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 20;
GENERAL SHAREHOLDER INFORMATION begins on page 36.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
PROSPECTUS SUMMARY
EQUITY PORTFOLIOS
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.
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
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.
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.
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.
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.
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MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 that may be acquired by the Portfolios 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;
o Each 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 Each portfolio may invest in certain instruments such as Forwards, certain
types of Futures & Options, certain types of Mortgage Securities and
When-Issued Securities which require the portfolio to segregate some or
all of its cash or liquid securities to cover its obligations pursuant to
such instruments. As asset segregation reaches certain levels, a portfolio
may lose flexibility in managing its investments properly, responding to
shareholder redemption requests, or meeting other obligations and may be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
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 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; and
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
HOW TO INVEST: Adviser Class Shares of each portfolio are available to
Shareholders with combined investments of $500,000 and Shareholder
Organizations who have a contractual arrangement with the Fund or the Fund's
Distributor, 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 Institutional and Investment Class Shares
which differ from the Adviser 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. 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 $40.9 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 serves as Transfer Agent to
the Fund. See Administrative Services.
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MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratio for a share of each Portfolio 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
and incorporated by reference in the Statement of Additional Information. The
Fund's financial statements for the year ended September 30, 1996 have been
examined by Price Waterhouse LLP whose opinion thereon (which was
unqualified) is also incorporated by reference in the Statement of Additional
Information.
The Adviser Class shares of the Mid Cap Growth, Fixed Income, High Yield,
Limited Duration and Balanced Portfolios had not commenced operations as of
September 30, 1996, therefore, Institutional Class share financial
information is provided to investors for informational purposes only and
should be referred to as a historical guide to a Portfolio's operations and
expenses. Past performance does not indicate future results.
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<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net Other
Beginning Investment (realized and Investment investment capital Distri-
of Period Income unrealized) Activities income) gains) butions
---- --------- ---------- ------------- ---------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Institutional Class Operations 3/30/90)#, ##, +++
1996 $18.60 $0.01 $ 4.70 $ 4.71 ($ 0.03) ($ 2.75) --
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) -- --
Value Portfolio (Commencement of Adviser Class Operations 7/17/96)##
1996 $14.11 $0.01 $ 1.49 $ 1.50 -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Total Value- End of Expenses Net Income Portfolio Average
Distri- End of Total Period to Average to Average Turnover Commission
butions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Institutional Class Operations 3/30/90)#, ##, +++
1996 ($ 2.78) $20.53 28.81% $403,281 0.60% 0.04% 141% $0.0491
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
Value Portfolio (Commencement of Adviser Class Operations 7/17/96)##
1996 -- $15.61 10.63% $ 15,493 0.86%* 1.66%* 53% $0.0572
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
# Formerly Emerging Growth Portfolio (through May 17, 1995)
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Mid Cap Growth Portfolio excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be 0.60%. For the period ended September 30, 1996,
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 be 0.85%*
### For fiscal years beginning on or after Sepember 1, 1995 a fund is required
to disclose the average commission rate per share it paid for trades on
which commissions were charged.
+++ Adjusted to reflect a 2.5 for 1 share split as of August 13, 1993.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
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<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net Other
Beginning Investment (realized and Investment investment capital Distri-
of Period Income unrealized) Activities income) gains) butions
---- --------- ---------- ------------- ---------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)##, +++
1996 $11.82 $0.78 $ 0.08 $ 0.86 ($ 0.79) ($ 0.06) --
1995 10.93 0.80 0.69 1.49 (0.60) -- --
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($0.13)+
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) --
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) --
1991 10.94 0.94 1.25 2.19 (0.93) -- --
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) --
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) --
1988 10.86 0.97 0.43 1.40 (0.86) -- --
1987 11.95 0.93 (0.61) 0.32 (0.91) (0.50) --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Total Value- End of Expenses Net Income Portfolio
Distri- End of Total Period to Average to Average Turnover
butions Period Return (thousands) Net Assets Net Assets Rate
---- ------- --------- ------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)##, +++
1996 ($ 0.85) $11.83 7.63% $1,790,146 0.48% 6.77% 162%
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
</TABLE>
+ Represents distributions in excess of realized net gain.
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the 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%.
+++ Adjusted to reflect a 2.5 for 1 share split as of August 13, 1993.
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MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net Other
Beginning Investment (realized and Investment investment capital Distri-
of Period Income unrealized) Activities income) gains) butions
---- --------- ---------- ------------- ---------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Institutional Class Operations 2/28/89)#, ##, +++
1996 $ 9.08 $0.88 $ 0.28 $1.16 ($0.92) -- --
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) -- --
Limited Duration Portfolio (Commencement of Institutional Class Operations 3/31/92)#, ##, +++
1996 $10.41 $0.58 ($ 0.03) $0.55 ($0.58) -- --
1995 10.19 0.56 0.22 0.78 (0.55) -- ($ 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) -- --
Balanced Portfolio (Commencement of Institutional Class Operations 12/31/92)##, +++
1996 $13.06 $0.53 $ 1.15 $1.68 ($0.50) ($0.43) --
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) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Total Value- End of Expenses Net Income Portfolio Average
Distri- End of Total Period to Average to Average Turnover Commission
butions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Institutional Class Operations 2/28/89)#, ##, +++
1996 ($0.92) $ 9.32 13.83% $289,810 0.49% 10.04% 115% --
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
Limited Duration Portfolio (Commencement of Institutional Class Operations 3/31/92)#, ##, +++
1996 ($0.58) $10.38 5.47% $123,227 0.43%++ 5.65% 174% --
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
Balanced Portfolio (Commencement of Institutional Class Operations 12/31/92)##, +++
1996 ($0.93) $13.81 13.47% $300,868 0.57% 3.85% 110% $0.0521
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
</TABLE>
<PAGE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ For the years indicated, the Adviser 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 and
Limited Duration Portfolios from exceeding 0.525% 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; 0.03% and 0.02% for the Limited
Duration Portfolio for the years ended September 30, 1993 and 1995,
respectively.
# Formerly High Yield Securities Portfolio and Limited Duration Fixed Income
Portfolio, respectively (through December 23, 1994).
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the High Yield, Limited Duration and Balanced
Portfolios excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would be 0.49%, 0.42%
and 0.57%, respectively, for 1995 and 0.48%, 0.42%, and 0.57% respectively,
for 1996.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on
which commissions were charged.
+++ Adjusted to reflect a 2.5 for 1 share split as of August 13, 1993.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossay MAS Funds - 9
<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 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 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.
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.
- --------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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.
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 Fixed Income Portfolio 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.
Portfolio turnover rates for certain portfolios as of September 30, 1996
were: Mid Cap Growth - 141%, Fixed Income - 162%, High Yield - 115%, Limited
Duration - 174% and Balanced - 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
bro-
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
kerage 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 or
as detailed in the Investment Limitations, 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.
(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.
(c) 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) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (3)
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; and (4) asset-backed
securities will be classified according to the underlying assets securing
such securities;
(d) 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;
(e) 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);
- --------------------------------------------------------------------------------
MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(f) each portfolio may pledge, mortgage or hypothecate assets in an amount up
to 50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff; and
(g) a portfolio will not invest its assets in securities of any investment
company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<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: The Adviser uses a four-part process combining
quantitative, fundamental, and valuation
analysis with a strict sales discipline.
Stocks that pass an initial screen based on
estimate revisions undergo detailed
fundamental research. Valuation analysis is
used to eliminate the most overvalued
securities. Holdings are sold when their
estimate-revision scores fall to unacceptable
levels, when fundamental research uncovers
unfavorable trends, or when their valuations
exceed the level that the Adviser believes is
reasonable given their growth prospects.
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
- --------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</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
- --------------------------------------------------------------------------------
MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<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 by earning a
high rate of 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Emerging Markets Issuers High Yield Repurchase Agreements
Investments: Asset-Backeds Floaters Inverse Floaters SMBS
Brady Bonds Foreign Bonds Investment Companies Structured Notes
Cash Equivalents Foreign Currency Loan Participations Swaps
CMOs Foreign Equities Mortgage Securities U.S. Governments
Convertibles Forwards Municipals When Issued
Corporates Futures & Options Preferred Stock Zero Coupons
Eastern European Issuers
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
Emerging Markets Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies CMOs Futures & Options Swaps
Investments: Asset-Backeds Convertibles Mortgage Securities U.S. Governments
Brady Bonds Corporates Repurchase Agreements When Issued
Cash Equivalents Floaters Structured Notes Zero Coupons
</TABLE>
Comparative Index: Salomon 1-3 Year Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<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 determines
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters Rights
Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Investment Funds Structured Notes
Brady Bonds Foreign Currency Loan Participations Swaps
Cash Equivalents Foreign Equities Mortgage Securities U.S. Governments
CMOs Forwards Municipals Warrants
Common Stock Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates
</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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<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
Portfolio, the Adviser selects fixed-income securities not only on the basis
of judgments regarding Maturity and Duration Management and Value
- --------------------------------------------------------------------------------
MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
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 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.
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.
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MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
The following table 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 as of September 30, 1996 (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.
<TABLE>
<CAPTION>
High Yield Portfolio Fixed Income Portfolio
<S> <C> <C> <C>
QUALITY QUALITY
TSY, AGY, AAA 5.28% TSY, AGY, AAA 71.29%
AA 0.00% AA 7.83%
A 0.00% A 5.83%
BAA 3.97% BAA 4.62%
BA 30.28% BA 5.66%
B 47.43% B 2.84%
CAA 5.91% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 7.13% Not Available 1.93%
TOTAL 100.00% TOTAL 100.00%
</TABLE>
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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<PAGE>
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: At times it is anticipated that a substantial portion 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.
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.
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.
ADRs also include American Depositary Shares.
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MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<PAGE>
(2) Each portfolio may invest in commercial paper rated at time of
purchase by one or more Nationally Recognized Statistical Rating
Organizations ("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.
Like bonds in general, mortgage-backed securities will generally decline
in price when interests rates rise. Rising interest rates also tend to
discourage refinancings of home mortgages with the result that the average
life of mortgage securities held by a portfolio may be lengthened. This
extension of average life causes the market price of the securities to
decrease further than if their average lives were fixed. In part to
compensate for these risks, mortgages will generally offer higher yields than
comparable bonds. However, when interest rates fall, mortgages may not enjoy
as large a gain in market value due to prepayment risk because additional
mortgage prepayments must be reinvested at lower interest rates.
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.
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MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar type of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or
pool of securities by a foreign or U.S. corporation. Depositary Receipts may
be sponsored or unsponsored. The depositary of unsponsored Depositary
Receipts may provide less information to receipt holders.
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 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 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 during the 1940's, 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<PAGE>
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,
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 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.
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. Foreign Equities also include Depositary Receipts.
Investing in foreign companies involves certain special considerations which
are not typically associated with investing in U.S. companies (see Foreign
Investing).
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 do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they 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 denomi-
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MAS Funds - 28 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
nated 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 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 transaction hedge or position hedge to the
extent that the value of a security denominated in 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. For proxy hedges, cross-hedges, or a synthetic position, there
is an additional risk in that those transactions create residual foreign
currency exposure. When a portfolio enters into a forward contract for
purposes of creating a position hedge, transaction hedge, cross hedge, or a
synthetic security, it will generally be required to hold 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 con-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<PAGE>
sidered 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."
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
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MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<PAGE>
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.
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.
Possible Risks: 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. Like bonds in
general, mortgage-backed securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. However, when interest rates fall,
mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the 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.
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
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MAS Funds - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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
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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 33
<PAGE>
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 interest-only or 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.
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
notional amount.
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MAS Funds - 34 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 or liquid securities. 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 may 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 may be 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.
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 segregated
account consisting of cash or liquid securities 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 35
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
Adviser Class Shares are available to Shareholders with combined
investments of $500,000 and Shareholder Organizations who have a contractual
arrangement with the Fund or the Fund's Distributor, including institutions
such as trusts, foundations or broker-dealers purchasing for the accounts of
others.
Adviser Class Shares of each 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.
Initial Purchase by Mail: Subject to acceptance by the Fund, an account
may be opened by completing and signing an Account Registration Form
(provided at the end of the prospectus) and mailing it to the MAS Funds, c/o
Miller Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken,
Pennsylvania 19428-0868 together with a check ($500,000 minimum) payable to
MAS Funds.
The portfolios requested should be designated on the Account Registration
Form. 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. 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, Adviser Class
Shares of each portfolio may also be purchased by wiring Federal Funds to the
Fund's Custodian Bank, The Chase Manhattan Bank (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, notification must
be given to MAS Funds' Client Services Group at 1-800-354-8185 prior to the
determination of net asset value. Adviser 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
Additional Investments: Additional investments of Adviser 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
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MAS Funds - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
Funds' Client Services Group at 1-800-354-8185 prior to the determination of
net asset value.
Other Purchase Information: The Fund reserves the right, in its sole
discretion, to suspend the offering of Adviser 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 Adviser 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.
Adviser 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 may pay compensation to or receive compensation from Shareholder
Organizations for the sale of Adviser Class Shares.
REDEMPTION OF SHARES
Adviser Class Shares of each portfolio may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of
Adviser 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 Adviser 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 Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 37
<PAGE>
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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, 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 Adviser Class Shares may be exchanged
for shares of the Fund's other portfolios offering Adviser Class Shares based
on the respective net asset values of the shares involved. 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 Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868.
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. The sale of shares may result in a capital gain or loss for tax
purposes.
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MAS Funds - 38 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868. As in the case of
redemptions, the written request must be received in good order as defined
above. Unless shares are being transferred to an existing account, requests
for transfer must be accompanied by a completed Account Registration Form for
the receiving party.
VALUATION OF SHARES
Mid Cap Growth and Value Portfolios:
Net asset value per share 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.
Fixed Income, High Yield and Limited Duration 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.
