<PAGE>
- ---------------------------------- INSTITUTIONAL CLASS PROSPECTUS -----------
MAS
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MAS FUNDS
January 31, 1998
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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-seven
portfolios, twenty-five of which are described in this Prospectus. The Fund's
Small Cap Value Portfolio is not currently being offered to new investors. This
Prospectus offers the Institutional Class Shares of these twenty-five
portfolios.
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Shares of the Cash Reserves Portfolio are neither insured nor guaranteed by the
U.S. Government. The port-folio 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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<TABLE>
<CAPTION>
PORTFOLIO PAGE REFERENCE
<S> <C> <C> <C> <C> <C>
How to Use This Prospectus: 3 Fixed Income: Balanced:
Cash Reserves 21 Balanced 35
Portfolio Summaries: Domestic Fixed Income 22 Balanced Plus 36
Equity: Fixed Income 23 Multi-Asset-Class 37
Emerging Markets Value 16 Fixed Income II 24
Equity 16 Global Fixed Income 25 Prospectus Glossary:
Growth 17 High Yield 26 Strategies 38
International Equity 17 Intermediate Duration 27 Investments 42
Mid Cap Growth 18 International Fixed Income 28
Mid Cap Value 18 Limited Duration 29 General Shareholder
Small Cap Value 19 Mortgage-Backed Securities 30 Information: 52
Value 20 Multi-Market Fixed Income 31
Municipal 32 Table of Contents: Back Cover
PA Municipal 33
Special Purpose Fixed Income 34
</TABLE>
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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, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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
in a portfolio will incur either directly or indirectly. 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 None
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
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<S> <C> <C> <C>
Emerging Markets Value (formerly, Emerging Markets) 0.503%* 0.677% 1.180%
Equity 0.500 0.100 0.600
Growth 0.500 0.100** 0.600
International Equity 0.500 0.150 0.650
Mid Cap Growth 0.500 0.130 0.630
Mid Cap Value 0.750 0.130 0.880
Small Cap Value 0.750 0.100 0.850
Value 0.500 0.100 0.600
Cash Reserves 0.204* 0.116 0.320
Domestic Fixed Income 0.375 0.125 0.500
Fixed Income 0.375 0.105 0.480
Fixed Income II 0.375 0.125 0.500
Global Fixed Income 0.375 0.195 0.570
High Yield 0.375 0.125 0.500
Intermediate Duration 0.375 0.125 0.500
International Fixed Income 0.375 0.155 0.530
Limited Duration 0.300 0.120 0.420
Mortgage-Backed Securities 0.318* 0.182 0.500
Multi-Market Fixed Income 0.350* 0.230** 0.580
Municipal 0.352* 0.148 0.500
PA Municipal 0.281* 0.219 0.500
Special Purpose Fixed Income 0.375 0.105 0.480
Balanced 0.450 0.130 0.580
Balanced Plus 0.550 0.150** 0.700
Multi-Asset-Class 0.594* 0.186 0.780
</TABLE>
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 expenses that otherwise would be deducted from portfolio assets.
Amounts in the above table have been restated to reflect current fees and
expenses.
* 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
Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities, Municipal,
PA Municipal, Multi-Market Fixed Income and Multi-Asset-Class Portfolios from
exceeding 1.18%, 0.32%, 0.50%, 0.50%, 0.50%, 0.58% and 0.78%, respectively.
Absent such waivers and/or reimbursements by the Adviser, Total Operating
Expenses would be 1.427%, 0.366%, 0.557%, 0.523%, 0.594%, 0.680% and 0.836%,
for the Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities,
Municipal, PA Municipal, Multi-Market Fixed Income and Multi-Asset-Class
Portfolios, respectively.
** Other expenses are based on estimated amounts for the current year.
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MAS Fund - 2 Terms in bold type are defined in the Prospectus Glosary
<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 exam-ples are shown, which are
based on estimated expenses.
Portfolio 1 year 3 year 5 year 10 year
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Emerging Markets Value
(formerly, Emerging Markets) $ 12 $ 37 $ 65 $143
Equity 6 19 33 75
Growth 6 19 -- --
International Equity 7 21 36 81
Mid Cap Growth 6 20 35 79
Mid Cap Value 9 28 49 108
Small Cap Value 9 27 47 105
Value 6 19 33 75
Cash Reserves 3 10 18 41
Domestic Fixed Income 5 16 28 63
Fixed Income 5 15 27 60
Fixed Income II 5 16 28 63
Global Fixed Income 6 18 32 71
High Yield 5 16 28 63
Intermediate Duration 5 16 28 63
International Fixed Income 5 17 30 66
Limited Duration 4 13 24 53
Mortgage-Backed Securities 5 16 28 63
Multi-Market Fixed Income 6 19 -- --
Municipal 5 16 28 63
PA Municipal 5 16 28 63
Special Purpose Fixed Income 5 15 27 60
Balanced 6 19 32 73
Balanced Plus 7 22 -- --
Multi-Asset-Class 8 25 43 97
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 all portfolios
begins on page 14;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin on
page 16;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on page
38; and
GENERAL SHAREHOLDER INFORMATION begins on page 52.
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Terms in bold type are defined in the Prospectus Glosary MAS Fund - 3
<PAGE>
SUMMARY 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.
The Global Fixed Income, International Fixed Income and Emerging Markets Value
Portfolios are Non-Diversified for purposes of the Investment Company Act of
1940 (the "1940 Act"), meaning that they may invest a greater percentage of
assets in the securities of one issuer than the other portfolios. Each other
portfolio is diversified.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each Portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold type:
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which entails
a risk of loss should a borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest rates
resulting in increases or decreases in the value of the obligations held by a
portfolio. The value of Fixed-Income Securities can be expected to vary
inversely to changes in prevailing interest rates, i.e., as interest rates
decline, market value tends to increase and vice versa. Certain Fixed Income
Securities may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on
underlying mortgage assets). 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 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 Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies.
Portfolios investing in foreign securities may also engage in foreign
currency exchange transactions. See Forwards, Futures & Options, and Swaps;
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;
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MAS Fund - 4 Terms in bold type are defined in the Prospectus Glosary
<PAGE>
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; and
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.
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")
is a Pennsylvania limited liability partnership founded in 1969, wholly owned by
indirect subsidiaries of Morgan Stanley, Dean Witter, Discover and Co., and is
located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser provides
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors, and as of December 31, 1997 had
in excess of $59.4 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor") provides
distribution services to the Fund.
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Terms in bold type are defined in the Prospectus Glosary MAS Fund - 5
<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, 1997 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, 1997, the Growth, Balanced Plus, and
Multi-Market Fixed Income Portfolios had not commenced operations. (Data is
adjusted to reflect a 2.5 for 1 share split as of August 13, 1993 for all
portfolios in operation as of that date, except for the Global
Fixed Income Portfolio.)
<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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
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Emerging Markets Value Portfolio (formerly, the Emerging Markets Portfolio)
(Commencement of Institutional Class Operations 2/28/95)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 11.52 $ 0.16 $ 1.73 $ 1.89 ($ 0.20) ($ 0.80) -- ($ 1.00)
1996 11.63 0.19 0.45 0.64 (0.17) (0.58) -- (0.75)
1995 10.00 0.10 1.53 1.63 -- -- -- --
Equity Portfolio (Commencement of Institutional Class Operations 11/14/84)
1997 $ 25.67 $ 0.36 $ 8.22 $ 8.58 ($ 0.40) ($ 4.40) -- ($ 4.80)
1996 24.43 0.50 3.26 3.76 (0.50) (2.02) -- (2.52)
1995 21.05 0.52 4.55 5.07 (0.52) (1.17) -- (1.69)
1994 22.82 0.44 0.41 0.85 (0.41) (2.21) -- (2.62)
1993 22.04 0.41 1.95 2.36 (0.43) (1.15) -- (1.58)
1992 20.78 0.43 1.86 2.29 (0.42) (0.61) -- (1.03)
1991 15.86 0.44 5.64 6.08 (0.44) (0.72) -- (1.16)
1990 18.65 0.48 (2.57) (2.09) (0.54) (0.16) -- (0.70)
1989 14.48 0.51 4.15 4.66 (0.46) (0.03) -- (0.49)
1988 17.14 0.40 (1.93) (1.53) (0.32) (0.81) -- (1.13)
International Equity Portfolio (Commencement of Institutional Class Operations 11/25/88)
1997+++ $ 13.24 $ 0.25 $ 2.71 $ 2.96 ($ 0.26) ($ 0.27) -- ($ 0.53)
1996 12.51 0.31 0.77 1.08 (0.29) (0.06) -- (0.35)
1995 14.52 0.19 (0.75) (0.56) -- (1.35) ($0.10)# (1.45)