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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 39
<PAGE>
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 Portfolio: 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 Portfolio 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.
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 Value, Fixed Income, High Yield, Limited Duration and Balanced
Portfolios normally distribute substantially all of their net
investment income to shareholders in the form of quarterly dividends.
o The Mid Cap Growth Portfolio normally distributes substantially all of
its net investment income in the form of annual 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 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.
Federal Taxes: The following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. No attempt has been made to
- --------------------------------------------------------------------------------
MAS Funds - 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
present a detailed explanation of the federal income tax treatment of the
portfolio or its shareholders. In addition, state and local tax consequences
of an investment in the portfolio may differ from the Federal income tax
consequences described below. Accordingly, shareholders are urged to consult
their tax advisers regarding specific questions as to federal, state and
local taxes.
Each portfolio of the Fund intends to qualify for taxation as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code") so
that each portfolio will not be subject to Federal income tax to the extent
it distributes net investment company taxable income and net capital gains
(the excess of net long-term capital gain over net short-term capital loss)
to shareholders. Each Portfolio is treated as a separate entity for Federal
income tax purposes and is not combined with any of the Funds' other
portfolios. Dividends, either in cash or reinvested in shares, paid by a
portfolio from net investment income will be taxable to shareholders as
ordinary income. In the case of the Value, Mid Cap Growth, and Balanced
Portfolios, such dividends paid to corporate shareholders will generally
qualify in part for the dividends received deduction for corporations to the
extent attributable to dividends received by such portfolios from domestic
corporations. The Fund will send each shareholder of such portfolios 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, and 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 October, November or December by a portfolio will be
deemed to have been paid by such portfolio and received by shareholders on
December 31st of the year declared 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. No portfolio will be able to elect to treat shareholders as
having paid their proportionate share of such taxes for foreign tax credit
purposes.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 41
<PAGE>
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 upon request.
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, wholly owned by indirect subsidiaries of the 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 $40.9 billion in assets under
management.
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
-------
Mid Cap Growth Portfolio .500%
Value Portfolio .500
Fixed Income Portfolio .375
High Yield Portfolio .375
Limited Duration Portfolio .300
Balanced Portfolio .450
Until further notice, the Adviser has voluntarily agreed to waive advisory
fees and/or reimburse certain other expenses to the extent necessary to keep
Total Operating Expenses actually deducted from portfolio assets for the
Adviser Class of Value and Limited Duration Portfolios from exceeding 0.900%
and 0.700%, respectively.
For the fiscal year ended September 30, 1996, the Adviser received the
following as compensation for its services:
Rate
-------
Mid Cap Growth Portfolio .500%
Value Portfolio .500
Fixed Income Portfolio .375
High Yield Portfolio .375
Limited Duration Portfolio .300
Balanced Portfolio .450
- --------------------------------------------------------------------------------
MAS Funds - 42 Terms in bold type are defined in the Prospectus Glossary
<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:
Mid Cap Growth Portfolio: Arden C. Armstrong and Abhi Y. Kanitkar;
Value Portfolio: Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich;
Fixed Income: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley;
High Yield Portfolio: Stephen F. Esser, Thomas L. Bennett and Robert E.
Angevine;
Limited Duration Portfolio: Ellen D. Harvey, Scott F. Richard and Christian
G. Roth;
Balanced Portfolio: Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley;
A description of their business experience during the past five years is as
follows:
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He assumed responsibility for High Yield Portfolio in
1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986.
She assumed responsibility for the Mid Cap Growth Portfolio in 1990.
Richard M. Behler, Principal, Morgan Stanley, joined MAS in 1995. He served
as a Portfolio Manager from 1992 through 1995 for Moore Capital Management
and as Senior Vice President for Merrill Lynch Economics from 1987 through
1992. He assumed responsiblity for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
assumed responsibility for the Fixed Income Portfolio in 1984, the High Yield
Portfolio in 1985 and the Balanced Portfolio in 1992.
John D. Connolly, Principal, Morgan Stanley, joined MAS in 1990. He assumed
responsibility for the Mid Cap Growth Portfolio in 1990 and the Balanced
Portfolio in 1992.
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
assumed responsibility for the Fixed Income Portfolio in 1987.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the High Yield Portfolio in 1989.
Ellen D. Harvey, Principal, Morgan Stanley, joined MAS in 1984. She assumed
responsibility for the Limited Duration Portfolio in 1992.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Value Portfolio in 1997.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Value Portfolio in 1990.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 43
<PAGE>
Scott F. Richard, Managing Director, Morgan Stanley, 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 Limited Duration Portfolio in
1994.
Christian G. Roth, Principal, Morgan Stanley, joined MAS in 1991. He assumed
responsibility for the Limited Duration Portfolio in 1994.
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution, Inc.; joined MAS in 1987. He assumed responsibility for the
Balanced Portfolio in 1992.
Horacio A. Valeiras, Principal, Morgan Stanley; joined MAS in 1992. He served
as an International Strategist from 1989 through 1992 for Credit Suisse First
Boston and as a Director-Equity Research in 1992. He assumed responsibility
for the Balanced Portfolio in 1996.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
assumed responsibility for the Fixed Income Portfolio in 1984 and the
Balanced Portfolio in 1992.
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, 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.
DISTRIBUTION PLAN: Adviser Class Shares are sold without a sales charge, but
are subject to a Rule 12b-1 fee. The Fund, on behalf of the applicable
portfolio, will make monthly payments to the Fund's distributor under the
Distribution Plan approved by the Board of Trustees at an annual rate of up
to .25% of each portfolio's average daily net assets attributable to Adviser
Class Shares. The Fund's distributor will use the Rule 12b-1 fee it receives
for (i) compensation for its services in connection with distribution
assistance or provision of shareholder or account maintenance services, or
(ii) payments to financial intermediaries, plan fiduciaries, and investment
professionals, including the Adviser, for providing distribution support
services, and/or account maintenance services to shareholders (including,
where applicable, any underlying beneficial owners) of Adviser Class Shares.
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.
- --------------------------------------------------------------------------------
MAS Funds - 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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 2, 1997, Wendell & Co. (New York, NY) owned a controlling
interest (as that term is defined by Investment Company Act of 1940, as
amended) of the Balanced Portfolio.
Custodians: The Chase Manhattan Bank, 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Fund's Transfer Agent and dividend disbursing
agent.
Reports: Shareholders receive semi-annual 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 45
<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; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.;
Director, Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.;
Director, Federal National Mortgage Association; Director, Reliance Group
Holdings; Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee, Southern California
Edison Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services,
Inc.; Director, Legal and General America, Inc.; Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
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, MAS Funds; Principal, Morgan Stanley; 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, The Chase Manhattan Bank.
Lorraine Truten, CFA, Vice President, MAS Funds; Principal, Morgan
Stanley; Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP;
President, MAS Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan
Stanley; Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP;
formerly Assistant Vice President, Provident Financial Processing
Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis &
Bockius, LLP; formerly Attorney, Ropes & Gray.
- --------------------------------------------------------------------------------
MAS Funds - 46 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 47
<PAGE>
- --------------------------------------------------------------------------------
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Funds - 48 Terms in bold type are defined in the Prospectus Glossary
<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. - -
-------- ---------- -----------------
Form of Business Entity: / / Corporation / / Partnership
/ / Trust / / Other
--------------------------------------------------
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. - -
----------- ---------- -----------
===============================================================================
<PAGE>
/3/ INVESTMENT
For Purchase of:
<TABLE>
<CAPTION>
<S> <C>
/ / Mid Cap Growth Portfolio $__________________________
/ / Value Portfolio __________________________
/ / Fixed Income Portfolio __________________________
/ / High Yield Portfolio __________________________
/ / Limited Duration Portfolio __________________________
/ / Balanced Portfolio __________________________
</TABLE>
/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 persons
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 if no box is checked below.
The instructions provided below may only be changed by written notification.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
/ / Income dividends and capital gains to be reinvested 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds Subscription Account
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. The Internal Revenue Service does not require your
consent to any provision of this document other than the certifications required
to avoid backup withholding.
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
(X)
- ----------------------------------------------------------------------------
Signature Date
This application is separate from the prospectus
- --------------------------
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>
JANUARY 31, 1997
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds
One Tower Bridge Services Company
West Conshohocken, 73 Tremont Street
Pennsylvania 19428-2899 Boston, Massachusetts
02108-0913
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 Shareholder Information 36
Prospectus Summary 4 Purchase of Shares 36
Financial Highlights 7 Redemption of Shares 37
Yield and Total Return 10 Shareholder Services 38
Investment Suitability 11 Valuation of Shares 39
Investment Limitations 12 Dividends, Capital Gains
Portfolio Summaries 14 Distributions and Taxes 40
Equity Investments 14 Investment Adviser 42
Fixed-Income Investments 16 Portfolio Management 43
Prospectus Glossary: Administrative Services 44
Strategies 20 General Distribution Agent 44
Investments 24 Portfolio Transactions 44
Other Information 45
Trustees and Officers 46
<PAGE>
- --------------------------------------------------------------------------------
LOGO
------------------------
ADVISER CLASS PROSPECTUS
------------------------
MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
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<PAGE>
LOGO------------------------------------------------------------------PROSPECTUS
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January 31, 1997
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Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
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MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, three of which are described in this prospectus. The Advisory
Foreign Fixed Income, Advisory Mortgage and Emerging Markets 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 and
Emerging Markets Portfolios are non-diversified investment companies. The
investment objective of each portfolio is described with its investment policies
as referenced below.
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PORTFOLIO OBJECTIVES PAGE REFERENCE
----------------------------- --------------
Advisory Foreign Fixed Income 9
Advisory Mortgage 9
Emerging Markets 10
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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 31, 1997 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.
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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, 1996.
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
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income 0.000%* 0.124% 0.124%
Advisory Mortgage 0.000* 0.089 0.089
Emerging Markets 0.636* 0.544 1.180
Where applicable as described in Financial Highlights, the Total Operating
Expense ratios reflected in the table above may be 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 0.150%, 0.080% and 1.180% for the Advisory Foreign Fixed Income,
Advisory Mortgage and Emerging Markets Portfolios, respectively. Absent these
fee waivers by the Adviser, Total Operating Expenses would be 0.499%, 0.479%
and 1.290% for the Advisory Foreign Fixed Income, Advisory Mortgage and
Emerging Markets 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.
Portfolio 1 year 3 year 5 year 10 year
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income $ 1 $ 4 $ 7 $ 16
Advisory Mortgage 1 3 5 11
Emerging Markets 12 37 65 143
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MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<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;
SUMMARY PAGES of each portfolio's Objective, Policies and Strategies begin on
page 9;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 11;
GENERAL INFORMATION begins on page 24.
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.
The Emerging Markets Portfolio seeks to achieve long-term capital growth by
investing primarily in Common Stocks of Emerging Market Issuers. [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 that may be acquired by the Portfolios 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;
o Each portfolio may invest in certain instruments such as Forwards, certain
types of Futures & Options, certain types of Mortgage Securities and
When-Issued Securities which require the portfolio to segregate some or
all of its cash or liquid securities to cover its obligations pursuant to
such instruments. As asset segregation reaches certain levels, a portfolio
may lose flexibility in managing its investments properly responding to
shareholder redemption requests, or meeting other obligations and may be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses;
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
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 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 and Emerging Markets 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 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 $40.9 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, serves as Transfer Agent
to the Fund. See Administrative Services.
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MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<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, Advisory Mortgage
and Emerging Markets Portfolios throughout the periods presented and is part
of the Portfolios' audited Annual Report to Shareholders for the period ended
September 30, 1996 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, 1996 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 Capital Gains
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
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)##
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.80 $0.68 $1.02 $1.70 ($0.66) ($0.11) --
1995 10.00 0.74 0.44 1.18 (0.38) -- --
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)##
1996 $10.41 $0.72 ($0.06) ($0.66) ($0.72) ($0.03) ($0.03)+
1995 10.00 0.25 0.35 0.60 (0.19) -- --
Emerging Markets Portfolio (Commencement of Operations 2/28/95)##
1996 $11.63 $0.19 $0.45 $0.64 ($0.17) ($0.58) --
1995 10.00 0.10 1.53 1.63 -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)##
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 ($0.77) $11.73 16.47% $ 236,092 0.12%++ 6.06% 170% --
1995 (0.38) 10.80 12.12 537,133 0.16*++ 7.44* 96
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)##
1996 ($0.78) $10.29 6.56% $1,974,592 0.09%++ 7.17% 139% --
1995 (0.19) 10.41 6.03 1,443,038 0.10*++ 6.72* 110
Emerging Markets Portfolio (Commencement of Operations 2/28/95)##
1996 ($0.75) $11.52 6.21% $ 32,984 1.18%++ 1.62% 108% $0.0014
1995 -- 11.63 16.30 42,459 1.18*++ 2.04* 63
</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 Advisory Foreign Fixed Income,
Advisory Mortgage and Emerging Markets Portfolios from exceeding 0.15%,
0.08% and 1.18% respectively. Voluntarily waived fees and reimbursed
expenses totalled 0.38%*, 0.49%* and 0.29%*, respectively, for the period
ended September 30, 1995 and 0.38%, 0.39% and 0.11%, respectively, for the
year ended September 30, 1996.
## For the periods ended September 30, 1995 and 1996, 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, for 1995 and 0.12% and 0.08% for
1996. The Ratio of Expenses to Average Net Assets for the Emerging
Markets Portfolio also excluded such offers but would not significantly
differ with their inclusion.
### For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate paid for trades on which
commissions were charged.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<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 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. The Advisory Foreign Fixed Income and Advisory
Mortgage Portfolio 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 stock and bond
markets.
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
- --------------------------------------------------------------------------------
MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Advisory Foreign Fixed Income and Advisory Mortgage
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. Portfolio turnover rates for the
portfolios as of September 30, 1996 are as follows: Advisory Foreign Fixed
Income - 170%, Advisory Mortgage - 139% and Emerging Markets - 108%. 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 and Emerging Markets Portfolios. However, all 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 Advisory Foreign Fixed Income and Emerging Markets
Portfolios. However, all Portfolios will comply with the diversification
requirements imposed by Sub-Chapter M of the Internal Revenue Code;
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<PAGE>
(c) 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) with
respect to the Emerging Markets Portfolio, utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (3) with respect to
the Emerging Markets Portfolio, 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; (4) asset-backed securities will be
classified according to the underlying assets securing such securities; and
(5) the Advisory Mortgage Portfolio will concentrate in Mortgage Securities.
(d) 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;
(e) 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);
(f) a portfolio may pledge, mortgage or hypothecate assets in an amount up to
50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff; and
(g) a portfolio will not invest its assets in securities of any investment
company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d), and (e), 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 or Emerging Markets Portfolios. 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.
- --------------------------------------------------------------------------------
MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<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 Duration: Average weighted maturity generally greater
than 5 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable: Agencies Eastern European Issuers Inverse Floaters SMBS
Investments: Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals U.S. Governments
CMOs Forwards Preferred Stock When Issued Securities
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates
</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
- --------------------------------------------------------------------------------
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 organization will be
Specifications: Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater
than 7 years
Duration generally between 2 and 7 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Floaters Mortgage Securities Swaps
Investments: Asset-Backeds Futures & Options Repurchase Agreements U.S. Governments
Cash Equivalents Inverse Floaters SMBS When Issued Securities
CMOs Investment Companies Structured Notes Zero Coupons
</TABLE>
Benchmark Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<PAGE>
Emerging Markets Portfolio - (a non-diversified portfolio available only to
advisory clients of MAS)
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 attrativeness of emerging markets and
individual emerging market securities. The
Portfolio is available only to the Adviser's
private advisory clients.
Policies: Generally at least 65% invested in Equity
Securities of Emerging Markets Issuers
Derivatives may be used to pursue portfolio
strategy.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Eastern European Issuers High Yield Structured Investments
Investments: Agencies Emerging Markets Issuers Investment Companies Structured Notes
Brady Bonds Foreign Bonds Investment Funds Swaps
Cash Equivalents Foreign Currency Loan Participations U.S. Governments
Common Stocks Foreign Equities Preferred Stock Warrants
Convertibles Forwards Repurchase Agreements When Issued
Corporates Futures & Options Rights Zero Coupons
</TABLE>
Comparative Index: MSCI Emerging Markets Free Index
Strategies: Emerging Markets Investing
Foreign Investing
Non-Diversified Status
- --------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
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/or 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).
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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
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.
High Yield Investing: The Emerging Markets Portfolio may purchase High Yield
securities which involves investing in these 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 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.
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 the Emerging Markets Portfolio with more than 5%
invested in High Yield securities as of September 30, 1996 (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. The portfolio's debt holdings total less
than 100% because it also invests in Equity Securities.
Emerging Markets Portfolio
QUALITY
TSY, AGY, AAA 0.00%
AA 0.00%
A 0.00%
BAA 0.50%
BA 0.00%
B 1.12%
CAA 0.00%
CA OR BELOW 0.00%
Not Available 9.59%
TOTAL 11.21%
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MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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 invest
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<PAGE>
ment 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.
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.
ADRs also include American Depositary Shares.
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 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:
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MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(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.
(2) Each portfolio may invest in commercial paper rated at time of purchase
by one or more Nationally Recognized Statistical Rating Organizations
("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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<PAGE>
Like bonds in general, mortgage-backed securities will generally decline in
price when interests rates rise. Rising interest rates also tend to
discourage refinancings of home mortgages with the result that the average
life of mortgage securities held by a portfolio may be lengthened. This
extension of average life causes the market price of the securities to
decrease further than if their average lives were fixed. In part to
compensate for these risks, mortgages will generally offer higher yields than
comparable bonds. However, when interest rates fall, mortgages may not enjoy
as large a gain in market value due to prepayment risk because additional
mortgage prepayments must be reinvested at lower interest rates.
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 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.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar types of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or
pool of securities by a foreign or U.S. corporation. Depositary Receipts may
be sponsored or unsponsored. The depositary of unsponsored Depositary
Receipts may provide less information to receipt holders.
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 economies. Unstable economic and
political conditions may adversely affect security values. Upon the accession
to power of Communist regimes during the 1940's, 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
emerg-
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MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
ing 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,
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 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.
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. Foreign Equities also include Depositary Receipts.
Investing in foreign companies involves certain special considerations which
are not typically associated with investing in U.S. companies (see Foreign
Investing).
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 do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date.
Also, although such contracts can 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<PAGE>
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 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 transaction hedge or position hedge to the
extent that the value of a security denominated in 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. For proxy hedges, cross-hedges, or a synthetic position, there
is an additional risk in that those transactions create residual foreign
currency exposure. When a portfolio enters into a forward contract for
purposes of creating a position hedge, transaction hedge, cross hedge, or a
synthetic security, it will generally be required to hold 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:
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MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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."
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 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 purchased
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 coun-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<PAGE>
tries 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 Organizations ("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.
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), 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.
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.
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MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
Possible Risks--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. Like bonds in
general, mortgage-backed securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further
than if their average lives were fixed. However, when interest rates fall,
mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the 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.
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.
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 per-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
mit 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 repurchase 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 interest-only or 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 pay-
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MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
ment 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
notional 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 or liquid securities. 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 may 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 may be 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.
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 segregated
account consisting of cash or liquid securities 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 opportu-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<PAGE>
nity 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 INFORMATION
PURCHASE OF SHARES
The Advisory Foreign Fixed Income, Advisory Mortgage and Emerging Markets
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.
VALUATION OF SHARES
Advisory Foreign Fixed Income and Advisory Mortgage 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
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MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
Emerging Markets Portfolio: Net asset value per share is determined by
dividing the total market value of the portfolio's investments and other
assets, less any liabilities, by the total outstanding shares of the
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 Board of Trustees.
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. The Emerging Markets
Portfolio normally distributes substantially all of its net investment income
in the form of annual dividends.
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.
If any portfolio does not have income available to distribute, as determined
in compliance with the appropriate tax laws, no distribution will be made.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<PAGE>
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 following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. No attempt has been made to
present a detailed explanation of the federal income tax treatment of the
portfolio or its shareholders. In addition, state and local tax consequences
of an investment in the portfolio may differ from the Federal income tax
consequences described below. Accordingly, shareholders are urged to consult
their tax advisers regarding specific questions as to federal, state and
local taxes.
Each portfolio intends to qualify for taxation as a regulated investment
company under the Internal Revenue Code of 1986 (the "Code") so that each
portfolio will not be subject to Federal income tax to the extent it
distributes net investment company taxable income and net capital gains (the
excess of net long-term capital gain over net short-term capital loss) to
shareholders. Each Portfolio is treated as a separate entity for Federal
income tax purposes and is not combined with any of the Funds' other
portfolios. 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 and will generally not qualify for the dividends received deduction
for corporations.
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, and are not eligible for the dividends received
deduction for corporations. Shareholders are notified annually by the Fund as
to the 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 October, November or December by a portfolio will be
deemed to have been paid by such portfolio and received by shareholders on
December 31st of the year declared 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.
- --------------------------------------------------------------------------------
MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
The Advisory Foreign Fixed Income and the Emerging Markets 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. The portfolios 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).
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 upon request.
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 $40.9 billion in assets under management.
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 portfolio's average daily net
assets for the quarter:
Rate
---------
Advisory Foreign Fixed Income 0.375%*
Advisory Mortgage 0.375*
Emerging Markets 0.750*+
* Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees for the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios. 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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<PAGE>
for the Advisory Foreign Fixed Income, Advisory Mortgage and Emerging
Markets Portfolios from exceeding 0.15%, 0.08% and 1.18%, respectively.
Absent these fee waivers and reimbursements by the Adviser, Total Operating
Expenses would be 0.50%, 0.48% and 1.29% for the Advisory Foreign Fixed
Income, Advisory Mortgage and Emerging Markets Portfolios, respectively.
+ 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.
For the fiscal year ended September 30, 1996, the Adviser received no
compensation for its services under the Investment Advisory Agreement with
respect to the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios, and received compensation at the rate of 0.636% of average net
assets with respect to the Emerging Markets Portfolio.
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;
Emerging Markets Portfolio - Horacio A. Valerias.
A description of their business experience during the past five years is as
follows:
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
assumed responsibility for the Advisory Mortgage Portfolio in 1995.
J. David Germany, Managing Director, Morgan Stanley, 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, Managing Director, Morgan Stanley, 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.
Horacio A. Valerias, Principal, Morgan Stanley, 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 Emerging Markets Portfolio in 1993.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
assumed responsibility for the Advisory Foreign Fixed Income 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, 73
- --------------------------------------------------------------------------------
MAS Funds - 28 erms in bold type are defined in the Prospectus Glossary
<PAGE>
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-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.
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<PAGE>
As of January 2, 1997, Ministers and Missionaries (New York, NY) and the
Smithsonian Institution (New York, NY) owned controlling interests (as that
term is defined by the Investment Company Act of 1940, as amended) in the
Emerging Markets Portfolio.
Custodians: The Chase Manhattan Bank, 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Fund's Transfer Agent and dividend disbursing
agent.
Reports: Shareholders receive semi-annual 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 Portfolios are closed
for business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
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; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.;
Director, Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.;
Director, Federal National Mortgage Association; Director, Reliance Group
Holdings; Director, Melville Corporation.
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;
Director, Electro Rent Corporation; Trustee, Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services, Inc.;
Director, Legal and General America, Inc.; Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
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.
- --------------------------------------------------------------------------------
MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
- --------------------------------------------------------------------------------
James D. Schmid, President, MAS Fund; Principal, Morgan Stanley; 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, MAS Funds; Principal, Morgan Stanley;
Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS
Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley;
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius,
LLP; formerly Attorney, Ropes & Gray.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<PAGE>
LOGO------------------------------------------------------------------PROSPECTUS
January 31, 1997
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
General Information
Fund Expenses 2 Purchase of Shares 24
Prospectus Summary 3 Redemption of Shares 24
Financial Highlights 5 Valuation of Shares 24
Yield and Total Return 6 Dividends, Capital Gains
Investment Suitability 6 Distributions and Taxes 25
Investment Limitations 7 Investment Adviser 27
Portfolio Summaries 9 Portfolio Management 28
Prospectus Glossary: Administrative Services 28
Strategies 11 General Distribution Agent 29
Investments 14 Portfolio Transactions 29
Trustees and Officers 30
MILLER
ANDERSON
* SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 800-354-8285----
<PAGE>
LOGO -----------------------------------------------------------------PROSPECTUS
Small Cap Value Portfolio
January 31, 1997
- --------------------------------------------------------------------------------
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, one of which is described in this Prospectus. The investment
objective of the Small Cap Value Portfolio (the "portfolio") is described with a
summary of investment policies as referenced below. This Prospectus offers the
Institutional Class Shares of the Fund. This portfolio is not currently being
offered to new investors. This Prospectus is for use only by defined
contribution plan participants.
- --------------------------------------------------------------------------------
PORTFOLIO PAGE REFERENCE
How to Use This
Prospectus: 2
Prospectus Summary: 3
Prospectus Glossary:
Strategies 10
Investments 10
General Shareholder
Information: 15
Table of
Contents: Back Cover
- --------------------------------------------------------------------------------
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 31, 1997 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 the portfolio will incur either directly or indirectly. The
expenses and fees set forth below are based on the portfolio's operations
during the fiscal year ended September 30, 1996.
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
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
--------------- ------------ ---------- -----------
Small Cap Value 0.750% 0.112% 0.862%
EXAMPLE
The purpose of this table is to assist in understanding the various expenses
that a shareholder in the 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.
Portfolio 1 year 3 year 5 year 10 year
--------------- -------- -------- -------- ---------
Small Cap Value $9 $28 $48 $106
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 including INVESTMENT LIMITATIONS begins on page 6;
A SUMMARY PAGE for the portfolio's Objective, Policies and Strategies begins
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 SHAREHOLDER INFORMATION begins on page 15.
- --------------------------------------------------------------------------------
MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
PROSPECTUS SUMMARY
The Small Cap Value Portfolio (not currently offered to new investors) seeks
to achieve above-average total return over a market cycle of three to five
years, consistent with reasonable risk, by investing primarily in a
diversified portfolio of Common Stocks with equity capitalizations in the
range of companies represented in the Russell 2000 Index which are deemed by
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.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to the Portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold
type:
o The 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 The portfolio may participate in a Securities Lending program which
entails a risk of loss should a borrower fail financially;
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 the 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;
o Fixed-Income Securities that may be acquired by the Portfolio 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 The 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 The portfolio may invest in certain instruments such as Forwards, certain
types of Futures & Options, certain types of Mortgage Securities and
When-Issued Securities which require the portfolio to segregate some or
all of its cash or liquid securities to cover its obligations pursuant to
such instruments. As asset segregation reaches certain levels, the
portfolio may lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other
obligations and may be forced to sell other securities that it wanted to
retain or to realize unintended gains or losses; and
o Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies. See
Foreign Investing. The portfolio may also engage in foreign currency
exchange transactions. See Forwards, Futures & Options, and Swaps.
HOW TO INVEST: This Prospectus is for use only by defined contribution plan
participants who may invest according to plan specifications. For information
on how to purchase, redeem, or exchange Institutional Class Shares,
participants should contact their plan administrator.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
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 $40.9 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, serves as Transfer Agent
to the Fund. See Administrative Services.