1994 13.18 0.12 1.63 1.75 (0.16) (0.25) -- (0.41)
1993 11.03 0.21 2.14 2.35 (0.20) -- -- (0.20)
1992 11.56 0.36 (0.33) 0.03 (0.56) -- -- (0.56)
1991 9.83 0.22 1.83 2.05 (0.23) (0.09) -- (0.32)
1990 11.86 0.26 (1.90) (1.64) (0.31) (0.08) -- (0.39)
1989 10.00 0.26 1.75 2.01 (0.15) -- -- (0.15)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
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<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio (formerly, the Emerging Markets Portfolio)
(Commencement of Institutional Class Operations 2/28/95)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $ 12.41 18.08% $ 22,808 1.18%++ 1.30% 64% $ 0.0019
1996 (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 --
Equity Portfolio (Commencement of Institutional Class Operations 11/14/84)
1997 $ 29.45 38.46% $1,312,547 0.60% 1.30% 85% $ 0.0294
1996 25.67 16.48 1,442,261 0.60 1.95 67 0.0557
1995 24.43 26.15 1,597,632 0.61 2.39 67 --
1994 21.05 4.11 1,193,017 0.60 2.10 41 --
1993 22.82 11.05 1,098,003 0.59 1.86 51 --
1992 22.04 11.55 918,989 0.59 2.03 21 --
1991 20.78 40.18 675,487 0.60 2.36 33 --
1990 15.86 (11.67) 473,261 0.59 2.66 44 --
1989 18.65 32.95 602,261 0.59 3.29 29 --
1988 14.48 (8.41) 385,864 0.62 2.99 51 --
International Equity Portfolio (Commencement of Institutional Class Operations 11/25/88)
1997+++ $ 15.67 23.16% $ 649,755 0.66% 1.81% 62% $ 0.0035
1996 13.24 8.87 635,706 0.69 1.88 78 0.0093
1995 12.51 (3.36) 1,160,986 0.70 1.90 112 --
1994 14.52 13.33 1,132,867 0.64 0.89 69 --
1993 13.18 21.64 891,675 0.66 1.23 43 --
1992 11.03 0.37 512,127 0.70 1.41 42 --
1991 11.56 21.22 274,295 0.67 2.08 51 --
1990 9.83 (14.38) 126,035 0.65 2.40 45 --
1989 11.86 20.36 87,083 0.63* 3.05* 4 --
</TABLE>
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MAS Fund - 6 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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Institutional Class Operations 3/30/90)
1997 $ 20.53 ($ 0.01) $ 4.75 $ 4.74 -- ($ 3.43) -- ($ 3.43)
1996 18.60 0.01 4.70 4.71 (0.03) (2.75) -- (2.78)
1995 16.29 0.03 4.21 4.24 (0.03) (1.90) -- (1.93)
1994 18.56 0.02 (0.58) (0.56) (0.01) (1.70) -- (1.71)
1993 14.51 0.01 4.80 4.81 -- (0.76) -- (0.76)
1992 14.92 0.01 0.44 0.45 (0.03) (0.83) -- (0.86)
1991 9.00 0.04 5.91 5.95 (0.03) -- -- (0.03)
1990 10.00 0.02 (1.01) (0.99) (0.01) -- -- (0.01)
Mid Cap Value Portfolio (Commencement of Institutional Class Operations 12/30/94)
1997+++ $ 14.49 $ 0.05 $ 8.37 $ 8.42 ($ 0.10) ($ 1.01) -- ($ 1.11)
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) -- (1.59)
1995 10.00 0.55### 2.90 3.45 -- -- -- --
Small Cap Value Portfolio (Commencement of Institutional Class Operations 7/01/86)
1997 $ 19.64 $ 0.15 $ 8.39 $ 8.54 ($ 0.11) ($ 3.10) -- ($ 3.21)
1996 18.28 0.18 3.62 3.80 (0.20) (2.24) -- (2.44)
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) -- (2.07)
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) -- (1.18)
1993 12.84 0.18 4.64 4.82 (0.11) -- -- (0.11)
1992 11.45 0.10 1.48 1.58 (0.19) -- -- (0.19)
1991 7.20 0.23 4.21 4.44 (0.19) -- -- (0.19)
1990 10.42 0.28 (3.05) (2.77) (0.45) -- -- (0.45)
1989 8.54 0.34 1.74 2.08 (0.20) -- -- (0.20)
1988 10.24 0.18 (1.42) (1.24) (0.14) (0.32) -- (0.46)
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Institutional Class Operations 3/30/90)
1997 $ 21.84 28.05% $ 446,963 0.63% (0.07%) 134% $ 0.0514
1996 20.53 28.81 403,281 0.60 0.04 141 0.0491
1995 18.60 30.56 373,547 0.61 0.21 129 --
1994 16.29 (3.28) 302,995 0.60 0.12 55 --
1993 18.56 33.92 309,459 0.59 0.07 69 --
1992 14.51 2.87 192,817 0.60 0.05 39 --
1991 14.92 66.26 171,163 0.60 0.29 46 --
1990 9.00 (9.98) 76,398 0.64* 0.34* 23 --
Mid Cap Value Portfolio (Commencement of Institutional Class Operations 12/30/94)
1997+++ $ 21.80 61.40% $ 220,260 0.90%++ 0.28% 184% $ 0.0467
1996 14.49 22.30 50,449 0.88++ 1.61 377 $ 0.0462
1995 13.45 34.50 4,507 0.93*++ 10.13*### 639### --
Small Cap Value Portfolio (Commencement of Institutional Class Operations 7/01/86)
1997 $ 24.97 49.81% $ 897,396 0.86% 0.70% 107% $ 0.0480
1996 19.64 24.00 585,457 0.86 0.99 145 0.0498
1995 18.28 18.39 430,368 0.87 1.20 119 --
1994 17.67 8.04 308,156 0.88 0.91 162 --
1993 17.55 37.72 175,029 0.88 1.33 93 --
1992 12.84 14.12 105,886 0.86 1.06 50 --
1991 11.45 63.07 52,182 0.88 1.70 53 --
1990 7.20 (27.63) 100,848 0.85 1.77 59 --
1989 10.42 24.85 189,223 0.85 3.48 36 --
1988 8.54 (11.50) 202,500 0.86 2.32 41 --
</TABLE>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 7
<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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
Value Portfolio (Commencement of Institutional Class Operations 11/05/84)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 15.61 $ 0.34 $ 5.75 $ 6.09 ($ 0.30) ($ 1.03) -- ($ 1.33)
1996 14.89 0.30 2.20 2.50 (0.32) (1.46) -- (1.78)
1995 12.63 0.31 3.34 3.65 (0.31) (1.08) -- (1.39)
1994 12.76 0.30 0.59 0.89 (0.29) (0.73) -- (1.02)
1993 12.67 0.30 1.92 2.22 (0.31) (1.82) -- (2.13)
1992 12.92 0.35 1.05 1.40 (0.38) (1.27) -- (1.65)
1991 10.29 0.44 3.79 4.23 (0.44) (1.16) -- (1.60)
1990 14.56 0.52 (3.14) (2.62) (0.62) (1.03) -- (1.65)
1989 12.42 0.54 2.73 3.27 (0.47) (0.66) -- (1.13)
1988 15.81 0.48 (1.68) (1.20) (0.46) (1.73) -- (2.19)
Cash Reserves Portfolio (Commencement of Institutional Class Operations 8/29/90)
1997 $ 1.000 $ 0.052 -- $ 0.052 ($ 0.052) -- -- ($ 0.052)
1996 1.000 .052 -- .052 (.052) -- -- (.052)
1995 1.000 .055 -- .055 (.055) -- -- (.055)
1994 1.000 .034 -- .034 (.034) -- -- (.034)
1993 1.000 .028 -- .028 (.028) -- -- (.028)
1992 1.000 .038 -- .038 (.038) -- -- (.038)
1991 1.000 .064 -- .064 (.064) -- -- (.064)
1990 1.000 .007 -- .007 (.007) -- -- (.007)
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
1997 $ 10.89 $ 0.74 $ 0.33 $ 1.07 ($ 0.67) ($ 0.02) -- ($ 0.69)
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61)
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23)
1994 11.99 0.94 (1.23) (0.29) (0.95) ($ 0.73) (0.15)# (1.83)
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) -- (1.31)
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) -- (1.17)
1991 10.26 0.92 1.10 2.02 (0.94) -- -- (0.94)
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) -- (1.06)
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) -- (0.82)
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) -- (0.46)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
Value Portfolio (Commencement of Institutional Class Operations 11/05/84)
<C> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 20.37 41.25% $3,542,772 0.62% 1.93% 46% $ 0.0577
1996 15.61 18.41 1,844,740 0.61 2.07 53 0.0572
1995 14.89 32.58 1,271,586 0.60 2.43 56 --
1994 12.63 7.45 981,337 0.61 2.40 54 --
1993 12.76 19.67 762,175 0.59 2.48 43 --
1992 12.67 12.83 448,329 0.60 2.87 55 --
1991 12.92 45.54 458,117 0.60 3.67 64 --
1990 10.29 (19.88) 369,044 0.59 3.87 51 --
1989 14.56 28.49 726,776 0.59 4.05 35 --
1988 12.42 (5.40) 619,287 0.59 3.96 47 --
Cash Reserves Portfolio (Commencement of Institutional Class Operations 8/29/90)
1997 $ 1.000 5.32% $ 98,464 0.33%++ 5.20% N/A --
1996 1.000 5.35 78,497 0.33++ 5.19 N/A --
1995 1.000 5.57 44,624 0.33++ 5.45 N/A --
1994 1.000 3.40 37,933 0.32++ 3.70 N/A --
1993 1.000 2.81 10,717 0.32++ 2.78 N/A --
1992 1.000 3.89 12,935 0.32++ 3.95 N/A --
1991 1.000 6.63 24,163 0.32++ 6.57 N/A --
1990 1.000 0.74 23,285 0.48* 8.31* N/A --
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
1997 $ 11.27 10.20% $ 96,954 0.51%++ 6.48% 217% --
1996 10.89 4.41 95,362 0.52++ 5.73 168 --
1995 11.03 14.33 36,147 0.51++ 6.80 313 --
1994 9.87 (2.87) 36,521 0.50++ 7.65 78 --
1993 11.99 14.08 90,350 0.50 7.15 96 --
1992 11.80 15.41 98,130 0.47 7.67 136 --
1991 11.34 20.99 83,200 0.48 8.18 131 --
1990 10.26 3.90 77,622 0.48 8.35 181 --
1989 10.90 9.14 68,855 0.49 8.24 219 --
1988 10.78 12.63 53,236 0.50 8.62 224 --
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 11.83 $ 0.80 $ 0.50 $ 1.30 ($ 0.78) ($ 0.13) -- ($ 0.91)
1996 11.82 0.78 0.08 0.86 (0.79) (0.06) -- (0.85)
1995 10.93 0.80 0.69 1.49 (0.60) -- -- (0.60)
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($ 0.13)# (1.42)
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) -- (1.44)
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) -- (1.17)
1991 10.94 0.94 1.25 2.19 (0.93) -- -- (0.93)
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) -- (1.13)
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) -- (0.77)
1988 10.86 0.97 0.43 1.40 (0.86) -- -- (0.86)
Fixed Income Portfolio II (Commencement of Institutional Class Operations 8/31/90)
1997 $ 11.23 $ 0.74 $ 0.39 $ 1.13 ($ 0.79) ($ 0.11) -- ($ 0.90)
1996 11.33 0.70 (0.03) 0.67 (0.66) (0.08) (0.03)# (0.77)
1995 10.42 0.71 0.71 1.42 (0.51) -- -- (0.51)
1994 11.97 0.63 (1.16) (0.53) (0.67) (0.21) (0.14)# (1.02)
1993 11.67 0.69 0.77 1.46 (0.61) (0.55) -- (1.16)
1992 11.34 0.77 0.61 1.38 (0.81) (0.24) -- (1.05)
1991 10.09 0.81 1.10 1.91 (0.66) -- -- (0.66)
1990 10.00 0.04 0.05 0.09 -- -- -- --
Global Fixed Income Portfolio (Commencement of Institutional Class Operations 4/30/93)
1997+++ $ 11.01 $ 0.60 ($ 0.22) $ 0.38 (0.59) ($ 0.16) -- ($ 0.75)
1996 11.05 0.63 0.09 0.72 (0.71) (0.05) -- (0.76)
1995 10.20 0.71 0.81 1.52 (0.67) -- -- (0.67)
1994 10.67 0.58 (0.61) (0.03) (0.41) (0.03) -- (0.44)