- --------------------------------------------------------------------------------
MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<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, 1996 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)
<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>
Small Cap Value Portfolio (Commencement of Operations 7/1/86)#, ##
1996 $18.28 $0.18 $ 3.62 $ 3.80 ($ 0.20) ($ 2.24) --
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) -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
---- ------------- --------- -------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap Value Portfolio (Commencement of Operations 7/1/86)#, ##
1996 ($ 2.44) $19.64 24.00% $585,457 0.86% 0.99% 145% $0.0498
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
</TABLE>
# Formerly Small Capitalization Value Portfolio (through December 23, 1994)
## For the years ended September 30, 1995 and 1996, 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 fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
YIELD AND TOTAL RETURN:
From time to time the portfolio 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, the 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 the 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. The portfolio may also advertise or quote a yield
which is gross of expenses.
The performance of the 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 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 the portfolio and should be read in
conjunction with specific information about the portfolio.
Objectives: The 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 the portfolio may
not be as great as that achieved by another portfolio that can invest in a
broader range of securities. The objective of the portfolio is fundamental
and may only be changed with approval of holders of a majority of the shares
of the portfolio. The achievement of the portfolio's objective cannot be
assured.
Suitability: The portfolio is designed for long-term investors who can accept
the risks entailed in investing in the stock and bond markets, and is not
meant to provide a vehicle for playing short-term swings in the market. The
portfolio is designed principally for the investments of tax-exempt fiduciary
investors who are entrusted with the
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MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
responsibility of investing assets held for the benefit of others. Since such
investors are not subject to Federal income taxes, securities transactions
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.
Securities Lending: The 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, the 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: The portfolio 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 portfolio 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 portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. The portfolio's
turnover rate for the fiscal year ended September 30, 1996 was 145%. High
rates of portfolio turnover necessarily result in correspondingly heavier
brokerage and portfolio trading costs which are paid by the portfolio.
Cash Equivalents/Temporary Defensive Investing: Although the portfolio
intends to remain substantially fully invested, a small percentage of the
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
the portfolio. In addition, the 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 the
portfolio without limit.
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. The portfolio will not concentrate investments in any one industry.
Investment Limitations: The 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, the 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.
(b) with respect to 75% of its assets, the 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.
(c) the 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) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (3)
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, and (4) asset-backed
securities will be classified according to the underlying assets securing
such securities.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<PAGE>
(d) the 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;
(e) the 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);
(f) a portfolio may pledge, mortgage or hypothecate assets in an amount up to
50% of its total assets, provided that the portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff; and
(g) the portfolio will not invest its assets in securities of any Investment
Company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), 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 the 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.
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MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Small 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 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 $1
billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: Russell 2000 Index
Strategies: Value Stock Investing
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
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
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. ADRs also include
American Depositary Shares.
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 or any of
several other agencies.
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).
The 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.
The portfolio 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) The portfolio may invest in commercial paper rated at time of purchase by
one or more Nationally Recognized Statistical Rating Organizations ("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);
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MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(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.
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.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar types of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or pool
of securities by a foreign or U.S. corporation. Depositary Receipts may be
sponsored or unsponsored. The depositary of unsponsored Depositary Receipts may
provide less information to receipt holders.
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. The 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, Forwards, Futures and Options, and Swaps.
Equity Securities: Commonly include but are not limited to Common Stock,
Preferred Stock, ADRs, Rights, Warrants, Convertibles, and Foreign Equities. See
the 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, Convertibles, Cash Equivalents,
Repurchase Agreements, Preferred Stock, and Foreign Bonds. 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.
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,
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
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; and (3)
non-government foreign corporate debt securities.
Foreign Currency: The portfolio may invest in foreign securities and thereafter
may regularly transact security purchases and sales in foreign currencies. The
portfolio 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. Foreign Equities also include Depositary Receipts. Investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies (see Foreign Investing).
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 do not eliminate fluctuations caused by
changes in the local currency prices of the securities, but rather, they
establish an exchange rate at a future date. Also, although such contracts can
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.
The 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
portfolio 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 the portfolio has or expects to have portfolio
exposure. The portfolio 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. The
portfolio's entry into forward contracts, as well as any use of cross or proxy
hedging techniques will generally require the portfolio to hold liquid
securities or cash equal to the portfolio's obligations in a segregated account
throughout the duration of the contract.
The 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 the 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, the 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 transaction hedge or position hedge to the extent
that the value of a security denominated in foreign currency is not exactly
matched with the portfolio's obligation under the forward contract. On the date
of maturity, the 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. For
proxy hedges, cross-hedges, or a synthetic position, there is an additional risk
in that those transactions create residual foreign currency exposure. When the
portfolio enters into a forward contract for purposes of creating a position
hedge, transaction hedge, cross hedge, or a synthetic security, it will
generally be required to hold 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 secu-
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MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
rity, 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.
The 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 the portfolio and the prices of futures and options relating
to the stocks, bonds or futures contracts purchased or sold by the 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 the 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 the 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.
Investment Companies: The portfolio is 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 portfolio 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 portfolio from acquiring in the aggregate more than 10% of
the outstanding voting shares of any registered closed-end investment company.
To the extent the 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 portfolio may
not purchase shares of any affiliated investment company except as permitted by
SEC Rule or Order.
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 the 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 its
value, including accrued interest, always equals or exceeds the repurchase
price.
Pursuant to an order issued by the Securities and Exchange Commission, the
portfolio may pool its daily uninvested cash balances with those of other
portfolios of the Fund 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 portfolio will incur lower transaction costs and potentially obtain
higher rates of interest on such repurchase agreements. The portfolio's
participation in the income from jointly purchased repurchase agreements will be
based on the portfolio's percentage share in the total repurchase 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<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, the 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
portfolio 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 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. The 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 or liquid securities. The 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 the portfolio is
contractually obligated to make. If the other party to an interest rate or total
rate of return swap defaults, the 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 may 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 may be
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
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 portfolio 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.
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 the portfolio in a when-issued transaction until the portfolio receives
payment or delivery from the other party to the transaction. Although the
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. The portfolio will
maintain with the custodian a segregated account consisting of cash or liquid
securities 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
- --------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
This Prospectus is for use by defined contribution plan participants who may
invest according to plan specifications. For information on how to purchase,
redeem, or exchange Institutional Class Shares of the portfolio, participants
should contact their plan administrator.
VALUATION OF SHARES
Net asset value per share of each class is determined by dividing the total
market value of the portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the 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.
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.
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.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES: Dividends and Capital Gains
Distributions:
o The Small Cap Value Portfolio normally distributes substantially all of
its net investment income in the form of annual dividends.
If the portfolio does not have income available to distribute, as determined in
compliance with the appropriate tax laws, no distribution will be made.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<PAGE>
If any net capital gains are realized from the sale of underlying securities,
the portfolio normally distributes 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 Plan Administrator elects
otherwise.
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).
Federal Taxes: The following summary of Federal income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial or administrative action. No attempt has been made to present a
detailed explanation of the Federal income tax treatment of the portfolio or its
shareholders. In addition, state and local tax consequences of an investment in
the portfolio may differ from the Federal income tax consequences described
below. Accordingly, shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state and local taxes.
The portfolio intends to qualify for taxation as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") so that it will
not be subject to Federal income tax to the extent it distributes net investment
company taxable income and net capital gains (the excess of net long-term
capital gain over net short-term capital loss) to its shareholders. The
portfolio is treated as a separate entity for Federal income tax purposes and is
not combined with the Fund's other portfolios.
Exchanges and redemptions of shares in the 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.
The portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so, the
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 October, November or December by the portfolio will be
deemed to have been paid by the portfolio and received by shareholders on
December 31st of the year declared 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 portfolio 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 the portfolio 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 portfolio's assets to be invested within various
countries is not known. The portfolio intends to operate so as to qualify for
treaty reduced rates of tax where applicable. The portfolio will not be able to
elect to treat shareholders as having paid their proportionate share of such
taxes for foreign tax credit purposes.
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 upon request.
- --------------------------------------------------------------------------------
MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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, wholly owned by indirect subsidiaries of the 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 $40.9 billion in assets under
management.
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 the
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
-------
Small Cap Value Portfolio* .750%
* 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.
For the fiscal year ended September 30, 1996, the Adviser received the
following as compensation for its services:
Rate
------
Small Cap Value Portfolio .750%
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<PAGE>
PORTFOLIO MANAGEMENT
The investment professionals of MAS who are primarily responsible for the
day-to-day management of the portfolio are as follows:
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution Inc., joined MAS in 1987. He assumed responsibility for the
Small Cap Value Portfolio in 1987.
Bradley S. Daniels, Vice President, Morgan Stanley, joined MAS in 1985. He
assumed responsibility for the Small Cap Value Portfolio in 1986.
William B. Gerlach, Vice President, Morgan Stanley, joined MAS in 1991. He
assumed responsibility for the Small Cap Value Portfolio in 1996.
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, 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.
- --------------------------------------------------------------------------------
MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<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, 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Fund's Transfer Agent and dividend distributing
agent.
Reports: The Plan Administrator receives 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 portfolio is closed for
business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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; Managing Director, Morgan
Stanley; Portfolio Manager and member of the Executive Committee, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Director,
Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.; Director,
Federal National Mortgage Association; Director, Reliance Group Holdings;
Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee, Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
*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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<PAGE>
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services, Inc.;
Director, Legal and General America, Inc.; Director, William Penn Life Insurance
Company of New York; formerly Executive Vice President, Chief Financial Officer,
Director and Member of the Executive Committee of Sperry Corporation (now part
of Unisys Corporation).
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, MAS Funds; Principal, Morgan Stanley; 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, MAS Funds; Principal, Morgan Stanley; Head
of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund
Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley,
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius, LLP;
formerly Attorney, Ropes & Gray.
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MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
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MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<PAGE>
LOGO -----------------------------------------------------------------PROSPECTUS
January 31, 1997
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds
One Tower Bridge Services Company
West Conshohocken, 73 Tremont Street
Pennsylvania 19428-2899 Boston,
Massachusetts
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 Shareholder Information
Prospectus Summary 3 Valuation of Shares 15
Financial Highlights 5 Dividends, Capital Gains
Yield and Total Return 6 Distributions
Investment Suitability 6 and Taxes 15
Investment Limitations 7 Investment Adviser 17
Portfolio Summary 9 Portfolio Management 18
Prospectus Glossary: Administrative Services 18
Strategies 10 General Distribution Agent 18
Investments 10 Portfolio Transactions 18
Other Information 18
Trustees and Officers 19
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -----------------------------------------------------------------------------
<PAGE>
LOGO---------------------------------------------------ADVISER CLASS PROSPECTUS
Municipal Portfolio
January 31, 1997
- -------------------------------------------------------------------------------
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, one of which is described in this Prospectus. The portfolio operates
as a separate diversified investment company. The investment objective of the
portfolio is described with a summary of investment policies as referenced
below. This Prospectus offers the Adviser Class Shares of the portfolio. The
Fund also currently offers Institutional Class Shares of the portfolio.
- -------------------------------------------------------------------------------
PORTFOLIO PAGE REFERENCE
How to Use This Prospectus: 3
Prospectus Summary:
Municipal 4
Prospectus Glossary:
Strategies 12
Investments 14
General Shareholder
Information: 26
Table of Contents: 39
- -------------------------------------------------------------------------------
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 31, 1997 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 - ADVISER CLASS SHARES
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
annual expenses and fees set forth below are estimated based upon the
portfolio attaining certain average asset levels. The Adviser may from time
to time waive fees or reimburse expenses thereby reducing total operating
expenses.
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 0.25%
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- --------------------------------------------------------------------------------
Municipal 0.288%* 0.262% 0.800%
* The Adviser has agreed to waive advisory fees and/or reimburse certain
other expenses to the extent necessary to keep the Total Operating Expenses
of the portfolio from exceeding 0.800%. Absent this waiver estimated Total
Operating Expenses for the portfolio would be 0.887%
- -------------------------------------------------------------------------------
MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
EXAMPLE
The purpose of this table is to assist in understanding the various expenses
that a shareholder in the 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. Long-term shareholders may
eventually pay more than the economic equivalent of the maximum front-end
sales charge otherwise permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
Portfolio 1 year 3 year 5 year 10 year
- -------------------------------------------------------------------------------
Municipal $8 $26 $44 $99
- -------------------------------------------------------------------------------
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 6;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to the portfolio
begins on page 8;
A SUMMARY PAGE for the portfolio's Objective, Policies and Strategies begins on
page 11;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on
page 12;
GENERAL SHAREHOLDER INFORMATION begins on page 26.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
PROSPECTUS SUMMARY
The Municipal Portfolio: seeks to realize above-average total return over a
market cycle of three to five years, consistent with conservation of capital
and the realization of current income which is exempt from federal income
tax, by investing primarily in a diversified portfolio of 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 five and ten years.
RISK FACTORS: Prospective investors in the Portfolio should consider the
following factors as they apply to the Portfolio's allowable investments and
policies. See the Prospectus Glossary for more information on terms printed
in bold type:
o The 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 The portfolio may participate in a Securities Lending program which
entails a risk of loss should a borrower fail financially;
o Fixed-Income Securities that may be acquired by the Portfolio will be
affected by general changes in interest rates resulting in increases or
decreases in the value of the obligations held by the 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 Securities purchased on a When-Issued basis may decline or appreciate in
market value prior to their actual delivery to the portfolio;
o The 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 The portfolio may invest in certain instruments such as Forwards, certain
types of Futures & Options, certain types of Mortgage Securities and
When-Issued Securities which require the portfolio to segregate some or
all of its cash or liquid securities to cover its obligations pursuant to
such instruments. As asset segregation reaches certain levels, a portfolio
may lose flexibility in managing its investments properly, responding to
shareholder redemption requests, or meeting other obligations and may be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses;
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);
- -------------------------------------------------------------------------------
MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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; and
o Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies. See
Foreign Investing. The portfolio may also engage in foreign currency
exchange transactions. See Forwards, Futures & Options, and Swaps.
HOW TO INVEST: Adviser Class Shares of the portfolio are available to
Shareholders with combined investments of $500,000 and Shareholder
Organizations who have a contractual arrangement with the Fund or the Fund's
Distributor, 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 Institutional Class Shares which differ from
the Adviser 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 the 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.
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 $40.9 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 serves as Transfer Agent to
the Fund. See Administrative Services.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
FINANCIAL HIGHLIGHTS -- FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratios for a share of the Portfolio 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
and incorporated by reference in the Statement of Additional Information. The
Fund's financial statements for the year ended September 30, 1996 have been
examined by Price Waterhouse LLP whose opinion thereon (which was
unqualified) is also incorporated by reference in the Statement of Additional
Information.
The Adviser Class shares of the Municipal Portfolio had not commenced
operations as of September 30, 1996, therefore, Institutional Class share
financial information is provided to investors for informational purposes
only and should be referred to as a historical guide to the Portfolio's
operations and expenses. Past performance does not indicate future results.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend Capital Gain
Net Asset or Losses Distributions Distributions
Value- Net on Securities Total from (net (realized net Other
Beginning Investment (realized and Investment investment capital Distri-
of Period Income unrealized) Activities income) gains) butions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)##, ###, +
1996 $10.75 $0.51 $0.49 $ 1.00 ($0.52) -- --
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) -- --
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Net Asset Net Assets- Ratio of Ratio of
Total Value- End of Expenses Net Income Portfolio
Distri- End of Total Period to Average to Average Turnover
butions Period Return** (thousands) Net Assets Net Assets Rate
- --------------------------------------------------------------------------------------------------
Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)##, ###, +
1996 ($0.52) $11.23 9.46% $54,536 0.51%++ 4.66% 78%
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
</TABLE>
- ------------
* Annualized
** Total return figures for partial years are not annualized.
+ Adjusted to reflect a 2.5 to 1 share split as of August 13, 1993.
++ For the periods indicated, the Adviser voluntarily agreed to wave its
advisory fees and reimburse certain expenses to the extent necessary, if
any, to keep the total annual operating expenses for the Municipal
Portfolio from exceeding 0.500%. Voluntarily waived fees and reimbursed
expenses totalled 0.20%*, 0.06%, 0.09% and 0.09% in 1993, 1994, 1995 and
1996 for the Municipal Portfolio.
# Represents distributions in excess of net investment income.
## For the periods ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Municipal Portfolio excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be 0.50% and 0.50%, respectively for the Municipal
Portfolio.
### Formerly known as the Municipal Fixed Income Portfolio (through December
23, 1994)
- -------------------------------------------------------------------------------
MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
YIELD AND TOTAL RETURN
From time to time the portfolio 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, the portfolio may also quote an
aggregate total return for various periods representing the cumulative change
in value of an investment in the 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 the 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 semi-annual 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 portfolio 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 portfolios yield (computed as above) by the amount
necessary to reflect the payment of Federal income tax 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.
The performance of the 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 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.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<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 the portfolio and should be read in
conjunction with the other information about the portfolio.
Objective: The 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 the portfolio may
not be as great as that achieved by another portfolio that can invest in a
broader range of securities. The portfolio will seek to produce total return
by actively trading portfolio securities. The objective of the portfolio is
fundamental and may only be changed with approval of holders of a majority of
the shares of the portfolio. The achievement of the portfolio's objective
cannot be assured.
Suitability: The portfolio is designed for long-term investors who can accept
the risks entailed in investing in the bond market, and are not meant to
provide a vehicle for playing short-term swings in the market. Investments in
the portfolio are suitable for taxable investors who would benefit from the
portfolio's tax-exempt income.
Securities Lending: The 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, the 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: The portfolio 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 portfolio 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 portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held.
Cash Equivalents/Temporary Defensive Investing: Although the portfolio
intends to remain substantially fully invested, a small percentage of the
portfolio's assets are generally held in the form of Cash Equivalents in
order
- -------------------------------------------------------------------------------
MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
to meet redemption requests and otherwise manage the daily affairs of the
portfolio. In addition, the 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 the portfolio
without limit. In addition, the Adviser may, for temporary defensive
purposes, increase or decrease the average weighted maturity or duration of
the portfolio without regard to the 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 the portfolio's specific investment policies
or as detailed in the Investment Limitations, the portfolio will not
concentrate investments in any one industry.
Investment Limitations: The 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, the 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;
(b) with respect to 75% of its assets, the 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;
(c) the 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) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (3)
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; and (4) asset-backed
securities will be classified according to the underlying assets securing
such securities;
(d) the 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;
(e) the 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);
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<PAGE>
(f) the portfolio may pledge, mortgage or hypothecate assets in an amount up
to 50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section
18(f) of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff and;
(g) the portfolio will not invest its assets in securities of any investment
company, except as permitted by the 1940 Act, as amended, or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), 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 the 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.
- -------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<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 fixed-income
securities.
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 5
and 10 years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers High Yield SMBS
Investments: Asset-Backeds Emerging Markets Issuers Inverse Floaters Structured Notes
Brady Bonds Floaters Investment Companies Swaps
Cash Equivalents Foreign Bonds Mortgage Securities Taxable Investments
CMOs Foreign Currency Municipals U.S. Governments
Convertibles Forwards Preferred Stock When Issued
Corporates Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled
by the Adviser using:
50% Lehman 5-Year Municipal Bond Index
50% Lehman 10-Year Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
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 the 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 the portfolio may experience sudden and
substantial price declines. This lower liquidity might have an effect on the
portfolio's ability to 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, the portfolio may find it difficult
to value its securities accurately. The 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.
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.
- -------------------------------------------------------------------------------
MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
Mortgage Investing: At times it is anticipated that a substantial portion of
the 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
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<PAGE>
(FNMA), other government agencies, and private issuers. It is expected that
the portfolio's primary emphasis will be on mortgage-backed securities issued
by the various Government-related organizations. However, the 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 the portfolio in a total return context.
This means that taxable investments will regularly be included in the
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, the 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, the 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").
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 the 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.
INVESTMENTS
The Portfolio may invest in the securities defined below in accordance with
its 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 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
- -------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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).
The 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.
The portfolio 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) The portfolio may invest in commercial paper rated at time of purchase by
one or more Nationally Recognized Statistical Rating Organizations ("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);
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<PAGE>
(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.
Like bonds in general, mortgage-backed securities will generally decline in
price when interests rates rise. Rising interest rates also tend to
discourage refinancings of home mortgages with the result that the average
life of mortgage securities held by a portfolio may be lengthened. This
extension of average life causes the market price of the securities to
decrease further than if their average lives were fixed. In part to
compensate for these risks, mortgages will generally offer higher yields than
comparable bonds. However, when interest rates fall, mortgages may not enjoy
as large a gain in market value due to prepayment risk because additional
mortgage prepayments must be reinvested at lower interest rates.
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.
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MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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. The portfolio will buy
Corporates subject to its quality constraints. If a security held by the
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. The
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
Notes and Swaps. See the 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 during the 1940's, 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<PAGE>
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,
Inverse Floaters, Cash Equivalents, Repurchase Agreements, Preferred Stock,
and Foreign Bonds. See the portfolio's listing of Allowable Investments to
determine which securities a portfolio may hold.
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 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.
Foreign Currency: The portfolio may invest in foreign securities and will
regularly transact security purchases and sales in foreign currencies. The
portfolio may hold foreign currency or purchase or sell currencies on a
forward basis (see Forwards).
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 do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date.
Also, although such contracts can 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.
The 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 portfolio 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 the portfolio has or
expects to have portfolio exposure. The portfolio 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. The portfolio's entry into forward contracts, as well as
any use of cross or proxy hedging techniques will generally require the
portfolio to hold liquid securities or cash equal to the portfolio's
obligations in a segregated account throughout the duration of the contract.
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MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
The 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, the
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, the 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 transaction hedge or position hedge to the
extent that the value of a security denominated in foreign currency is not
exactly matched with the portfolio's obligation under the forward contract.
On the date of maturity, the 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. For proxy hedges, cross-hedges, or a synthetic
position, there is an additional risk in that those transactions create
residual foreign currency exposure. When the portfolio enters into a forward
contract for purposes of creating a position hedge, transaction hedge, cross
hedge, or a synthetic security, it will generally be required to hold 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.
The 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 the 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 the 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 the 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 con-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<PAGE>
sidered 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."
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 the 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.
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MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Investment Companies: The portfolio is 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 portfolio 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 portfolio from acquiring in the
aggregate more than 10% of the outstanding voting shares of any registered
closed-end investment company.
To the extent the 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 portfolio may
not purchase shares of any affiliated investment company except as permitted
by SEC Rule or Order.
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 fall below investment grade if it deems retention of the security to
be in the best interests of the portfolio. The portfolio 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. The portfolio 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.
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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
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.
Possible Risks: 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. Like bonds in
general, mortgage-backed securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of
mortgage securities held by the portfolio may be lengthened. This extension
of average life causes the market price of the securities to decrease further
than if their average lives were fixed. However, when interest rates fall,
mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the 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.
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.
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MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 portfolio 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.
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 the 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 its value, including accrued interest, always
equals or exceeds the repurchase price.
Pursuant to an order issued by the Securities and Exchange Commission, the
portfolio may pool its daily uninvested cash balances with those of other
Portfolios of the Fund 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 portfolio will incur lower transaction costs and
potentially obtain higher rates of interest on such repurchase agreements.
The portfolio's participation in the income from jointly purchased repurchase
agreements will be based on its 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
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<PAGE>
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 interest-only or 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 the portfolio's yield to
maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the 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 the 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 the 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
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,
the 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 portfolio may enter will generally involve an agreement to pay
interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon
notional amount.
The 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 the portfolio receiving or paying, as
the case may be, only the net amount of the two returns. The 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 or liquid securities. The 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
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MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
limited to the net amount of interest payments that the portfolio is
contractually obligated to make. If the other party to an interest rate or
total rate of return swap defaults, the portfolio's risk of loss consists of
the net amount of interest payments that the portfolio is contractually
entitled to receive. In contrast, currency swaps may 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 may be 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 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 portfolio 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.
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 the portfolio in a when-issued transaction until the
portfolio receives payment or delivery from the other party to the
transaction. Although the 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. The portfolio will maintain with the custodian a
segregated account consisting of cash or liquid securities 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
Adviser Class Shares are available to Shareholders with combined investments
of $500,000 and Shareholder Organizations who have a contractual arrangement
with the Fund or the Fund's Distributor, including institutions such as
trusts, foundations or broker-dealers purchasing for the accounts of others.
Adviser Class Shares of the portfolio may be purchased at the net asset value
per share next determined after receipt of the purchase order. The portfolio
determines net asset value as described under Other Information-Valuation of
Shares each day that the portfolio is 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 completing and signing an Account Registration Form (provided at
the end of the prospectus) and mailing it to the MAS Funds, c/o Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, Pennsylvania
19428-0868 together with a check ($500,000 minimum) payable to MAS Funds.
The Municipal Portfolio should be designated on the Account Registration
Form. 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. Please note that purchases made
by check 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, Adviser Class
Shares of the portfolio may also be purchased by wiring Federal Funds to the
Fund's Custodian Bank, The Chase Manhattan Bank (see instructions below). A
completed Account Registration Form should be forwarded to MAS Funds' Client
Services Group in advance of the wire. For all purchases, notification must
be given to MAS Funds' Client Services Group at 1-800-354-8185 prior to the
determination of net asset value. Adviser 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:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Municipal Portfolio, Account Number,
Account Name)
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MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Additional Investments: Additional investments of Adviser 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.
Notification must be given to MAS Fund's Client Services Group at
1-800-354-8185 prior to the determination of net asset value.
Other Purchase Information: The Fund reserves the right, in its sole
discretion, to suspend the offering of Adviser Class Shares of the portfolio
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 the portfolio's Adviser 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.
Adviser Class Shares of the portfolio 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 portfolio through a Shareholder Organization may be
charged a transaction-based fee or other fee for the services of such
organization. The 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 may pay
compensation to or receive compensation from Shareholder Organizations for
the sale of Adviser Class shares.
REDEMPTION OF SHARES
Adviser Class Shares of the portfolio may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of
Adviser 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: The portfolio will redeem Adviser 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 Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868.
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<PAGE>
(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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, 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 the
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.
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MAS Funds - 28 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
SHAREHOLDER SERVICES
Exchange Privilege: The portfolio's Adviser Class Shares may be exchanged for
shares of the Fund's other portfolios offering Adviser Class Shares based on
the respective net asset values of the shares involved. 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 Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868.
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. The sale of shares may result in a capital gain or loss 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 Miller Anderson & Sherrerd, LLP, One Tower
Bridge, West Conshohocken, PA 19428-0868. As in the case of redemptions, the
written request must be received in good order as defined above. Unless
shares are being transferred to an existing account, requests for transfer
must be accompanied by a completed Account Registration Form for the
receiving party.
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 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.
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
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<PAGE>
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.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES:
The Municipal Portfolio normally distributes substantially all of its net
investment income in the form of monthly dividends.
If the 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 portfolio normally distributes 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.
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.
Federal Taxes: The following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. No attempt has been made to
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MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
present a detailed explanation of the federal income tax treatment of the
portfolio or its shareholders. In addition, state and local tax consequences
of an investment in the portfolio may differ from the Federal income tax
consequences described below. Accordingly, shareholders are urged to consult
their tax advisers regarding specific questions as to federal, state and
local taxes.
The portfolio intends to qualify for taxation as a regulated investment
company under the Internal Revenue Code of 1986 (the "Code") so that it will
not be subject to Federal income tax to the extent it distributes investment
company taxable income and net capital gain (the excess of net long-term
capital gain over net short-term capital loss) to shareholders. The Portfolio
is treated as a separate entity for Federal income tax purposes and is not
combined with any of the Funds' other portfolios.