1993 10.00 0.13 0.61 0.74 (0.07) -- -- (0.07)
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio (Commencement of Institutional Class Operations 11/14/84)
<S> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 12.22 11.47% $3,219,987 0.49% 6.73% 179% --
1996 11.83 7.63 1,790,146 0.48 6.77 162 --
1995 11.82 14.19 1,487,409 0.49 7.28 140 --
1994 10.93 (4.43) 1,194,957 0.49 6.79 100 --
1993 12.86 14.26 909,738 0.47 7.06 144 --
1992 12.67 14.35 859,712 0.47 7.50 137 --
1991 12.20 21.12 831,547 0.47 8.25 143 --
1990 10.94 3.79 666,736 0.46 8.43 209 --
1989 11.64 9.25 559,995 0.47 8.36 100 --
1988 11.40 13.43 405,385 0.49 8.91 168 --
Fixed Income Portfolio II (Commencement of Institutional Class Operations 8/31/90)
1997 $ 11.46 10.58% $ 226,662 0.50% 6.54% 182% --
1996 11.23 6.12 191,740 0.50 6.06 165 --
1995 11.33 14.13 176,945 0.51 6.75 153 --
1994 10.42 (4.76) 129,902 0.51 6.07 137 --
1993 11.97 13.53 94,836 0.51 6.17 101 --
1992 11.67 13.02 78,302 0.49 7.05 182 --
1991 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 Institutional Class Operations 4/30/93)
1997+++ $ 10.64 3.53% $ 77,493 0.57% 5.65% 137% --
1996 11.01 6.83 67,282 0.60 5.25 133 --
1995 11.05 15.54 55,147 0.58 6.34 118 --
1994 10.20 (0.29) 43,066 0.57 5.48 117 --
1993 10.67 7.43 53,164 0.58*++ 5.08* 30 --
</TABLE>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio (Commencement of Institutional Class Operations 2/28/89)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 9.32 $ 0.86 $ 0.87 $ 1.73 ($ 0.87) ($ 0.03) -- ($ 0.90)
1996 9.08 0.88 0.28 1.16 (0.92) -- -- (0.92)
1995 8.97 0.90 0.19 1.09 (0.85) ($ 0.08) ($ 0.05)# (0.98)
1994 9.49 0.75 (0.42) 0.33 (0.69) (0.16) -- (0.85)
1993 8.58 0.73 0.90 1.63 (0.72) -- -- (0.72)
1992 7.80 0.74 0.89 1.63 (0.85) -- -- (0.85)
1991 7.07 1.42 0.82 2.24 (1.51) -- -- (1.51)
1990 9.98 1.36 (2.82) (1.46) (1.42) (0.03) -- (1.45)
1989 10.00 0.55 (0.44) 0.11 (0.13) -- -- (0.13)
Intermediate Duration Portfolio (Commencement of Institutional Class Operations 10/3/94)
1997+++ $10.28 $ 0.61 $ 0.27 $ 0.88 ($ 0.53) ($ 0.15) -- ($ 0.68)
1996 10.68 0.60 0.03 0.63 (0.65) (0.38) -- (1.03)
1995 10.00 0.69 0.42 1.11 (0.43) -- -- (0.43)
International Fixed Income Portfolio (Commencement of Institutional Class Operations 4/29/94)
1997 $10.77 $ 0.50 ($ 0.44) $ 0.06) ($ 0.38) ($ 0.26) -- ($ 0.64)
1996 11.01 0.52 0.12 0.64 (0.80) (0.08) -- (0.88)
1995 10.05 0.67 0.92 1.59 (0.63) -- -- (0.63)
1994 10.00 0.21 (0.11) 0.10 (0.05) -- -- (0.05)
Limited Duration Portfolio (Commencement of Institutional Class Operations 3/31/92)
1997 $10.38 $ 0.62 $ 0.08 $ 0.70 ($ 0.59) -- -- ($ 0.59)
1996 10.41 0.58 (0.03) 0.55 (0.58) -- -- (0.58)
1995 10.19 0.56 0.22 0.78 (0.55) -- ($ 0.01)# (0.56)
1994 10.72 0.56 (0.52) 0.04 (0.51) ($ 0.04) (0.02)# (0.57)
1993 10.58 0.32 0.22 0.54 (0.32) (0.08) -- (0.40)
1992 10.00 0.19 0.49 0.68 (0.10) -- -- (0.10)
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
High Yield Portfolio (Commencement of Institutional Class Operations 2/28/89)
<S> <C> <C> <C> <C> <C> <C> <C>
1997+++ $ 10.15 19.90% $ 523,899 0.51% 9.05% 96% --
1996 9.32 13.83 289,810 0.49 10.04 115 --
1995 9.08 13.58 220,785 0.50 10.68 96 --
1994 8.97 3.57 182,969 0.50 9.01 112 --
1993 9.49 20.12 50,396 0.53++ 8.94 99 --
1992 8.58 22.49 20,491 0.53++ 9.74 148 --
1991 7.80 36.70 6,453 0.76 19.45 106 --
1990 7.07 (16.26) 4,820 0.82 16.93 65 --
1989 9.98 0.91 3,479 0.73* 11.66* 17 --
Intermediate Duration Portfolio (Commencement of Institutional Class Operations 10/3/94)
1997+++ $ 10.48 8.93% $ 72,119 0.55%++ 5.93% 204% --
1996 10.28 6.27 12,017 0.56++ 6.17 251 --
1995 10.68 11.39 19,237 0.52*++ 6.56* 168 --
International Fixed Income Portfolio (Commencement of Institutional Class Operations 4/29/94)
1997 $ 10.19 0.44% $ 152,752 0.53% 5.27% 107% --
1996 10.77 6.13 143,137 0.53 5.39 124 --
1995 11.01 16.36 127,882 0.54 6.35 140 --
1994 10.05 1.01 66,879 0.60*++ 5.83* 31 --
Limited Duration Portfolio (Commencement of Institutional Class Operations 3/31/92)
1997 $ 10.49 6.98% $ 155,570 0.43%++ 6.15% 130% --
1996 10.38 5.47 123,227 0.43 5.65 174 --
1995 10.41 7.95 100,186 0.43++ 5.96 119 --
1994 10.19 0.40 62,775 0.41 4.16 192 --
1993 10.72 5.33 128,991 0.42++ 3.92 217 --
1992 10.58 6.90 13,065 0.49* 4.99* 159 --
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio (Commencement of Institutional Class Operations 1/31/92)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $10.42 $ 0.91 $ 0.16 $ 1.07 ($ 0.73) -- -- ($ 0.73)
1996 10.49 0.68 (0.07) 0.61 (0.68) -- -- (0.68)
1995 9.95 0.72 0.47 1.19 (0.65) -- -- (0.65)
1994 10.95 0.52 (0.83) (0.31) (0.45) ($ 0.21) ($ 0.03)# (0.69)
1993 10.44 0.63 0.48 1.11 (0.60) -- -- (0.60)
1992 10.00 0.29 0.28 0.57 (0.13) -- -- (0.13)
Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)
1997 $11.23 $ 0.53 $ 0.40 $ 0.93 ($ 0.52) -- -- ($ 0.52)
1996 10.75 0.51 0.49 1.00 (0.52) -- -- (0.52)
1995 10.04 0.59 0.71 1.30 (0.59) -- -- (0.59)
1994 11.15 0.51 (1.01) (0.50) (0.54) -- ($ 0.07)# (0.61)
1993 10.00 0.37 1.04 1.41 (0.26) -- -- (0.26)
PA Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)
1997 $11.37 $ 0.55 $ 0.34 $ 0.89 ($ 0.55) -- -- ($ 0.55)
1996 10.91 0.51 0.46 0.97 (0.51) -- -- (0.51)
1995 10.13 0.58 0.77 1.35 (0.57) -- -- (0.57)
1994 11.26 0.56 (1.00) (0.44) (0.64) ($ 0.05)# -- (0.69)
1993 10.00 0.39 1.17 1.56 (0.30) -- -- (0.30)
Special Purpose Fixed Income Portfolio (Commencement of Institutional Class Operations 3/31/92)
1997+++ $12.26 $ 0.85 $ 0.52 $ 1.37 ($ 0.87) ($ 0.18) -- ($ 1.05)
1996 12.53 0.83 0.08 0.91 (0.88) (0.30) -- (1.18)
1995 11.52 0.91 0.75 1.66 (0.65) -- -- (0.65)
1994 13.40 0.80 (1.28) (0.48) (0.78) (0.53) ($ 0.09)# (1.40)
1993 12.72 0.88 0.92 1.80 (0.82) (0.30) -- (1.12)
1992 11.80 0.39 0.72 1.11 (0.19) -- -- (0.19)
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio (Commencement of Institutional Class Operations 1/31/92)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $10.76 10.70% $ 38,085 0.50%++ 7.79% 164% --
1996 10.42 6.10 50,925 0.50++ 6.46 116 --
1995 10.49 12.52 49,766 0.50++ 6.35 107 --
1994 9.95 (2.95) 119,518 0.50++ 5.30 220 --
1993 10.95 11.03 50,249 0.50++ 6.92 93 --
1992 10.44 5.75 13,601 0.50*++ 8.11* 133 --
Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)
1997 $11.64 8.47% $ 75,120 0.51%++ 4.70% 54% --
1996 11.23 9.46 54,536 0.51++ 4.66 78 --
1995 10.75 13.37 36,040 0.50++ 5.64 58 --
1994 10.04 (4.64) 38,549 0.50++ 4.98 34 --
1993 11.15 14.20 26,914 0.50*++ 4.65* 66 --
PA Municipal Portfolio (Commencement of Institutional Class Operations 10/1/92)
1997 $11.71 8.01% $ 27,461 0.51%++ 4.74% 64% --
1996 11.37 9.03 28,488 0.51++ 4.58 51 --
1995 10.91 13.74 15,734 0.50++ 5.56 57 --
1994 10.13 (4.08) 23,515 0.50++ 5.39 69 --
1993 11.26 15.81 15,633 0.50*++ 4.74* 94 --
Special Purpose Fixed Income Portfolio (Commencement of Institutional Class Operations 3/31/92)
1997+++ $12.58 11.78% $ 492,784 0.49% 6.88% 198% --
1996 12.26 7.74 447,646 0.49 6.75 151 --
1995 12.53 14.97 390,258 0.49 7.33 143 --
1994 11.52 (4.00) 384,731 0.50 6.66 100 --
1993 13.40 15.19 300,185 0.48 6.84 124 --
1992 12.72 9.47 274,195 0.53* 6.94* 138 --
</TABLE>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 11
<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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio (Commencement of Institutional Class Operations 12/31/92)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $13.81 $ 0.51 $ 2.91 $ 3.42 ($ 0.54) ($ 1.39) -- ($ 1.93)
1996 13.06 0.53 1.15 1.68 (0.50) (0.43) -- (0.93)
1995 11.28 0.54 1.78 2.32 (0.47) (0.07) -- (0.54)
1994 11.84 0.47 (0.45) 0.02 (0.43) (0.15) -- (0.58)
1993 11.06 0.25 0.66 0.91 (0.13) -- -- (0.13)
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1997+++ $12.28 $ 0.38 $ 2.57 $ 2.95 ($ 0.51) ($ 1.08) -- ($ 1.59)
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) -- (0.57)
1995 9.97 0.44 1.33 1.77 (0.40) -- -- (0.40)
1994 10.00 0.07 (0.10) (0.03) -- -- -- --
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -------------------------------------------------------------------------------------------------------------
Balances Portfolio (Commencement of Institutional Class Operations 12/31/92)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $ 15.30 27.44% $ 343,284 0.58% 3.56% 145% $0.0578
1996 13.81 13.47 300,868 0.57 3.85 110 0.0521
1995 13.06 21.37 334,630 0.58 4.55 95
1994 11.28 0.19 309,596 0.58 4.06 75
1993 11.84 8.31 291,762 0.58* 3.99* 62
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1997+++ $ 13.64 26.50% $ 173,155 0.74%++ 3.07% 141% $0.0114
1996 12.28 13.75 129,558 0.58++ 3.82 122 0.0225
1995 11.34 18.28 96,839 0.58++ 4.56 112
1994 9.97 (0.30) 51,877 0.58*++ 4.39* 20
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Notes to the Financial Highlights
*Annualized
**Total return figures for partial years are not annualized.
***For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share paid for security
transactions on which commissions were charged.
#Represents distributions in excess of net realized gains.
##Represents distributions in excess of net investment income.
###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 the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods. Where
listed as N/A, if the expense offsets were included, the Ratio of Expenses
to Average Net Assets would not significantly differ.