The portfolio intends to invest a sufficient portion of its assets in
municipal bonds and notes so that it will qualify to pay exempt-interest
dividends to shareholders. Such exempt-interest dividends are excluded from a
shareholder's gross income for Federal income tax purposes. Tax-exempt
dividends received from the Municipal Portfolio 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 accountable to municipal
securities issued within the shareholder's state of residence. To the extent,
if any, that dividends paid to shareholders of the Municipal Portfolio 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 Portfolio may invest in
private activity municipal securities, the interest on which is subject to
the Federal alternative minimum tax for corporations and individuals and the
Federal environmental tax for corporations only. Exempt-interest dividends
from such private activity securities issued after August 7, 1986, will
generally be an item of tax preference and therefore potentially subject to
the alternative minimum tax environmental tax. A shareholder may lose the tax
exempt status of the accrued income of the portfolio if it redeems its shares
before a dividend has been declared. The portfolio may not be an appropriate
investment for persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds
or private activity bonds. Such persons should consult their tax advisers
before purchasing shares.
Whether paid in cash or additional shares of the 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, and 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 the portfolio.
Exchanges and redemptions of shares between portfolios are taxable events for
Federal income tax purposes. Individual shareholders may also be subject to
state and municipal taxes on such exchanges and redemptions.
The portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so,
the 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 the portfolio will be deemed to have been
paid and received by shareholders on the record date provided that the
dividends are paid before February 1 of the following year.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<PAGE>
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.
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 upon request.
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, wholly owned by indirect subsidiaries of the 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 $40.9 billion in assets under
management.
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 objective and policies of the portfolio, manages the
investment and reinvestment of the portfolio's assets. In this regard, it is
the responsibility of the Adviser to make investment decisions for the
portfolio and to place the portfolio's purchase and sales orders. As
compensation for the services rendered by the Adviser under the Agreement,
the portfolio pays the Adviser an advisory fee calculated by applying a
quarterly rate, based on an annual rate of 0.375% of the portfolio's average
daily net assets for the quarter.
Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary to
keep Total Operating Expenses actually deducted from portfolio assets for the
Adviser Class of the portfolio from exceeding 0.80%.
For the fiscal year ended September 30, 1996, the Adviser received
compensation for its services at the rate of .288%.
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MAS Funds - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
PORTFOLIO MANAGEMENT:
The investment professionals of MAS who are primarily responsible for the
day-to-day management of the portfolio are as follows:
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the Municipal Portfolio in 1992.
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
assumed responsibility for the Municipal Portfolio in 1994.
Scott F. Richard, Managing Director, Morgan Stanley, 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 Municipal 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 portfolio'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, 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.
DISTRIBUTION PLAN: Adviser Class Shares are sold without a sales charge, but
are subject to a Rule 12b-1 fee. The Fund, on behalf of the applicable
portfolio, will make monthly payments to the Fund's distributor under the
Distribution Plan approved by the Board of Trustees at an annual rate of up
to .25% of the portfolio's average daily net assets attributable to Adviser
Class Shares. The Fund's distributor will use the Rule 12b-1 fee it receives
for (i) compensation for its services in connection with distribution
assistance or provision of shareholder or account maintenance services, or
(ii) payments to financial intermediaries, plan fiduciaries, and investment
professionals, including the Adviser, for providing distribution support
services, and/or account maintenance services to shareholders (including,
where applicable, any underlying beneficial owners) of Adviser Class Shares.
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 the portfolio and directs the Adviser to
use its best efforts to obtain the best execution with respect to all
transactions for the portfolio. In doing so, the 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 33
<PAGE>
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 portfolio or who act as agents in the
purchase of shares of the portfolio for their clients.
Some securities considered for investment by the portfolio may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the 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.
The shares of the portfolio are fully paid and non-assessable, and have no
preference as to conversion, exchange, dividends, retirement or other
features. The shares of the portfolio 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, New York, NY serves as custodian for
the portfolio. The custodian holds 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, 73 Tremont Street, Boston, MA
02108-3913, serves as the Fund's Transfer Agent and dividend disbursing
agent.
Reports: Shareholders receive semi-annual 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 portfolio is closed for
business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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MAS Funds - 34 Terms in bold type are defined in the Prospectus Glossary
<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; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee,
Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.;
Director, Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.;
Director, Federal National Mortgage Association; Director, Reliance Group
Holdings; Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services, Inc.;
Director, Legal and General America, Inc.; Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
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.
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James D. Schmid, President, MAS Funds; Principal, Morgan Stanley; 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, The Chase Manhattan Bank.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 35
<PAGE>
Lorraine Truten, CFA, Vice President, MAS Funds; Principal, Morgan Stanley;
Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS
Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley;
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius,
LLP; formerly Attorney, Ropes & Gray.
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MAS Funds - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
MAS LOGO -------------------------------------------- ACCOUNT REGISTRATION FORM
- --------
MAS FUNDS MAS Fund Distribution, Inc.
General Distribution Agent
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/1/
REGISTRATION/PRIMARY MAILING ADDRESS
Confirmations and month-end statements will be mailed to this address.
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Attention
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Street or P.O. Box
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City State Zip -
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Telephone No. - -
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Form of Business Entity: / / Corporation / / Partnership
/ / Trust / / Other
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Type of Account: / / Defined Benefit Plan / / Defined Contribution Plan
/ / Profit Sharing/Thrift Plan
/ / Other Employee Benefit Plan
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/ / Endowment / / Foundation / / Taxable / / Other (Specify)
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/ / United States Citizen / / Resident Alien / / Non-Resident Alien, Indicate
Country of Residence
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/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
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Company
(If Applicable)
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Street or P.O. Box
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City State Zip -
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Telephone No. - -
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/3/ INVESTMENT
For Purchase of: / / Municipal Portfolio $______________________
______________________
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/4/
TAXPAYER IDENTIFICATION NUMBER
Part 1.
Social Security Number
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or
Employer Identification Number
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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.
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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 persons
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.
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MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
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SIDE ONE OF TWO
<PAGE>
MAS LOGO
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MAS FUNDS
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/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)
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Signature Date
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/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)
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Name of Commercial Bank (Net Savings Bank) Bank Account No.
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Name(s) in which your Bank Account is Established
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Bank's Street Address
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City State Zip Routing/ABA Number
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/7/ DISTRIBUTION OPTION -- Income dividends and capital gains distributions
(if any) will be reinvested in additional shares if no box is checked below.
The instructions provided below may only be changed by written notification.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
/ / Income dividends and capital gains to be reinvested 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.
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<PAGE>
/8/ WIRING INSTRUCTIONS
For purchasing Shares by wire, please send a Fedwire payment to:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds Subscription Account
Ref. (Portfolio name, your Account number, your Account name)
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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. The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding.
(X)
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Signature Date
(X)
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Signature Date
(X)
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Signature Date
(X)
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Signature Date
This application is separate from the prospectus
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FOR INTERNAL USE ONLY
(X)
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Signature Date
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O / / F / / OR / / S / /
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MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
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SIDE TWO OF TWO
<PAGE>
JANUARY 31, 1997
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
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TABLE OF CONTENTS
Page Page
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Fund Expenses 2 General Shareholder Information 26
Prospectus Summary 4 Purchase of Shares 26
Financial Highlights 6 Redemption of Shares 27
Yield and Total Return 7 Shareholder Services 29
Investment Suitability 8 Valuation of Shares 29
Investment Limitations 9 Dividends, Capital Gains
Portfolio Summaries 11 Distributions and Taxes 30
Prospectus Glossary: Investment Adviser 32
Strategies 12 Portfolio Management 33
Investments 14 Administrative Services 33
General Distribution Agent 33
Portfolio Transactions 33
Other Information 34
Trustees and Officers 35
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 39
<PAGE>
LOGO---------------------------------------------------------------------------
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PROSPECTUS
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MILLER
ANDERSON
& SHERRERD, LLP
ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
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<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1997
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 31, 1997, 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
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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 6
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 13
Mortgage-Backed Securities 13
Stripped Mortgage-Backed Securities 15
U.S. Government Securities 16
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 20
Shareholder Services 20
Investment Limitations 21
Management of the Fund 23
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Distribution Plans 28
Shareholder Service Agreement 28
Investment Adviser 28
Administration 30
Distributor for Fund 31
Custodians 31
Portfolio Transactions 32
Portfolio Turnover 33
General Information 33
Performance Information 35
Comparative Indices 41
Financial Statements 46
Appendix-Description of Securities and Ratings 46
Description of Bond Ratings 46
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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
3
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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.
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 were to 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, Balanced Plus 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
4
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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.
In addition, the Equity, Growth, International Equity, Mid Cap Growth, Mid Cap
Value, Small Cap Value, Value, Balanced, Multi-Asset-Class and Balanced Plus
portfolios may invest in Global Depositary Receipts ("GDRs") and European
Depositary Receipts ("EDRs") to the extent that they become available. GDRs and
EDRs are typically issued by foreign depositaries, although they may also be
issued by U.S. depositaries, and evidence ownership interests in a security or
pool of securities issued by either a foreign or a U.S. corporation.
Holders of unsponsored GDRs or EDRs generally bear all the costs associated with
establishing the unsponsored GDRs or EDRs. The depositary of unsponsored GDRs or
EDRs is under no obligation to distribute shareholder communications received
from the underlying issuer or to pass through to the holders of the unsponsored
GDRs or EDRs voting rights with respect to the deposited securities or pool of
securities. GDRs or EDRs are not necessarily denominated in the same currency as
the underlying securities to which they may be connected. Generally, GDRs or
EDRs in registered form are designed for use in the U.S. securities market and
GDRs or EDRs in bearer form are designed for use in securities markets outside
the United States. The Funds may invest in sponsored and unsponsored GDRs or
EDRs. For purposes of the Funds' investment policies, a Funds' investments in
GDRs or EDRs will be deemed to be investments in the underlying securities.
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 or with a Futures
Commission Merchant as approved by the Fund's Board.
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.
5
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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.
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
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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
7
<PAGE>
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 liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
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,
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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.
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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.
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
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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.
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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.
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
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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, Balanced Plus 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
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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.
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.
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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 interest-only or "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
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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.
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.
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<PAGE>
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
U.S. 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.
BRADY BONDS
A portion of certain of the Fund's fixed-income investments 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
17
<PAGE>
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.
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<PAGE>
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.
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 and its affiliates.
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<PAGE>
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 pursuant to Rule 18f-1 under
the Investment Company Act of 1940 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 in converting 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
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 Miller Anderson & Sherrerd, LLP, One Tower Bridge, 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.
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<PAGE>
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.
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,
subject to the limitations on investment in illiquid securities described in
non-fundamental limitation (7), 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
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<PAGE>
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;
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, no Portfolio will:
(1) enter into futures contracts to the extent that each Portfolio's outstanding
obligations to purchase securities under these contracts in combination with its
outstanding obligations with respect to options transactions would exceed 50% of
each Portfolio's 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;
(2) write put or call options except to the extent described above in (1);
(3) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, provided that each
Portfolio may make margin deposits in connection with transactions in options,
futures, and options on futures;
(4) sell short unless, the Portfolio (i) by virtue of its ownership of other
securities, 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, or (ii) maintains in a segregated account on the books of the
Fund's custodian an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short or such other amount as the SEC or its
staff may permit by rule, regulation, order or interpretation (transactions in
futures contracts and options, however, are not deemed to constitute selling
securities short);
(5) borrow money other than from banks or other Portfolios of MAS Funds,
provided that a Portfolio may borrow from banks or other Portfolios of MAS Funds
so long as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or
purchase additional securities when borrowings exceed 5% of total (gross)
assets;
(6) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that each Portfolio may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(7) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board of
Directors;
(8) invest for the purpose of exercising control over management of any company;
and
(9) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder.
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<PAGE>
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; Managing Director, Morgan
Stanley; Portfolio Manager and member of the Executive Committee, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Director,
Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business , University of Pennsylvania;
Director, Digital Equipment Corp.; Director, Sun Company, Inc.; Director,
Federal National Mortgage Association; Director, Reliance Group Holdings;
Director, Melville Corporation.
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; Director, Electro Rent Corporation; Trustee, Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services, Inc.;
Director, Legal and General America, Inc.; Director, William Penn Life Insurance
Company of New York; formerly Executive Vice President, Chief Financial Officer,
Director and Member of the Executive Committee of Sperry Corporation (now part
of Unisys Corporation).
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, MAS Funds; Principal, Morgan Stanley; 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, The Chase Manhattan Bank.
Lorraine Truten, CFA, Vice President, MAS Funds; Principal, Morgan Stanley; Head
of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund
Distribution, Inc.
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<PAGE>
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley;
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius, LLP;
formerly Attorney, Ropes & Gray.
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, 1996, the Fund paid $255,969 in fees
and expenses to its "non-interested" Trustees.
The Fund maintains an unfunded Deferred Compensation Plan ("Plan") which allows
each independent Trustee to defer payment of his or her retainer and fees to a
later date. The Fund's policy is for each Trustee to defer at least twenty-five
percent (25%) of his or her retainer and fees received annually from the Fund.