<TABLE>
<CAPTION>
Portfolio 1995 1996 1997 Portfolio 1995 1996 1997
- --------- ---- ---- ---- --------- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Value 1.18%* 1.18% 1.18% High Yield 0.49% 0.48% 0.50%
Equity 0.60 0.60 0.59 Intermediate Duration 0.52 0.52 0.52
International Equity 0.66 0.65 0.63 International Fixed Income 0.54 0.53 0.53
Mid Cap Growth 0.60 0.60 0.61 Limited Duration 0.42 0.42 0.42
Mid Cap Value 0.88* 0.88 0.88 Mortgage-Backed Securities 0.50 0.50 0.50
Small Cap Value 0.87 0.86 0.86 Municipal 0.50 0.50 0.50
Value 0.60 0.60 0.61 PA Municipal N/A 0.50 0.50
Cash Reserves 0.32 0.32 0.32 Special Purpose Fixed Income 0.48 0.49 0.48
Domestic Fixed Income 0.50 0.50 0.50 Balanced 0.57 0.57 0.56
Fixed Income 0.48 0.48 0.48 Multi-Asset-Class 0.58 0.58 0.74
Fixed Income II 0.49 0.49 0.49 Global Fixed Income 0.56 0.58 0.57
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
Voluntarily waived and/or reimbursed expenses for:
<TABLE>
<CAPTION>
Portfolio 1992 1993 1994 1995 1996 1997
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value -- -- -- 0.29%* 0.11% 0.10%
Mid Cap Value -- -- -- 2.13* 0.18 0.02
Cash Reserves -- 0.24% 0.14% 0.11 0.09 0.07
Domestic Fixed Income -- -- 0.03 0.09 0.01 0.01
Global Fixed Income -- 0.18* -- -- -- --
High Yield 0.22 0.09 -- -- -- --
Intermediate Duration -- -- -- 0.08* 0.13 0.05
International Fixed Income -- -- 0.11* -- -- --
Limited Duration -- 0.03 -- 0.02 -- 0.00
Mortgage-Backed Securities 0.30* 0.06 0.01 0.01 0.04 0.04
Municipal -- 0.20* 0.06 0.09 0.09 0.05
PA Municipal -- 0.25* 0.09 0.19 0.15 0.09
Multi-Asset-Class -- -- 0.26* 0.14 0.08 0.08
</TABLE>
+++ Per share amounts for the year ended September 30, 1997, are based on
average shares outstanding.
* Amount is less than 0.01%
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 13
<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).
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 a 30-day period 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 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 differs 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 Fund - 14 Terms in bold type are defined in the Prospectus Glosary
<PAGE>
GENERAL INFORMATION
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 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 annual turnover. 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 with respect to forward delivery mortgage-backed
securities. For the Balanced, Multi-Asset-Class and Balanced Plus Portfolios,
annual turnover rate is not expected to exceed 100% with respect to Equity
Securities.
The following portfolios have annual turnover rates of 100% or more: Mid Cap
Growth, Mid Cap Value, Small Cap Value, Domestic Fixed Income, Fixed Income,
Fixed Income II, Global Fixed Income, Intermediate Duration, International Fixed
Income, Limited Duration, Mortgage-Backed Securities, Special Purpose Fixed
Income, Balanced and Multi-Asset-Class. These high rates of annual 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 annual 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. The annual
turnover rate for each portfolio is shown in the Financial Highlights under
"Portfolio Turnover Rate."
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glosary MAS Fund - 15
<PAGE>
Cash Equivalents/Temporary Defensive Investing: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets is 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, Emerging Markets Value and
International Fixed Income Portfolios. However, these portfolios will comply
with the diversification requirements imposed by Sub-Chapter M of the Internal
Revenue Code and;
(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, Emerging Markets Value and International Fixed Income Portfolios.
However, these portfolios will comply with the diversification requirements
imposed by Sub-Chapter M of the Internal Revenue Code.
Limitations (a) and (b) 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 portfolios. 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 in this prospectus or the
Statement of Additional Information 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 portfolios' assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
- --------------------------------------------------------------------------------
MAS Fund - 16 Terms in bold type are defined in the Prospectus Glosary
<PAGE>
Emerging Markets Value Portfolio - (formerly, the Emerging Markets Portfolio) (a
non-diversified portfolio)
Objective: To achieve long-term capital growth by investing
primarily in common stocks of emerging markets issuers.
Approach: The Adviser evaluates both short-term and long-term
international economic trends and relative
attractiveness of emerging markets and individual
emerging market securities. The Adviser selects common
stocks which are deemed to be undervalued at the time of
purchase, based on proprietary measures of value.
Policies: Generally at least 65% invested in Equity Securities of
Emerging Markets Issuers, which are deemed to be
undervalued.
Derivatives may be used to pursue portfolio strategy.
Allowable ADRs Eastern European Issuers
Investments: Agencies Emerging Markets Issuers
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Corporates Futures & Options
High Yield Structured Investments
Investment Companies Structured Notes
Investment Funds Swaps
Loan Participations U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: MSCI Emerging Markets Free Index
Strategies: Emerging Markets Investing
Foreign Investing
Non-Diversified Status
Value Stock Investing
Portfolio
Manager: Horacio A. Valerias
- --------------------------------------------------------------------------------
<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's investment process is designed to capture
value by identifying stocks that offer low but rising
expectations. To determine the level of expectations
for various companies and the direction of
changes in those expectations, the Adviser analyzes the
companies' equity valuations and changes in the
companies' estimates of future earnings. In addition,
the Adviser diversifies across sectors to preserve
return while reducing risk, seeking the best values
within each sector of the market. A group of senior
investment professionals invests the portfolio using a
disciplined approach to stock selection supported by
fundamental research analysts. Each investment
professional makes his or her own buy, sell and sector-
allocation decisions. Overall sector allocation is
driven by bottom-up stock selection and its reviwed
regularly to preserve the benefits of diversification.
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
Allowable Investments: ADRs Corporates
Agencies Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Futures & Options Swaps
Investment Companies U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: S&P 500 Index
Strategies: Core Equity Investing
Portfolio
Management Team: Arden C. Armstrong, James J. Jolinger, Nicholas J.
Kovich, Brian Kramp, Robert J. Marcin and Gary G.
Schlarbaum
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glosary MAS Fund - 17
<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 meeting 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
Allowable Investments: ADRs Corporates
Agencies Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Futures & Options Swaps
Investment Companies U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: S&P 500 Index
Strategy: Growth Stock Investing
Portfolio
Management Team: Arden C. Armstrong and Gary G. Schlarbaum
- --------------------------------------------------------------------------------
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 U.S.
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
Allowable Investments: ADRs Eastern European Issuers
Agencies Emerging Markets Issuers
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Corporates Futures & Options
Investment Companies Structured Notes
Investment Funds Swaps
Loan Participations U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Structured Investments
Comparative Index: MSCI World Ex-U.S. Index
Strategies: International Equity Investing
Emerging Markets Investing
Foreign Investing
Portfolio
Management Team: Hassan Elmasry and Horacio A. Valerias
- --------------------------------------------------------------------------------
MAS Fund - 18 Terms in bold type are defined in the Prospectus Glossary
<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 selling 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 matching the S&P MidCap 400 Index (currently
$500 million to $600 billion)
Allowable Investments: ADRs Foreign Currency
Cash Equivalents Foreign Equities
Common Stock Futures & Options
Convertibles
Investment Companies Rights
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
Portfolio
Management Team: Arden C. Armstrong and Abhi Y. Kanitkar
- --------------------------------------------------------------------------------
<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, which are 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)
Allowable Investments: ADRs Corporates
Agencies Foreign Bonds
Cash Equivalents Foreign Equities
Common Stocks Foreign Currency
Convertibles Forwards
Futures & Options Swaps
Investment Companies U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 19
<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, which are 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)
Allowable Investments: ADRs Corporates
Agencies Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Futures & Options Swaps
Investment Companies U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: Russell 2000 Index
Strategies: Value Stock Investing
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum
- --------------------------------------------------------------------------------
MAS Fund - 20 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,
which are 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
Allowable Investments: ADRs Corporates
Agencies Foreign Bonds
Cash Equivalents Foreign Currency
Common Stocks Foreign Equities
Convertibles Forwards
Futures & Options Swaps
Investment Companies U.S. Governments
Preferred Stock Warrants
Repurchase Agreements When Issued Securities
Rights Zero Coupons
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
Portfolio
Management Team: Richard M. Behler, Nicholas J. Kovich and Robert J.
Marcin
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 21
<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
Allowable Investments: Agencies Corporates
Asset-Backeds Floaters
Cash Equivalents Investment Companies
Commercial Paper Repurchase Agreements
U.S. Governments
Yankees
Zero Coupons
Comparative Index: Lipper Money Market Index
Strategy: Money Market Investing
Portfolio
Management Team: Abigail Jones Feder and Ellen D. Harvey
- --------------------------------------------------------------------------------
MAS Fund - 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 and other investment grade
fixed-income securities of domestic issuers.
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 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: 80% of Fixed-Income Securities rated A or higher (or its
equivalent)
May invest up to 20% in Fixed-Income Securities rated
BBB (or its equivalent)
Maturity and Duration: Average weighted maturity generally greater than 5 years
Allowable Investments: Agencies Corporates
Asset-Backeds Floaters
Cash Equivalents Futures & Options
CMOs Inverse Floaters
Convertibles Investment Companies
Mortgage Securities Structured Notes
Municipals Swaps
Preferred Stock U.S. Governments
Repurchase Agreements When Issued Securities
SMBS Zero Coupons
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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
Allowable Investments: Agencies Floaters
Asset-Backeds Foreign Bonds
Brady Bonds Foreign Currency
Cash Equivalents Forwards
CMOs Futures & Options
Convertibles High Yield
Corporates Inverse Floaters
Investment Companies Structured Notes
Loan Participations Swaps
Mortgage Securities U.S. Governments
Municipals When Issued Securities
Preferred Stock Yankees
Repurchase Agreements Zero Coupons
SMBS
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 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 and other investment grade
fixed-income securities.
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: 100% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
Allowable Investments: Agencies Floaters
Asset-Backeds Foreign Bonds
Brady Bonds Foreign Currency
Cash Equivalents Forwards
CMOs Futures & Options
Convertibles Inverse Floaters
Corporates
Investment Companies Structured Notes
Mortgage Securities Swaps
Municipals U.S. Governments
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
SMBS Zero Coupons
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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 U.S. 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. The Adviser
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
Allowable Investments: Agencies Eastern European Issuers
Asset-Backeds Emerging Markets Issuers
Brady Bonds Floaters
Cash Equivalents Foreign Bonds
CMOs Foreign Currency
Convertibles Forwards
Corporates Futures & Options
Inverse Floaters Structured Notes
Investment Companies Swaps
Mortgage Securities U.S. Governments
Municipals When Issued Securities
Preferred Stock Yankees
Repurchase Agreements Zero Coupons
SMBS
Comparative Index: Salomon World Government Bond Index
Strategies: Foreign Investing
Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
Portfolio
Management Team: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 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
(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
Allowable Investments: Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Foreign Equities
Convertibles Forwards
Corporates Futures & Options
Eastern European Issuers High Yield
Inverse Floaters Structured Notes
Investment Companies Swaps
Loan Participations U.S. Governments
Mortgage Securities When Issued Securities
Municipals Yankees
Preferred Stock Zero Coupons
Repurchase Agreements
SMBS
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Investing
Foreign Fixed Income Investing
Emerging Markets Investing
Portfolio
Management Team: Robert E. Angevine, Thomas L. Bennett and Stephen F.
Esser
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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
Allowable Investments: Agencies Floaters
Asset-Backeds Foreign Bonds
Brady Bonds Foreign Currency
Cash Equivalents Forwards
CMOs Futures & Options
Convertibles Inverse Floaters
Corporates
Investment Companies Structured Notes
Mortgage Securities Swaps
Municipals U.S. Governments
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
SMBS Zero Coupons
Comparative Index: Lehman Brothers Intermediate Government/Corporate Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Ellen D. Harvey, Scott F. Richard and Christian G. Roth
- --------------------------------------------------------------------------------
MAS Fund - 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. The Adviser
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
Allowable Investments: Agencies Eastern European Issuers
Asset-Backeds Emerging Markets Issuers
Brady Bonds Floaters
Cash Equivalents Foreign Bonds
CMOs Foreign Currency
Convertibles Forwards
Corporates Futures & Options
Inverse Floaters Structured Notes
Investment Companies Swaps
Mortgage Securities U.S. Governments
Municipals When Issued Securities
Preferred Stock Yankees
Repurchase Agreements Zero Coupons
SMBS
Comparative Index: Salomon World Government Bond Index Except U.S.
Strategies: Foreign Investing
Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
Portfolio
Management Team: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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. The Adviser 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. The Adviser then strives to
purchase the most attractively priced portfolio that
meets our duration and investment objectives. When
purchasing securities other than U.S. Governments, the
Adviser evaluates credit, liquidity, and option risk.
When the Adviser 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
Allowable Investments: Agencies Convertibles
Asset-Backeds Corporates
Brady Bonds Floaters
Cash Equivalents Futures & Options
CMOs Investment Companies
Mortgage Securities When Issued Securities
Repurchase Agreements Yankees
Structured Notes Zero Coupons
Swaps
U.S. Governments
Comparative Index: Salomon 1-3 Year Treasury/Government Sponsored Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Portfolio
Management Team: Ellen D. Harvey, Scott F. Richard and Christian G. Roth
- --------------------------------------------------------------------------------
MAS Fund - 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 Securities.
Policies: Generally at least 65% invested in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 7 years
Duration generally between 2 and 7 years
Allowable Investments: Agencies Futures & Options
Asset-Backeds Inverse Floaters
Cash Equivalents Investment Companies
CMOs Mortgage Securities
Floaters
Municipals Swaps
Repurchase Agreements U.S. Governments
SMBS When Issued Securities
Structured Notes Zero Coupons
Comparative Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
Portfolio
Management Team: Kenneth B. Dunn, Scott F. Richard and Roberto Sella
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 31
<PAGE>
Multi-Market Fixed Income Portfolio
Objective: To realize above-average total return over a market
cycle of three to five years, consistent with reasonable
risk, by investing primarily in a diversified portofolio
of fixed-income securities of U.S. and foreign issuers.
Approach: The Adviser determines the mix of investments in
domestic and foreign Fixed-Income and High Yield
Securities expected to maximize available total return.
Strategic judgements 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 bond markets.
Policies: Generally at least 65% in Fixed-Income Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
Allowable Investments: Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Forwards
Convertibles Futures & Options
Corporates High Yield
Eastern European Issuers Inverse Floaters
Investment Companies Structured Notes
Loan Assignments Structured Securities
Loan Participations Swaps
Mortgage Securities U.S. Governments
Municipals Warrants
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
SMBS Zero Coupons
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using
60% Salomon Broad Investment Grade Index
20% Salomon World Government Bond Index Ex U.S.
12% Salomon High Yield Market Index
8% J.P. Morgan Emerging Markets Bond Index
Strategies: Foreign Investing
Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Emerging Markets Investing
High Yield Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn Stephen F. Esser, J.
David Germany, Paul Ghaffari and Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 32 Terms in bold type are defined in the Prospectus Glosary
<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 the Adviser 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
Allowable Investments: Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Forwards
Convertibles Futures & Options
Corporates High Yield
Eastern European Issuers
Inverse Floaters Structured Notes
Investment Companies Swaps
Mortgage Securities Taxable Investments
Municipals U.S. Governments
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
SMBS Zero Coupons
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
Portfolio
Management Team: Kenneth B. Dunn, Steven K. Kreider and Scott F. Richard
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 33
<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
Allowable Investments: Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Forwards
Convertibles Futures & Options
Corporates High Yield
Eastern European Issuers Inverse Floaters
Investment Companies Structured Notes
Mortgage Securities Swaps
Municipals Taxable Investments
PA Municipals U.S. Governments
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
SMBS Zero Coupons
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
Portfolio
Management Team: Kenneth B. Dunn, Steven K. Kreider and Scott F. Richard
- --------------------------------------------------------------------------------
MAS Fund - 34 Terms in bold type are defined in the Prospectus Glossary
<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
Allowable Investments: Agencies Floaters
Asset-Backeds Foreign Bonds
Brady Bonds Foreign Currency
Cash Equivalents Forwards
CMOs Futures & Options
Convertibles High Yield
Corporates Inverse Floaters
Investment Companies SMBS
Loan Participations Structured Notes
Mortgage Securities Swaps
Municipals U.S. Governments
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
Zero Coupons
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Fixed Income Management and Asset Allocation
Value Investing
Mortgage Investing
High Yield Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 35
<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
Allowable Investments: ADRs Eastern European Issuers
Agencies Floaters
Asset-Backeds Foreign Bonds
Brady Bonds Foreign Currency
Cash Equivalents Foreign Equities
CMOs Forwards
Common Stocks Futures & Options
Convertibles High Yield
Corporates Inverse Floaters
Investment Companies SMBS
Investment Funds Structured Notes
Loan Participations Swaps
Mortgage Securities U.S. Governments
Municipals Warrants
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
Rights Zero Coupons
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 Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A.
Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 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
Allowable Investments: ADRs Eastern European Issuers
Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Foreign Equities
Common Stocks Forwards
Convertibles Futures & Options
Corporates High Yield
Inverse Floaters SMBS
Investment Companies Structured Investments
Investment Funds Structured Notes
Loan Participations Swaps
Mortgage Securities U.S. Governments
Municipals Warrants
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
Rights Zero Coupons
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 Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A, Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 37
<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 U.S. 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
Allowable Investments: ADRs Eastern European Issuers
Agencies Emerging Markets Issuers
Asset-Backeds Floaters
Brady Bonds Foreign Bonds
Cash Equivalents Foreign Currency
CMOs Foreign Equities
Common Stocks Forwards
Convertibles Futures & Options
Corporates High Yield
Inverse Floaters SMBS
Investment Companies Structured Investments
Investment Funds Structured Notes
Loan Participations Swaps
Mortgage Securities U.S. Governments
Municipals Warrants
Preferred Stock When Issued Securities
Repurchase Agreements Yankees
Rights Zero Coupons
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 Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 38 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 the
Adviser'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 Special Purpose Fixed
Income, Balanced, Multi-Asset-Class and Balanced Plus 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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 39
<PAGE>
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.
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.
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MAS Fund 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Coupons 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, 1997 (not including money market instruments).
These figures are dollar-weighted averages of month-end portfolio holdings and
do not necessarily indicate a portfolio's current or future debt holdings.
Portfolios whose debt holdings total less than 100% also invest in Equity
Securities.
High Yield Portfolio Multi-Asset-Class Portfolio
QUALITY QUALITY
TSY, AGY, AAA 9.06% TSY, AGY, AAA 26.22%
AA 0.05 AA 2.32
A 0.19 A 1.09
BBB 6.09 BBB 2.09
BB 42.51 BB 4.64
B 35.48 B 6.02
CCC 0.96 CCC 0.35
Not Rated: Not Rated:
BB 0.83* BB 0.06*
B 2.30* B 0.22*
NR 2.54 NR 0.17
---- ----
Total not rated 5.66 Total not rated 0.45
TOTAL 100.00% TOTAL 43.18%
* The Adviser believes that these non-rated securities are equivalent in quality
to the rating indicated.
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.
The Adviser 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 41
<PAGE>
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 greater than 50% of a
fixed-income portfolio's assets may be invested in mortgage-related securities.
These include Mortgage 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), Fannie Mae, other government agencies, and private
issuers. It is expected that a portfolio's primary emphasis will be in Mortgage
Securities issued by the various government-related organizations. However, a
portfolio may invest, without limit, in Mortgage 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 qualtity.
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.
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MAS Fund 42 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Municipals Management: The Adviser 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.
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 1940 Act. 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 the Adviser 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 the Adviser'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 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 43
<PAGE>
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 fairly 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).
Each portfolio may invest in obligations of U.S. banks, and, except for the
Domestic Fixed Income Portfolio, in 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 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 the Cash Reserves 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).
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;
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MAS Fund 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(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, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) Repurchase Agreements collateralized by securities listed above; and
(7) Investments by the Cash Reserves 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 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.
Commercial Paper: is a term used to desribe short-term obligations with
maturities ranging from 2 to 270 days. These obligations are primarily issued by
corporations needing to finance large amounts of receivables, but may be issued
by banks and other borrowers. Commercial Paper is issued either directly or
through broker-dealers, and may be discounted or interest-bearing. Commercial
Paper is unsecured, but is almost always backed by bank lines of credit.
Virtually all Commercial Paper is ranked by Moody's or Standard & Poor's.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 45
<PAGE>
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 portfolios may enter into
over-the-counter Derivatives transactions with counterparties 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. 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 a 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. As a result, 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's listing of Allowable Investments to determine which
of these 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.
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's listing of Allowable Investments
to determine which of these 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.
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<PAGE>
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
mortgages 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.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 47
<PAGE>
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 Securities and
Exchange Commission's ("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 Corporates,
Preferred Stocks, and Convertibles 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." The rating C
is reserved for income bonds on which "no interest is being paid." 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
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MAS Fund 48 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 1940 Act 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 or limit 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 (a) 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)); (b)
guaranteed by the U.S. Government or a private organization; or (c) considered
by the Adviser to be investment grade quality. 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 Securities, including
mortgage pass-throughs and 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. 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 49
<PAGE>
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), Fannie Mae,
private issuers and other government agencies. There can be no assurance that
the private insurers can meet their obligations under the policies. Mortgage
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 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 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 U.S. Treasuries), 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. Municipals 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.
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MAS Fund 50 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Municipal notes are issued to meet the short-term funding requirements of local,
regional and state governments. Municipal notes include bond anticipation notes,
revenue anticipation notes and tax and revenue anticipation notes. These are
short-term debt obligations issued by state and local governments to aid cash
flows while waiting for taxes or revenue to be collected, at which time the debt
is retired. Other types of municipal notes in which the portfolio may invest are
construction loan notes, short-term discount notes, tax-exempt commercial paper,
demand notes, and similar instruments. Demand notes permit an investor (such as
the portfolio) to demand from the issuer payment of principal plus accrued
interest upon a specified number of days' notice. The portfolios eligible to
purchase municipal bonds may also purchase AMT bonds. AMT bonds are tax-exempt
private activity bonds issued after August 7, 1986, the proceeds of which are
directed, at least in part, to private, for-profit organizations. While the
income from AMT bonds is exempt from regular federal income tax, it is a tax
preference item in the calculation of the alternative minimum tax. The
alternative minimum tax is a special separate tax that applies to a limited
number of taxpayers who have certain adjustments to income or tax preference
items.
PA Municipals: are obligations of the Pennsylvania state government, state
agencies and various local governments, including counties, cities, townships,
special districts and authorities. In general, the credit quality and credit
risk of any issuer's debt is contingent upon the state and local economy, the
health of the issuer's finances, the amount of the issuer's debt, the quality of
management and the strength of legal provisions in the debt document that
protect debt holders. Credit risk is usually lower wherever the economy is
strong, growing and diversified, where financial operations are sound and the
debt burden is reasonable. Concentration of investment in the securities of one
state exposes a portfolio to greater credit risks than would be present in a
nationally diversified portfolio of municipal securities. The risks associated
with investment in the securities of a single state include possible tax changes
or a deterioration in economic conditions and differing levels of supply and
demand for the municipal obligations of that state.
Debt of Government Agencies, Authorities and Commissions: Certain state-created
agencies have statutory authorization to incur debt for which legislation
providing for state appropriations to pay debt service thereon is not required.
The debt of these agencies is supported by assets of, or revenues derived from,
the various projects financed; it is not an obligation of the Commonwealth. Some
of these agencies, however, such as the Delaware River Joint Toll Bridge
Commission, are indirectly dependent on Commonwealth funds through various
state-assisted programs.
Preferred Stock: are non-voting ownership shares in a corporation which pay a
fixed or variable stream of dividends.