To that end, the Plan requires that each Eligible Trustee (defined by the Plan
as a member of the Board of Trustees who is not an "interested person" of the
Fund, as such term is defined under Section 2(a)(19) of the Investment Company
Act of 1940) defer his or her entire retainer, which is deemed a deferral of
twenty-five percent (25%) of the Trustee's retainer and fees received from the
Fund for the year. The Plan also permits the Eligible Trustee to defer all, or a
portion, of the fees received for attending meetings of the Board of Trustees
throughout the year. Amounts deferred by each Eligible Trustee are credited with
a return equal to what those amounts would have received if they had been
invested in portfolios of the Fund selected by that Trustee. Any deferred
amounts will not be available to Eligible Trustees for a period of two (2) years
and distributions may not be deferred beyond the Eligible Trustee's membership
on the Board of Trustees. Distributions to an Eligible Trustee are either in the
form of a lump sum or equal annual installments over a period of five (5) years
and commence within ninety (90) days after the last date during the deferral
period on which the Fund makes a valuation of the Eligible Trustee's deferred
compensation. The Fund intends that the Plan shall be maintained at all times on
an unfunded basis for federal income tax purposes under the Internal Revenue
Code of 1986. The rights of an Eligible Trustee and the beneficiaries to the
amounts held under the Plan are unsecured and such amounts are subject to the
claims of the creditors of the Fund. The Plan became effective May 23, 1996.
There were no payments under the plan during the fiscal year ended September 30,
1996.
The aggregate compensation paid by the Fund to each of the Trustees during its
fiscal year ended September 30, 1996 is set forth below.
<TABLE>
<CAPTION>
Aggregate Pension or Benefits Total
Compensation Accrued As Part Compensation
Name of Trustee from the Fund# of Fund Expenses from the Fund
- ------------------- ------------- ----------------
<S> <C> <C> <C>
Thomas L. Bennett* $ -0- $ -0- $ -0-
David P. Eastburn** $22,000 $ -0- $22,000
Thomas P. Gerrity*** $ -0- $ -0- $ -0-
Joseph P. Healey $40,000## $ -0- $40,000
Joseph J. Kearns $40,000## $ -0- $40,000
Vincent R. McLean**** $27,000## $ -0- $27.000
C. Oscar Morong, Jr. $40,000## $ -0- $40,000
</TABLE>
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<PAGE>
*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.
**David P. Eastburn retired as Trustee of the Fund on February 29, 1996.
***Thomas P. Gerrity became a Trustee of the Fund after the fiscal year end of
September 30, 1996.
****Vincent R. McLean became a Trustee of the Fund on February 29, 1996.
# Includes amounts deferred from quarterly meeting fees at the election of
Trustees under the Deferred Compensation Plan.
## In addition, each Trustee has deferred his retainer of $12,000 under the
Deferred Compensation Plan.
Principal Holders of Securities
As of January 2, 1997 following persons owned of record or beneficially 5% or
more of the shares of a Portfolio:
INSTITUTIONAL CLASS:
Emerging Markets Portfolio: Ministers and Missionaries, New York, NY, 42.18%;
Smithsonian Institution, New York, NY, 26.65%; Checking and Co., Boston, MA,
10.03%; KMPG Peat Marwick, Montval, New Jersey, 8.93%.
International Equity Portfolio: Western Metal, West Conshohoken, PA, 9.51%;
Ministers and Missionaries, New York, NY, 8.41%.
Mid Cap Growth Portfolio: J Paul Getty Trust, Chicago, IL, 18.75%; New York
State Common, Albany, NY, 8.22%;
Mid Cap Value Portfolio: Fishnet & Company, Boston, MA, 15.41%; Hearst
Corporation, New York NY, 15.41%; Georgetown Memorial Hospital, Georgetown, SC,
14.95%; Berklee College of Music, Boston, MA, 11.61%; Charles Schwab & Co, San
Francisco, CA, 6.96%;
Small Cap Value Portfolio: J Paul Getty Trust, Chicago, IL, 10.98%; Silicon
Graphics, Chicago, IL, 8.77%; American Red Cross, Falls Church, VA, 6.87%;
Fishnet & Company, Boston, MA, 5.33%;
Value Portfolio: Charles Schwab, San Francisco, CA, 10.06%;
Cash Reserves Portfolio: The Northern Trust Company, Morgan Stanley, Chicago,
IL, 31.77%; Salkeld & Co., New York, NY, 19.75%; Hans A. Wolf or Elizabeth Wolf,
Palo Alto, CA, 8.36%; Association for Information & Image Management, Silver
Spring, MD, 5.16%;
Domestic Fixed Income Portfolio: Saxon & Co., Philadelphia, PA, 19.74%; Hartford
Foundation For Public Giving, Hartford, CT, 13.07%; Philadelphia Orchestra,
Philadelphia, PA, 10.17%; Saxon & Co., Philadelphia, PA, 6.41%; Paintmakers
Money Accumulation, Portland, OR, 5.60%; Fox Chase Cancer Center, Philadelphia,
PA, 5.10%;
25
<PAGE>
Fixed Income Portfolio II: Sheet Metal Workers, Suitland, MD, 11.34%; Johns
Hopkins University, Jersey City, NJ, 10.85%; Diocese of Camden, Camden, NJ,
9.08%; Northwestern Memorial Hospital, Chicago, IL, 7.83%; Sandoz Corp Savings
Plan, Chicago, IL, 7.68%; Sarah Lawrence College, Bronxville, NY, 5.21%;
Global Fixed Income Portfolio: Charles A. Dana Foundation, New York, NY, 26.64%;
Hudson-Webber Foundation, Detroit, MI, 11.67%; "All For Her," Albany, NY,
11.00%; Abilene Christian University, Abilene, TX, 8.71%; Pitney Bowes, Inc.,
Stamford, CT, 8.08%; Forest Oil Corp. Pension Trust, Boston, MA, 7.16%;
Rockefeller Family Fund, New York, NY, 5.60%;
High Yield Securities Portfolio: Western Metal, West Conshohoken, PA, 8.88%;
John & Catherine MacArthur, Chicago, IL, 6.30%; Charles Schwab, San Francisco,
CA, 6.24%; Carnegie Corp., New, NY, 5.59%; Armco Master Pension, Pittsburgh, PA,
5.09%; Connelly Foundation, West Conshohoken, PA, 5.08%; KPMG Peat Marwick,
Montvale, NJ, 5.03%;
Intermediate Duration Portfolio: Morgan Stanley Group Inc., New York, NY;
31.77%; Jaffe Family Foundation, Suffern, NY, 22.42%; Los Angeles
Hotel-Restaurant Employees, Los Angeles, CA, 19.94%; Northumberland County
Employee, Altoona, PA, 18.96%; Union Local 1034 Severance Trust, Abington, PA,
6.04%;
International Fixed Income Portfolio: Armco, Pittsburgh, PA, 23.82%; J. Paul
Getty, Chicago, IL, 16.64%; Children's Hospital, Philadelphia, PA, 15.62%;
Western Metal, West Conshohoken, PA, 12.47%; Smithsonian Institution, New York,
NY, 6.38%;
Limited Duration Portfolio: Cannon Hourly Retirement Plan, New York, NY, 13.42%;
A. .Hotel & Restaurant Union Welfare, Calabasas, CA, 12.04%; Northern
California Bakery Drivers, San Francisco, CA, 8.70%; Paper Converters,
Philadelphia, PA, 6.06%; Benedictine Abbey of Newark, Newark, NJ, 5.52%; Batrus
& Company, New York, NY, 5.28%;
Mortgage-Backed Securities Portfolio: Inglis House Foundation, Philadelphia, PA,
31.41%; Northwestern University, Evanston, IL, 22.86%; Cives Corp. Savings &
Profit Sharing, Roswell, GA, 16.40%; Teamsters Local 641, Philadelphia, PA,
11.23%; The Paper Magic Group, Scranton, PA, 11.00%;
Municipal Portfolio: Union Electric Employees, Pittsburgh, PA, 16.50%; Robert A.
Fox, Jenkintown, PA, 10.57%; Jesse J. Thompson, Charlotte, NC, 10.54%; Union
Electric Employees, Pittsburgh, PA, 9.53%; Batrus & Co., New York, NY, 5.22%;
PA Municipal Portfolio: Richard Worley, West Conshohoken, PA, 25.91%; Kenneth B.
Dunn & Pamela R. Dunn, Bala Cynwyd, PA, 18.97%; R&S Roberts, Philadelphia, PA,
15.64%; John JF Sherrerd, Bryn Mawr, PA, 8.13%; Morris Williams Jr. & Ruth W.
Williams, Gladwyne, PA, 6.26%;
Balanced Portfolio: Wendel & Co., New York, NY, 28.84%; A&P Savings, New York,
NY, 8.16%; Bay Area Rapid Transit, Calabasas, CA, 6.65%; Bay Area Rapid Transit,
Calabasas, CA, 6.18%;
Multi-Asset-Class Portfolio: KPMG Peat Marwick, Montvale, NJ, 20.14%; The
Library Co of Philadelphia, Philadelphia, PA, 9.74%; Milbank Tweed Hadley &
McCloy, Brooklyn, NY, 7.82%; National Center For State Courts, Williamsburg, VA,
5.83%; The W-S Foundation, Winston-Salem, NC, 5.51%;
26
<PAGE>
Advisory Foreign Fixed Income Portfolio: Minnesota State Board of Inv., St.
Paul, MN, 9.83%; Kaiser Foundation, Oakland, CA, 7.18%; Johns Hopkins
University, Baltimore, MD, 5.34%;
Advisory Mortgage Portfolio: Children's Hospital, Philadelphia, PA, 5.54%;
INVESTMENT CLASS
Equity Portfolio: Roanoke Electric Steel, Charlotte, NC, 57.73%; Philadelphia
Marine Trade Association, Philadelphia, PA, 35.75%; Insurance Trust of Penn,
Philadelphia, PA, 6.52%;
Value Portfolio: Mac & Co., Pittsburgh, PA, 27.39%; Washington Jane Smith HM,
Chicago, IL, 12.88%; Institute of Nuclear Power, Atlanta, GA, 12.19%; Trust
Company of America, Englewood, CA, 9.85%; Roanoke Electric Steel, Charlotte, NC,
9.58%; IBEW Local 223 Deferred Income Fund, Lakeville, MA, 5.26%; Doctors
Community Hospital, Lanham, MD, 5.23%;
Fixed Income Portfolio: Thomas Build Buses, Dallas, TX, 38.51%; Woodlawn
Cemetery Care Fund, Chicago, IL, 30.41%; Thomas Built Buses, Dallas, TX, 13.09%;
Roanoke Electric Steel, Charlotte, NC, 11.11%; Philadelphia Marine Trade
Association, Philadelphia, PA, 6.89%;
International Equity Portfolio: Doctors Community Hospital, Lanham, MD, 57.30%;
J. Richard Jones, Radnor, PA, 27.19%; Insurance Trust of Penn., Philadelphia,
PA, 8.19%; Richard Jones, Radnor, PA, 7.32%;
High Yield Portfolio: National Academy of Sciences, Washington, D.C., 42.03%;
Noblehouse International, Chicago, IL, 15.40%; Harvey & Bernice Jones, Little
Rock, AR, 14.83%; Standish, Ayer & Wood, Rochester, NY, 14.66%; Lou Weisbach
Revocable Trust, Niles, IL, 13.08%;
Mid Cap Value Portfolio: J. Richard Jones, Radnor, PA, 79.03%; J. Richard Jones,
Radnor, PA, 20.97%;
Special Purpose Fixed Income Portfolio: Doctors Community Hospital, Lanham, MD,
87.45%; Insurance Trust of Penn., Philadelphia, PA, 12.55%;
Multi- Asset-Class Portfolio: Kano-Zimmerman Profit Sharing, Nashville, TN,
51.49%; English Speaking Union, Winter Park, FL, 48.51%;
ADVISER CLASS:
Value Portfolio: IBJ Distributor Inc., New York, NY, 85.93%; Fidelity
Investments, Covington, KY, 6.18%;
Fixed Income Portfolio: IBJ Distributor Inc., New York, NY, 100%;
Balanced Portfolio: Fidelity Investments Institutions, Covington, KY, 100%
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.
27
<PAGE>
DISTRIBUTION PLANS
The Fund's Distribution Plan provides that the Adviser Class Shares will pay MAS
Fund Distribution, Inc. (the "Distributor") an annualized 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. For the fiscal year ended
September 30, 1996, the Value Portfolio paid $855 in distribution fees pursuant
to the Distribution Plan.
SHAREHOLDER SERVICE AGREEMENT
The Fund has entered into a Shareholder Service Agreement with the Distributor
whereby the Distributor will compensate service providers who provide certain
services to clients who beneficially own Investment Class shares of the
Portfolios described in the Investment Class prospectus. Each Portfolio will pay
to the Distributor a fee at the annual rate of .15% of the average daily net
assets of such Portfolio attributable to the shares serviced by the service
provider, which fee will be computed daily and paid monthly. During the fiscal
year ended September 30, 1996, the Fund paid $5,739 to compensate the
Distributor under this Shareholder Service Agreement.
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
28
<PAGE>
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 .650
Balanced Plus .550
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 Institutional Class Shares of the Emerging Markets, Mid Cap Value,
Cash Reserves, Domestic Fixed Income, Intermediate Duration, Limited Duration,
Mortgage-Backed Securities, Municipal, PA Municipal, Multi-Asset-Class, Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios' total annual operating
expenses from exceeding 1.180%, .880%, .320%, .500%, .520%, .420%, .500%, .500%,
.500%, .780%, .150% and .080% of its average daily net assets, respectively.