Repurchase Agreements: are transactions by which a portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. Such 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 SEC, 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 51
<PAGE>
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 1940 Act. 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
the Adviser 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 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
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MAS Fund 52 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
delivery obligations. If there is a default by the counterparty, a portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than Swaps.
The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the portfolios would be less favorable than it would have been if this
investment technique were not used.
Taxable Investments: comprise Fixed-Income Securities and other instruments
which pay income that is not exempt from taxation. Investors may be liable for
tax on the income distributed as a result of the portfolio holding taxable
investments. In this event, shareholders will receive an IRS form 1099
disclosing the taxable income paid for a calendar year.
U.S. Governments--U.S. Treasury securities: are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the payment
of both principal and interest.
Warrants: are options issued by a corporation which give the holder the option
to purchase stock.
When-Issued Securities: are securities purchased at a certain price even though
the securities may not be delivered for up to 90 days. No payment or delivery is
made by a portfolio in a when-issued transaction until the portfolio receives
payment or delivery from the other party to the transaction. Although a
portfolio receives no income from the above described securities prior to
delivery, the market value of such securities is still subject to change. As a
consequence, it is possible that the market price of the securities at the time
of delivery may be higher or lower than the purchase price. A portfolio will
maintain with the custodian a segregated account consisting of cash or liquid
securities in an amount at least equal to these commitments.
Yankees: are U.S. dollar-denominated Fixed-Income Securities issued by a foreign
government or corporation and sold in the U.S.
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 Coupons 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 General Shareholder Information-Valuation of Shares each day
that the portfolios are open for business. See Other Information-Closed Holidays
and General Shareholder Information--Valuation of Shares. The Cash Reserves
Portfolio declares dividends daily and, therefore, at the time of a purchase
must have funds immediately
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 53
<PAGE>
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
value per share determined two business days after receipt of the check by the
Fund. Please note that payments to investors who redeem shares purchased by
check will not be made 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 additional 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 any of
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MAS Fund 54 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 additional investment amounts.
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.
Institutional Class Shares of the Fund's portfolios are also sold to
corporations or other institutions such as trusts, foundations or broker-dealers
purchasing for the accounts of others (Shareholder Organizations). Investors
purchasing and redeeming shares of the portfolios through a Shareholder
Organization may be charged a transaction-based fee or other fee for the
services of such organization. Each Shareholder Organization is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Customers of Shareholder Organizations should read this Prospectus
in light of the terms governing accounts with their organization. The Fund does
not pay compensation to or receive compensation from Shareholder Organizations
for the sale of Institutional Class Shares.
REDEMPTION OF SHARES
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.
By Mail: Each portfolio will redeem 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 55
<PAGE>
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 New York
Stock Exchange ("NYSE"), the Custodian, or the Fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as determined
by the SEC.
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 SEC. 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
qualified 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
Emerging Markets Value, 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
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MAS Fund 56 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 values of other assets and securities for which
no quotations are readily available (including restricted securities), and, to
the extent permitted by the SEC, securities for which the value has been
materially affected by events occurring after the close of the market on which
they principally trade, are determined in good faith at fair value using methods
approved by the Trustees.
Domestic Fixed Income, Fixed Income, Fixed Income Portfolio II, Global Fixed
Income, High Yield, Intermediate Duration, International Fixed Income, Limited
Duration, Mortgage-Backed Securities, Multi-Market Fixed Income, 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), and, to the extent permitted by the SEC,
securities for which the value has been materially affected by events occurring
after the close of the market on which they principally trade, will be valued in
good faith at fair value using methods approved by the Board of Trustees.
Balanced, Balanced Plus 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,
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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 57
<PAGE>
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 1940 Act. 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 Board of Trustees has 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 Board of 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 Board of 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.
All Portfolios: Net asset value per share for Investment Class Shares,
Institutional Class Shares and Adviser Class Shares may differ due to
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES: Dividends and 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 II, Special Purpose
Fixed Income, High Yield, Limited Duration, Intermediate Duration,
Mortgage-Backed Securities, Balanced, Multi-Asset-Class, Global Fixed Income,
International Fixed Income, Multi-Market Fixed Income, Domestic Fixed Income
and Balanced Plus Portfolios normally distribute substantially all of their
net investment income to shareholders on a quarterly basis.
o The International Equity, Emerging Markets Value, Small Cap Value, Mid Cap
Value and Mid Cap Growth Portfolios normally distribute substantially all of
their net investment income on an annual basis.
o The Municipal and the PA Municipal Portfolios normally distribute
substantially all of their net investment income on a monthly basis.
o The Cash Reserves Portfolio declares distributions daily and normally
distributes substantially all of its investment income on a monthly basis.
If any portfolio does not have income available to distribute, as determined in
compliance with the appropriate tax laws, no distribution will be made.
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MAS Fund 58 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute such gains with the last distribution 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. 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.
TAXES: The following is a summary of some important tax issues that affect the
portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its shareholders. More
information about taxes is in the Statement of Additional Information.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes.
Federal Taxes: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax treatment
afforded regulated investment companies. As such, each portfolio will not be
subject to federal income tax to the extent it distributes net investment
company taxable income and net capital gains to shareholders. The Fund will
notify shareholders annually as to the tax classification of all distributions.
Income dividends received by shareholders (except for shareholders of the
Municipal and PA Municipal Portfolios (see Special Tax Considerations for the
Municipal and PA Municipal Portfolios) will be taxable as ordinary income,
whether received in cash or in additional shares. 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, corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such portfolios from
U.S. corporations. Capital gains distributions are taxable to shareholders at
capital gains rates. Each portfolio will designate capital gains distributions
to individual shareholders as either subject to the federal capital gains rate
imposed on property held for more than 18 months or on property held for more
than 1 year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to shareholders in the previous
year.
Each portfolio intends to declare and pay dividends and distributions so as to
avoid imposition of the federal excise tax applicable to regulated investment
companies. Further discussion is included in the Statement of Additional
Information.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 59
<PAGE>
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders must
certify on their Account Registration Forms that their Social Security Number or
Taxpayer Identification Number is correct, and that they are not subject to
backup withholding. Exchanges and redemptions of shares in a portfolio are
taxable events.
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. Each of the International Equity, Emerging Markets Value, Global Fixed
Income, International Fixed Income, Multi-Market Fixed Income, Multi-Asset-Class
and Balanced Plus Portfolios may be able to file an election with the Internal
Revenue Service to pass through to its shareholders for foreign tax credit
purposes the amount of foreign income taxes paid by such portfolio. Further
discussion is included in the Statement of Additional Information. The other
portfolios of the Fund will not be able to make this election.
State and Local Income Taxes: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors for
the state and local income tax consequences of distributions from the
portfolios.
Special Tax Considerations for the Municipal and PA Municipal Portfolios: Each
of the Municipal and PA Municipal Portfolios intends to pay "exempt-interest"
dividends to shareholders which are excluded from a shareholder's gross income
for federal income tax purposes. Exempt-interest dividends received by
shareholders from such portfolios may be subject to state and local taxes,
although some states allow a shareholder 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.
Since each of the portfolios may invest in private activity municipal
securities, investment in either of the portfolios 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.
To the extent, if any, that distributions paid to shareholders of either
portfolio are derived from taxable interest or capital gains, such distributions
will be subject to federal income tax. Additionally, such distributions are not
eligible for the dividends received deduction for corporations.
Furthermore, the PA Municipal Portfolio invests at least 65% of its assets in PA
Municipals. As a result, the income of the PA Municipal 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.
Further discussion of tax considerations affecting shareholders of these
portfolios is found in the Statement of Additional Information.
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 Morgan Stanley, Dean
Witter, Discover & Co., and is located at One Tower Bridge, West Conshohocken,
PA 19428. The Adviser provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
December 31, 1997 had in excess of $59.4 billion in assets under management. On
May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. In connection with this transaction, the Adviser entered
into a new Investment Management Agreement ("Agreement") with MAS Funds dated
May 31, 1997, which Agreement
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MAS Fund 60 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
was approved by the shareholders of each portfolio at a special meeting held on
May 1, 1997 or at an adjournment of such meeting held on May 12, 1997. The
Adviser will retain its name and remain at its current location, One Tower
Bridge, West Conshohocken, PA 19428. The Adviser will continue to provide
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors.
Under the Agreement with the Fund, the Adviser, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the stated
investment objectives and policies of each portfolio of the Fund, manages the
investment and reinvestment of the assets of each portfolio of the Fund. In this
regard, it is the responsibility of the Adviser to make investment decisions for
the Fund's portfolios and to place each portfolio's purchase and sales orders.
As compensation for the services rendered by the Adviser under the Agreement,
each portfolio pays the Adviser an advisory fee calculated by applying a
quarterly rate. The following table shows the Adviser's contractual rate
(annualized) along with the Adviser's actual rate of compensation for the Fund's
1997 fiscal year.
FY 1997
Contractual Actual
Rate Compensation Rate
---- -----------------
Emerging Markets Value Portfolio .750% .652%
Equity Portfolio .500 .500
Growth Portfolio .500 N/A
International Equity Portfolio .500 .500
Mid Cap Growth Portfolio .500 .500
Mid Cap Value Portfolio .750 .727
Small Cap Value Portfolio .750 .750
Value Portfolio .500 .500
Cash Reserves Portfolio .250 .180
Domestic Fixed Income Portfolio .375 .364
Fixed Income Portfolio .375 .375
Fixed Income Portfolio II .375 .375
Global Fixed Income Portfolio .375 .375
High Yield Portfolio .375 .375
Intermediate Duration Portfolio .375 .325
International Fixed Income Portfolio .375 .375
Limited Duration Portfolio .300 .297
Mortgage-Backed Securities Portfolio .375 .334
Multi-Market Fixed Income Portfolio .450 N/A
Municipal Portfolio .375 .329
PA Municipal Portfolio .375 .283
Special Purpose Fixed Income Portfolio .375 .375
Balanced Portfolio .450 .450
Balanced Plus Portfolio .550 N/A
Multi-Asset-Class Portfolio .650 .528
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 Institutional
Class of the Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities,
Municipal, PA Municipal, Multi-Market Fixed Income and Multi-Asset-Class
Portfolios from exceeding 1.18%, 0.32%, 0.50%, 0.50%, 0.50%, 0.58% and 0.78%,
respectively.
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 61
<PAGE>
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. 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 Portfolio in
1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in
1996 and the Multi-Market Fixed Income Portfolio in 1997.
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, the Municipal
and PA Municipal Portfolios in 1994 and the Multi-Market Fixed Income Portfolio
in 1997.
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 and the Multi-Market
Fixed Income Portfolio in 1997.
Abigail Jones Feder, Principal, Morgan Stanley, joined Morgan Stanley in 1985.
She assumed responsibility for the Cash Reserves 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
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994, the Balanced
Plus Portfolio in 1996 and the Multi-Market Fixed Income Portfolio in 1997.
Paul Ghaffari, Principal, Morgan Stanley, joined Morgan Stanley in 1993. He
served as Vice President in the Fixed Income Division of Emerging Markets Sales
and Trading Department at Morgan Stanley. He assumed responsibility for the
Multi-Market Fixed Income Portfolio in 1997.
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.
James J. Jolinger, Vice President, Morgan Stanley, joined MAS in 1994. He served
as Equity Analyst for Oppenheimer Capital from 1987-1994. He assumed
responsibility for the Equity Portfolio in 1997.
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.
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.
- --------------------------------------------------------------------------------
MAS Fund 62 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Brian Kramp, Vice President, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
Corestates Investment Advisors from 1985-1997. He assumed responsibility for the
Equity Portfolio in 1998.
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.
Chris Leavy joined MAS in 1997. He served as a Portfolio Manager for Capitoline
Investment Services from 1995-1997; a Portfolio Manager for Premier Trust
Company from 1994 to 1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. He assumed responsibility for the Mid Cap Value and
Small Cap Value Portfolio in 1998.
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. 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
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 Growth Portfolio in 1993, the
Balanced Portfolio in 1992 and the Multi-Asset-Class and Mid Cap Value
Portfolios in 1994.
Roberto Sella, Principal, Morgan Stanley, joined MAS in 1992. He assumed
responsibility for the Mortgage-Backed Securities Portfolio in 1998.
Horacio A. Valeiras, Principal, Morgan Stanley, joined MAS in 1992. He assumed
responsibility for the International Equity Portfolio in 1992, the Emerging
Markets Value Portfolioin 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, the Multi-Asset-Class
Portfolio in 1994, the Balanced Plus Portfolio in 1996 and the Multi-Market
Fixed Income Portfolio in 1997.
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 63
<PAGE>
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- --------------------------------------------------------------------------------
MAS Fund 64 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
- --------------------------------------------------------------------------------
MAS 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 State Citizen |_| Resident Alien ___________________________________
|_| Non-Resident Alien, Indicate Country of Residence
- --------------------------------------------------------------------------------
(2)
Interested Party
Option
In addition to the account statement sent to the above registered address, the
Fund is authorized to mail duplicate statements to the name and address provided
at right
For additional interested party mailings, please attach a separate sheet.
Attention ______________________________________________________________________
Company
(If Applicable) ________________________________________________________________
Street or P.O. Box _____________________________________________________________
City ______________________________________ State _____ Zip _________ - ____
Telephone No _____ - ______ - ______
- --------------------------------------------------------------------------------
(3) INVESTMENT
For Purchase of:
|_| Equity Portfolio |_| Fixed Income Portfolio
|_| Value Portfolio |_| Fixed Income Portfolio II
|_| Growth Portfolio |_| Special Purpose Fixed Income Portfolio
|_| Mid Cap Growth Portfolio |_| High Yield Portfolio
|_| Mid Cap Value Portfolio |_| Limited Duration Portfolio
|_| Balanced Portfolio |_| Intermediate Duration Portfolio
|_| Multi-Asset-Class Portfolio |_| Mortgage-Backed Securities Portfolio
|_| Balanced Plus Portfolio |_| Cash Reserves Portfolio
|_| Domestic Fixed Income Portfolio
|_| International Equity Portfolio
|_| Emerging Markets Value Portfolio
|_| International Fixed Income Portfolio
|_| Global Fixed Income Portfolio
|_| Multi-Market Fixed Income Portfolio
|_| Municipal Portfolio
|_| PA Municipal Portfolio
- --------------------------------------------------------------------------------
(4)
Taxpayer Identification Number
<PAGE>
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 340(a)(1)(C) of the Internal Revenue Code.
Important Tax Information
You (as a payee) are required by law to provide us (as payer) with your correct
taxpayer identification number. Accounts that have a missing or incorrect
taxpayer identification number will be subject to backup withholding at a 31%
rate on ordinary income and capital gains distribution as well as redemptions.
Backup withholding is not an additional tax; the tax liability of person
subjects 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
- ---------
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.
(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 Fund - 65
<PAGE>
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- --------------------------------------------------------------------------------
MAS Fund - 66 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 Fund - 67
<PAGE>
MAS
- ---
MAS FUNDS PROSPECTUS
January 31, 1998
Investment Adviser and Adminstrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Fund 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 32
Financial Highlights 6 Redemption of Shares 33
Yield and Total Return 9 Shareholder Services 34
Investment Suitability 9 Valuation of Shares 35
Investment Limitations 10 Dividends, Distributions and Taxes 36
Portfolio Summaries 11 Investment Adviser 37
Equity Investments 11 Portfolio Management 38
Fixed-Income Investments 14 Administrative Services 40
Propectus Glossary General Distribution Agent 40
Strategies 19 Portfolio Transactions 40
Investments 22 Other Information 40
Trustees and Officers 42
MILLER
ANDERSON
_& SHERRERD, LLP__ONE TOWER BRIDGE O WEST CONSHOHOCKEN, PA 19428 O 800-354-8185_
<PAGE>
MAS INVESTMENT CLASS PROSPECTUS
- ---
MAS FUNDS
January 31, 1998
- --------------------------------------------------------------------------------
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-seven
portfolios, nine of which are described in this Prospectus. This Prospectus
offers the Investment Class Shares of these nine portfolios.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The High Yield Portfolio will invest primarily, and certain other portfolios of
the Fund may invest to varying degrees, in high yield, high risk securities
which are speculative with regard to payment of interest and return of principal
(commonly referred to as junk bonds); therefore, investments in these portfolios
may not be suitable for all investors. See High Yield Investing in the Glossary
of Strategies for additional information regarding certain risks associated with
investment in such securities.
- --------------------------------------------------------------------------------
PORTFOLIO PAGE REFERENCE
<TABLE>
<CAPTION>
<S> <C> <C>
How to Use This Prospectus: 3 Fixed Income: Balanced:
Domestic Fixed Income 14 Balanced 17
Portfolio Summaries: Fixed Income 15 Multi-Asset-Class 18
Equity: High Yield 16
Equity 11 Prospectus Glossary:
International Equity 11 Strategies 19
Mid Cap Value 12 Investments 22
Value 13
General Shareholder
Information: 32
Table of Contents: Back Cover
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus, which should be retained for future reference, sets forth
concisely information that you should know before you invest. A Statement of
Additional Information containing additional information about the Fund has been
filed with the Securities and Exchange Commission. Such Statement is dated
January 31, 1998 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 NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
MILLER
ANDERSON
_& SHERRERD, LLP__ONE TOWER BRIDGE O WEST CONSHOHOCKEN, PA 19428 O 800-354-8185_
<PAGE>
EXPENSE SUMMARY B INVESTMENT CLASS SHARES
The following tables illustrate the various expenses and fees that a shareholder
in a portfolio will incur either directly or indirectly. 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%
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- --------------------------------------------------------------------------------
Equity 0.500% 0.100% 0.750%
International Equity 0.500 0.150 0.800
Mid Cap Value 0.750 0.130 1.030
Value 0.500 0.100 0.750
Domestic Fixed Income 0.375 0.125 0.650
Fixed Income 0.375 0.105 0.630
High Yield 0.375 0.125 0.650
Balanced 0.450 0.130 0.730
Multi-Asset-Class 0.594* 0.186 0.930
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 expenses that otherwise would be deducted from portfolio assets. The
amounts in the above table have been restated to reflect current fees and
expenses.
*The Adviser is, on a voluntary basis, waiving a portion of its fee and/or
reimbursing certain expenses for the Multi-Asset-Class Portfolio. Absent such
waivers and/or reimbursements by the Adviser, Total Operating Expenses would be
0.986%. These fee waivers and expense reimbursements are voluntary and may be
discontinued at any time at the Adviser's discretion.
- --------------------------------------------------------------------------------
MAS Fund - 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
- --------------------------------------------------------------------------------
Equity $8 $24 $42 $93
International Equity 8 26 44 99
Mid Cap Value 11 33 57 126
Value 8 24 42 93
Domestic Fixed Income 7 21 36 81
Fixed Income 6 20 35 79
High Yield 7 21 36 81
Balanced 7 23 41 91
Multi-Asset-Class 9 30 51 114
- --------------------------------------------------------------------------------
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 all portfolios
begins on page 9;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin on
page 11;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on page
19; and
GENERAL SHAREHOLDER INFORMATION begins on page 32.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 3
<PAGE>
SUMMARY 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.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold type:
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which entails a
risk of loss should a borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest rates
resulting in increases or decreases in the value of the obligations held by a
portfolio. The value of Fixed Income Securities can be expected to vary
inversely to changes in prevailing interest rates, i.e., as interest rates
decline, market value tends to increase and vice versa. Certain Fixed Income
Securities may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on
underlying mortgage assets). 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 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 Investments in foreign securities involve certain special considerations which
are not typically associated with investing in U.S. companies. Portfolios
investing in foreign securities may also engage in foreign currency exchange
transactions. See Forwards, Futures & Options, and Swaps;
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; and
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.
- --------------------------------------------------------------------------------
MAS Fund - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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. See
Redemption of Shares and Shareholder Services.
THE FUND'S INVESTMENT ADVISER: Miller Anderson & Sherrerd, LLP (the "Adviser")
is a Pennsylvania limited liability partnership founded in 1969, wholly owned by
indirect subsidiaries of Morgan Stanley, Dean Witter, Discover and Co., and is
located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser provides
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors, and as of December 31, 1997 had
in excess of $59.4 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor") provides
distribution services to the Fund.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 5
<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, 1997
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 Domestic Fixed Income Portfolio had not
commenced operations as of September 30, 1997, therefore, Institutional Class
share financial information is provided to investors for informational
purposes only and should be referred to as an historical guide to the
Portfolio's operations and expenses. Past performance does not indicate
future results. (Data is adjusted to reflect a 2.5 for 1 share split as of
August 13, 1993 for the Domestic Fixed Income Portfolio.)