For the fiscal years ended September 30, 1994, 1995 and 1996, the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
1994 1995 1996 1994 1995 1996
Fund (000) (000) (000) (000) (000) (000)
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio * 85 286 * 52 42
Equity Portfolio 5,933 6,840 7,785 0 0 0
Growth Portfolio * * * * * *
International Equity Portfolio 5,412 5,437 3,458 0 0 0
Mid Cap Growth Portfolio 1,593 1,504 1,986 0 0 0
Mid Cap Value Portfolio * 0 188 * 14 46
Small Cap Value Portfolio 1,833 2,683 3,464 0 0 0
Value Portfolio 4,764 5,078 7,716 0 0 0
Cash Reserves Portfolio 21 51 138 28 39 52
Domestic Fixed Income Portfolio 187 75 257 13 23 8
Fixed Income Portfolio 3,997 4,893 5,917 0 0 0
29
<PAGE>
Fixed Income II Portfolio 457 567 773 0 0 0
Global Fixed Income Portfolio 193 190 205 0 0 0
High Yield Portfolio 503 764 1,073 0 0 0
Intermediate Duration Portfolio * 57 52 * 17 18
International Fixed Income Portfolio 64 395 555 26 0 0
Limited Duration Portfolio 348 206 351 0 11 0
Mortgage-Backed Securities Portfolio 362 348 177 5 5 21
Municipal Portfolio 112 110 167 22 37 38
PA Municipal Portfolio 62 32 77 19 31 30
Special Purpose Fixed Income Portfolio 1,233 1,574 1,517 0 0 0
Balanced Portfolio 1,388 1,385 1,521 0 0 0
Multi-Asset-Class Portfolio 16 220 635 22 100 112
Balanced Plus Portfolio * * * * * *
Advisory Foreign Fixed Income Portfolio * 0 1,933 * 1,631 1,933
Advisory Mortgage Portfolio * 0 6,056 * 1,711 6,056
</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 The Chase Manhattan
Bank, serves as transfer agent and provides fund accounting and other services
pursuant to a sub- administration agreement.
For the fiscal years ended September 30, 1994, 1995 and 1996, the Fund paid the
following administrative fees:
30
<PAGE>
Administrative Fees Paid
1994 1995 1996
(000) (000) (000)
----- ----- -----
Emerging Markets Portfolio * 14 38
Equity Portfolio 949 1,094 1,246
Growth Portfolio * * *
International Equity Portfolio 875 870 553
Mid Cap Growth Portfolio 256 241 318
Mid Cap Value Portfolio * 1 20
Small Cap Value Portfolio 207 286 369
Value Portfolio 762 812 1,235
Cash Reserves Portfolio 15 29 44
Domestic Fixed Income Portfolio 43 21 55
Fixed Income Portfolio 843 1,044 1,262
Fixed Income II Portfolio 99 121 165
Global Fixed Income Portfolio 41 41 44
High Yield Portfolio 108 163 229
Intermediate Duration Portfolio * 16 11
International Fixed Income Portfolio 27 84 118
Limited Duration Portfolio 93 58 93
Mortgage-Backed Securities Portfolio 80 75 38
Municipal Portfolio 37 31 36
PA Municipal Portfolio 24 13 16
Special Purpose Fixed Income Portfolio 261 336 323
Balanced Portfolio 259 246 271
Multi-Asset-Class Portfolio 8 57 113
Balanced Plus Portfolio * * *
Advisory Foreign Fixed Income Portfolio * 357 412
Advisory Mortgage Portfolio * 374 1,292
* 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.
CUSTODIANS
The Chase Manhattan Bank, 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.
31
<PAGE>
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.
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, 1994, 1995 and 1996, the Fund paid brokerage commissions of
$8,785,671, $13,457,075 and $18,252,335 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. The Fund
paid $453,834 in brokerage commissions to affiliates for $191,758,624 of
brokered transactions for the fiscal year ended September 30, 1996.
32
<PAGE>
PORTFOLIO TURNOVER
The Portfolio turnover rate for each Portfolio for the past two fiscal years
ended September 30 was as follows:
Portfolio 1995 1996
- --------- ---- ----
Emerging Markets 63% 108%
Equity 67% 67%
Growth N/A N/A
International Equity 112% 78%
Mid Cap Growth 129% 141%
Mid Cap Value 639% 377%
Small Cap Value 119% 145%
Value 56% 53%
Domestic Fixed Income 313% 168%
Fixed Income 140% 162%
Fixed Income II 153% 165%
Global Fixed Income 118% 133%
High Yield 96% 115%
Intermediate Duration 168% 251%
International Fixed Income 140% 124%
Limited Duration 119% 174%
Mortgage-Backed Securities 107% 116%
Municipal 58% 78%
PA Municipal 57% 51%
Special Purpose Fixed Income 143% 151%
Balanced 95% 110%
Multi-Asset-Class 112% 122%
Balanced Plus N/A N/A
Advisory Mortgage 110% 139%
Advisory Foreign Fixed Income 96% 170%
N/A -- Portfolio had not commenced operations as of September 30, 1996.
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) of
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
33
<PAGE>
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.
34
<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:
35
<PAGE>
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
The average annual total return of each Institutional Class 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
9/30/96 9/30/96 9/30/96 9/30/96 Date
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Emerging Markets Portfolio 6.21 -- -- 14.25 02/28/95
Equity Portfolio 16.48 13.64 14.10 15.95 11/14/84
Growth Portfolio* N/A N/A -- -- N/A
International Equity Portfolio 8.87 7.80 -- 7.92 11/25/88
Mid Cap Growth Portfolio 28.81 17.51 -- 20.45 03/30/90
Mid Cap Value Portfolio 22.30 -- -- 32.88 12/30/94
Small Cap Value Portfolio 24.00 20.04 13.64 12.55 07/01/86
Value Portfolio 18.41 17.89 14.79 16.86 11/05/84
Cash Reserves Portfolio 5.35 4.19 -- 4.66 08/29/90
Domestic Fixed Income Portfolio 4.41 8.83 -- 10.00 09/30/87
Fixed Income Portfolio 7.63 8.94 9.38 10.92 11/14/84
Fixed Income Portfolio II 6.12 8.16 -- 10.00 08/31/90
Global Fixed Income Portfolio 6.83 -- -- 8.51 04/30/93
High Yield Portfolio 13.83 14.52 -- 11.45 02/28/89
Intermediate Duration Portfolio 6.27 -- -- 8.84 10/03/94
International Fixed Income Portfolio 6.13 -- -- 9.55 04/29/94
Limited Duration Portfolio 5.47 -- -- 5.77 03/31/92
Mortgage-Backed Securities Portfolio 6.10 -- -- 6.82 01/31/92
Municipal Portfolio 9.46 -- -- 7.83 10/01/92
PA Municipal Portfolio 9.03 -- -- 8.35 10/01/92
Special Purpose Fixed Income Portfolio 7.74 -- -- 9.42 03/31/92
Balanced Portfolio 13.47 -- -- 11.31 12/31/92
Multi-Asset-Class Portfolio 13.75 -- -- 14.48 07/29/94
Balanced Plus Portfolio* N/A -- -- -- N/A
Advisory Foreign Fixed Income Portfolio 16.47 -- -- 14.42 10/07/94
Advisory Mortgage Portfolio 6.56 -- -- 8.68 04/12/95
</TABLE>
* The Growth and Balanced Plus Portfolios had not commenced operations as of
September 30, 1996.
The average annual total return of each Investment Class Portfolio of the fund
for the periods noted is set forth below:
<TABLE>
<CAPTION>
Inception
1 Year 5 Years 10 Years Inception Date of
ended ended ended to Investment
9/30/96 9/30/96 9/30/96 9/30/96 Class
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Value Portfolio -- -- -- 4.78 05/6/96
Equity Portfolio -- -- -- 6.02 04/10/96
International Equity Portfolio -- -- -- 1.61 04/10/96
Mid Cap Value Portfolio -- -- -- 5.61 05/10/96
High Yield Portfolio -- -- -- 5.33 05/21/96
Special Purpose Fixed Income Portfolio -- -- -- 4.25 04/10/96
Multi-Asset-Class Portfolio -- -- -- 1.75 06/10/96
Balanced Plus Portfolio* -- -- -- -- N/A
</TABLE>
* The Balanced Plus Portfolio had not commenced operations as of September 30,
1996.
36
<PAGE>
The average annual total return of each Adviser Class Portfolio of the Fund for
the periods noted is set forth below:
<TABLE>
<CAPTION>
Inception
1 Year 5 Years 10 Years Inception Date of
ended ended ended to Adviser
9/30/96 9/30/96 9/30/96 9/30/96 Class
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Value Portfolio -- -- -- 10.63 07/17/96
</TABLE>
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.
<TABLE>
<CAPTION>
5 Years
ended Inception to
9/30/96 9/30/96
------- -------
<S> <C> <C>
Emerging Markets Portfolio N/A 23.52
Equity Portfolio 89.49 479.86
Growth Portfolio** N/A N/A
International Equity Portfolio 45.57 81.84
Mid Cap Growth Portfolio 124.09 235.40
Mid Cap Value Portfolio N/A 64.49
Small Cap Value Portfolio 149.25 235.21
Value Portfolio 127.75 538.61
Cash Reserves Portfolio 22.83 31.95
Domestic Fixed Income Portfolio 52.64 135.68
Fixed Income Portfolio 53.46 242.49
Fixed Income Portfolio II 48.02 78.57
Global Fixed Income Portfolio N/A 32.23
High Yield Portfolio 97.01 127.57
Intermediate Duration Portfolio N/A 18.38
International Fixed Income Portfolio N/A 24.73
Limited Duration Portfolio N/A 28.72
Mortgage-Backed Securities Portfolio N/A 36.03
Municipal Portfolio N/A 35.14
PA Municipal Portfolio N/A 37.77
Special Purpose Fixed Income Portfolio N/A 49.96
Balanced Portfolio N/A 49.44
Multi-Asset-Class Portfolio N/A 34.14
Balanced Plus Portfolio** N/A N/A
Advisory Foreign Fixed Income Portfolio N/A 30.58
Advisory Mortgage Portfolio N/A -
</TABLE>
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively. ** The Growth and Balanced Plus Portfolios had
not commenced operations as of September 30, 1996.
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)
37
<PAGE>
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:
<TABLE>
<CAPTION>
Annualized Since
Inception
Period Ended:
9/30/96
MAS EQUITY FUNDS (Gross of Fees)*
<S> <C> <C>
Inception Date
11/14/84 Equity Portfolio 16.67
11/05/84 Value Portfolio 17.59
07/01/86 Small Cap Value Portfolio 13.53
03/30/90 Mid Cap Growth Portfolio 21.17
11/25/88 International Equity Portfolio 8.59
12/30/94 Mid Cap Value 33.87
02/28/95 Emerging Markets Portfolio 15.62
MAS FIXED INCOME FUNDS
11/14/84 Fixed Income Portfolio 11.44
09/30/87 Domestic Fixed Income Portfolio 10.50
03/31/92 Special Purpose Income Portfolio 9.14
03/31/92 Limited Duration Portfolio 6.18
01/31/92 Mortgage-Backed Portfolio 7.45
02/28/89 High Yield Portfolio 12.15
10/01/92 Municipal Portfolio 8.41
10/01/92 PA Municipal Portfolio 8.87
04/30/93 Global Fixed Income Portfolio 9.15
04/29/94 International Fixed Income Portfolio 10.20
10/07/94 Advisory Foreign Fixed Income Portfolio 17.95
10/03/94 Intermediate Duration Portfolio 9.50
04/12/95 Advisory Mortgage Portfolio 8.71
MAS BALANCED FUNDS
12/31/92 Balanced Portfolio 11.93
07/29/94 Multi-Asset-Class
Portfolio 15.18
</TABLE>
*Annualized
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
9/30/96:
38
<PAGE>
Pre-tax return Post-tax return
PA Municipal Portfolio 8.35*/37.77** 8.04*/36.25**
Municipal Portfolio 7.82*/35.14** 7.69*/34.51**
*Annualized
**Cummulative
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/cd) + 1) 6 - 1 ]
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
9/30/96
-------
Emerging Markets Portfolio 2.27%
Equity Portfolio 1.96
International Equity Portfolio 1.90
Mid Cap Growth Portfolio 0.06
Mid Cap Value Portfolio 0.22
Small Cap Value Portfolio 0.72
Value Portfolio 1.97
Domestic Fixed Income Portfolio 5.91
Fixed Income Portfolio 7.14
Fixed Income Portfolio II 6.23
Global Fixed Income Portfolio 5.50
High Yield Portfolio 10.07
Intermediate Duration Portfolio 6.51
International Fixed Income Portfolio 5.52
Limited Duration Portfolio 6.17
Mortgage-Backed Securities Portfolio 8.16
Municipal Portfolio 4.84
PA Municipal Portfolio 4.69
Special Purpose Fixed Income Portfolio 7.16
Balanced Portfolio 4.09
39
<PAGE>
Multi-Asset-Class Portfolio 3.86
Advisory Foreign Fixed Income Portfolio 6.44
Advisory Mortgage Portfolio 7.07
As of the date of this Statement of Additional Information, the Growth and
Balanced Plus Portfolios, had not commenced operations.
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively.
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, 1996.
Period ending
9/30/96
-------
Value at beginning of period 1.000000
Value at end of period 1.000992
Net change in account value 0.000992
Annualized current yield 5.17%
Effective yield 5.31%
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.
40
<PAGE>
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. 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 5-Year Municipal Bond Index
Lehman Brothers 5-Year Municipal Bond Index is a total return performance
benchmark for the intermediate investment grade tax exempt bond market. the
index includes general obligation bonds, revenue bonds, insured bonds and
prefunded bonds with maturities between 4 and 6 years.
Lehman Brothers 10-Year Municipal
Lehman Brothers 10-Year Municipal Bond Index is a total return performance
benchmark for the long term, investment grade tax exempt bond market. The index
includes general obligation bonds, revenue bonds, insured bonds and prefunded
bonds with maturities between 8 and 12 years.
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
41
<PAGE>
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.
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
42
<PAGE>
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.
43
<PAGE>
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.
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.
44
<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 Mid Cap 400 Index
The S&P Mid Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is also a market-value
weighted index and was the first benchmark of midcap stock price movement.
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 Index
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.
45
<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1996,
including notes thereto and the report of Price Waterhouse LLP thereon are
incorporated herein by reference. A copy of the 1996 Annual Report will
accompany the delivery of this Statement of Additional Information.
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:
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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.
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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.
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
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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
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.
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