<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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ---------------------------------------------------------------------------------------------------------------------------
Equity Portfolio (Commencement of Investment Class Operations 04/10/96)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $25.66 $0.34 $8.17 $8.51 ($0.35) ($4.40) -- ($4.75)
1996 24.31 0.22 1.24 1.46 (0.11) -- -- (0.11)
International Equity Portfolio (Commencement of Investment Class Operations 04/10/96)
1997+++ $13.23 $0.23 $2.69 $2.92 ($0.25) ($0.27) -- ($0.52)
1996 13.02 0.09 0.12 0.21 -- -- -- --
Mid Cap Value Portfolio (Commencement of Investment Class Operations 05/10/96)
1997+++ $14.48 $0.01 $8.36 $8.37 ($0.09) ($0.01) -- ($1.10)
1996 13.77 0.04 0.67 0.71 -- -- -- --
Value Portfolio (Commencement of Investment Class Operations 05/06/96)
1997+++ $15.60 $0.31 $5.75 $6.06 ($0.27) ($0.03) -- ($1.30)
1996 14.97 0.12 0.59 0.71 (0.08) -- -- (0.08)
</TABLE>
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -----------------------------------------------------------------------------------------------
Equity Portfolio (Commencement of Investment Class Operations 04/10/96)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $29.42 38.12% $ 2,354 0.80%++ 1.12%++ 85% $0.0294
1996 25.66 6.02 113 0.75* 1.83* 67 0.0557
International Equity Portfolio (Commencement of Investment Class Operations 04/10/96)
1997+++ $15.63 22.85% $ 631 0.89%++ 1.60%++ 62% $0.0035
1996 13.23 1.61 235 0.81* 1.81* 78 0.0093
Mid Cap Value Portfolio (Commencement of Investment Class Operations 05/10/96)
1997+++ $21.75 61.05% $ 1,238 1.09%++ 0.04%++ 184% $0.0467
1996 14.48 5.16 127 1.03*++ 0.86*++ 377 0.0462
Value Portfolio (Commencement of Investment Class Operations 05/06/96)
1997+++ $20.36 41.01% $29,847 0.80%++ 1.75%++ 46% $0.0577
1996 15.60 4.78 9,244 0.76* 2.05* 53 0.0572
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 6 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 Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ---------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $10.89 $0.74 $0.33 $1.07 ($0.67) ($0.02) -- ($0.69)
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61)
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23)
1994 11.99 0.94 (1.23) (0.29) (0.95) (0.73) (0.15)# (1.83)
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) -- (1.31)
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) -- (1.17)
1991 10.26 0.92 1.10 2.02 (0.94) -- -- (0.94)
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) -- (1.06)
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) -- (0.82)
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) -- (0.46)
Fixed Income Portfolio (Commencement of Investment Class Operations 10/15/96)
1997+++ $11.80 $0.75 $0.40 $1.15 ($0.60) ($0.13) -- ($0.73)
High Yield Portfolio (Commencement of Investment Class Operations 5/21/96)
1997+++ $ 9.31 $0.84 $0.88 $1.72 ($0.84) ($0.03) -- ($0.87)
1996 9.06 0.31 0.16 0.47 (0.22) -- -- (0.22)
Balanced Portfolio (Commencement of Investment Class Operations 04/04/97)
1997 $13.11 $0.30 $2.09 $2.39 ($0.20) -- -- ($0.20)
Multi-Asset-Class Portfolio (Commencement of Investment Class Operations 6/10/96)
1997+++ $12.27 $0.36 $2.57 $2.93 ($0.49) ($1.08) -- ($1.57)
1996 12.17 0.13 $0.08 0.21 (0.11) -- -- (0.11)
</TABLE>
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
End of Total Period to Average to Average Turnover Commission
Period Return** (thousands) Net Assets+ Net Assets Rate Rate***
- -----------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $11.27 10.20% $96,954 0.51%++ 6.48%++ 217% --
1996 10.89 4.41 95,362 0.52++ 5.73 168 --
1995 11.03 14.33 36,147 0.51++ 6.80 313 --
1994 9.87 (2.87) 36,521 0.50++ 7.65 78 --
1993 11.99 14.08 90,350 0.50 7.15 96 --
1992 11.80 15.41 98,130 0.47 7.67 136 --
1991 11.34 20.99 83,200 0.48 8.18 131 --
1990 10.26 3.90 77,622 0.48 8.35 181 --
1989 10.90 9.14 68,855 0.49 8.24 219 --
1988 10.78 12.63 53,236 0.50 8.62 224 --
Fixed Income Portfolio (Commencement of Investment Class Operations 10/15/96)
1997+++ $12.22 10.07% $ 9,527 0.66%*++ 6.57%* 179% --
High Yield Portfolio (Commencement of Investment Class Operations 5/21/96)
1997+++ $10.16 19.77% $10,916 0.70%++ 8.84% 96% --
1996 9.31 5.34 5,139 0.62* 11.06* 115 --
Balanced Portfolio (Commencement of Investment Class Operations 04/04/97)
1997 $15.30 18.40% $ 3.943 0.73%*++ 3.32%* 145% $0.0578
Multi-Asset-Class Portfolio (Commencement of Investment Class Operations 6/10/96)
1997+++ $13.63 26.32% $ 5,075 0.96%++ 2.85% 141% $0.0114
1996 12.27 1.75 3,074 0.73*++ 3.68* 122 0.0225
</TABLE>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 7
<PAGE>
Notes to the Financial Highlights
*Annualized
**Total return figures for partial years are not annualized.
***For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share paid for security
transactions on which commissions were charged.
#Represents distribution in excess of net realized gains.
##Represents distributions in excess of net investment income.
+For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following Portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
Portfolio 1995 1996 1997
Equity -- 0.75%* 0.80%
International Equity -- 0.77 0.86
Mid Cap Value -- 1.03* 1.07
Value -- 0.75* 0.79
Domestic Fixed Income 0.50% 0.50 0.50
Fixed Income -- -- 0.65*
High Yield -- 0.61* 0.69
Balanced -- -- 0.70*
Multi-Asset-Class -- 0.73* 0.96
++For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio assets
for the respective portfolios from exceeding voluntary expense limitations.
For the respective periods ended September 30, the voluntarily waived and/or
reimbursed expenses totaled the below listed amounts.
Voluntarily waived and/or reimbursed expenses for:
Portfolio 1994 1995 1996 1997
Equity -- -- -- 1.28%
International Equity -- -- -- 6.83
Mid Cap Value -- -- 0.14%* 4.60
Value -- -- -- 0.09
Domestic Fixed Income 0.03% 0.09% 0.01 0.01
Fixed Income -- -- -- 0.12*
High Yield -- -- -- 0.22
Multi-Asset-Class -- -- 0.08* 0.55
+++Per share amounts for the year ended September 30, 1997, are based on
average shares outstanding.
- --------------------------------------------------------------------------------
MAS Fund - 8 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).
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 a 30-day period 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 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.
GENERAL INFORMATION
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 annual turnover. 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.
- -------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 9
<PAGE>
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 with respect to forward delivery mortgage-backed
securities. For the Balanced and Multi-Asset-Class Portfolios, the annual
turnover rate is not expected to exceed 100% with respect to Equity Securities.
The following portfolios have annual turnover rates of 100% or more: Mid Cap
Value, Fixed Income, Domestic Fixed Income, Balanced and Multi-Asset-Class.
These high rates of annual 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 annual 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. The annual turnover rate for each
portfolio is shown in the Financial Highlights under "Portfolio Turnover Rate."
Cash Equivalents/Temporary Defensive Investing: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets is 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; and
(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.
Limitations (a) and (b), 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 portfolios. 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 in this prospectus or the
Statement of Additional Information 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 portfolios' assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
- --------------------------------------------------------------------------------
MAS Fund - 10 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's investment process is designed to capture
value by identifying stocks that offer low but rising
expectations. To determine the level of expectations
for various companies and the direction of changes in
those expectations, the Adviser analyzes the companies'
equity valuations and changes in the companies'
estimates of future earnings. In addition, the Adviser
diversifies across sectors to preserve return while
reducing risk, seeking the best values within each
sector of the market. A group of senior investment
professionals invests the portfolio using a disciplined
approach to stock selection supported by fundamental
research analysts. Each investment professional makes
his or her own buy, sell and sector-allocation
decisions. Overall sector allocation is driven by
bottom-up stock selection and is reviewed regularly to
preserve the benefits of diversification.
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 Stocks Foreign Equities Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategies: Core Equity Investing
Portfolio
Management Team: Arden C. Armstrong, James J. Jolinger, Nicholas J.
Kovich, Brian Kramp, Robert J. Marcin and Gary G.
Schlarbaum
- --------------------------------------------------------------------------------
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 U.S.
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 Investments: ADRs Eastern European Issuers Investment Companies Structured Notes
Agencies Emerging Markets Issuers Investment Funds Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stocks Foreign Equities Repurchase Agreements When Issued Securities
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
Portfolio
Management Team: Hassan Elmasry and Horacio A. Valerias
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary Mas Fund - 11
<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, which are 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 Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stocks Foreign Equities Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum
- --------------------------------------------------------------------------------
MAS Fund - 12 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,
which are 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 Stocks Foreign Equities Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
Portfolio
Management Team: Richard M. Behler, Nicholas J. Kovich and Robert J.
Marcin
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 13
<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 and other
investment grade fixed-income securities of domestic
issuers.
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 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: 80% of Fixed-Income Securities rated A
or higher (or its equivalent)
May invest up to 20% in Fixed-Income Securities rated
BBB (or its equivalent)
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 Securities
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
Portfolio
Management Team Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
- --------------------------------------------------------------------------------
MAS Fund - 14 Terms in bold type are defined in the Prospectus Glossary
<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 Structured Notes
Asset-Backeds Foreign Bonds Loan Participations Swaps
Brady Bonds Foreign Currency Mortgage Securities U.S. Governments
Cash Equivalents Forwards Municipals When Issued Securities
CMOs Futures & Options Preferred Stock Yankees
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters SMBS
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 15
<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 (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 Investments: Agencies Emerging Markets Issuers Inverse Floaters Structured Notes
Asset-Backeds Floaters Investment Companies Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Mortgage Securities When Issued Securities
CMOs Foreign Equities Municipals Yankees
Convertibles Forwards Preferred Stock Zero Coupons
Corporates Futures & Options Repurchase Agreements
Eastern European Issuers High Yield SMBS
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Investing
Foreign Fixed Income Investing
Emerging Markets Investing
Portfolio
Management Team: Robert E. Angevine, Thomas L. Bennett and Stephen F.
Esser
- --------------------------------------------------------------------------------
MAS Fund - 16 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 Investment Companies SMBS
Agencies Floaters Investment Funds Structured Notes
Asset-Backeds Foreign Bonds Loan Participations Swaps
Brady Bonds Foreign Currency Mortgage Securities U.S. Governments
Cash Equivalents Foreign Equities Municipals Warrants
CMOs Forwards Preferred Stock When Issued Securities
Common Stocks Futures & Options Repurchase Agreements Yankees
Convertibles High Yield Rights Zero Coupons
Corporates Inverse Floaters
</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 Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A.
Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 17
<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 U.S. 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 Equivalents Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stocks Forwards Preferred Stock When Issued Securities
Convertibles Futures & Options Repurchase Agreements Yankees
Corporates High Yield Rights Zero Coupons
</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 Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Fixed Income Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G.
Schlarbaum, Horacio A. Valeiras and Richard B. Worley
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MAS Fund - 18 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 the
Adviser'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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 19
<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.
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MAS Fund - 20 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 Coupons 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, 1997 (not including money market instruments).
These figures are dollar-weighted averages of month-end portfolio holdings and
do not necessarily indicate a portfolio's current or future debt holdings.
Portfolios whose debt holdings total less than 100% also invest in Equity
Securities.
High Yield Portfolio Multi-Asset-Class Portfolio
QUALITY QUALITY
TSY, AGY, AAA 9.06% TSY, AGY, AAA 26.22%
AA 0.05 AA 2.32
A 0.19 A 1.09
BBB 6.09 BBB 2.09
BB 42.51 BB 4.64
B 35.48 B 6.02
CCC 0.96 CCC 0.35
Not Rated: Not Rated:
BB 0.83* BB 0.06*
B 2.30* B 0.22*
NR 2.54 NR 0.17
---- ----
Total Not Rated: 5.66 Total Not Rated: 0.45
TOTAL 100.00% TOTAL 43.18%
* The Adviser believes that these non-rated securities are equivalent in quality
to the rating indicated.
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.
The Adviser 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 21
<PAGE>
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 greater than 50% of a
fixed-income portfolio's assets may be invested in mortgage-related securities.
These include Mortgage Securities which represent interests in pools of mortgage
loans made by lenders such as commercial banks, savings and loan associations,
mortage bankers and others. The pools are assembled by various organizations,
including the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Fannie Mae, other government agencies, and private
issuers. It is expected that a portfolio's primary emphasis will be in Mortgage
Securities issued by the various government-related organizations. However, a
portfolio may invest, without limit, in Mortgage 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 the Adviser 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 the Adviser'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.
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MAS Fund - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 fairly 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).
Each portfolio may invest in obligations of U.S. banks and, except for the
Domestic Fixed Income Portfolio, in 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 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 Fund - 23
<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, Fannie Mae,
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 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.
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MAS Fund - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 portfolios may enter into
over-the-counter Derivatives transactions with counterparties 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. 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 a 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. As a result, 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
these 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.
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's listing of Allowable Investments
to determine which of these 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 25
<PAGE>
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
mortgages 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.
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.
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MAS Fund - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Securities and
Exchange Commission's ("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 Corporates,
Preferred Stocks, and Convertibles 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." The rating C
is reserved for income bonds on which "no interest is being paid." 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 27
<PAGE>
Inverse Floaters--Inverse Floating Rate Obligations: are Fixed-Income
Securities, which have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an Inverse Floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an Inverse Floater causes an increase in the coupon rate.
Inverse Floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and Inverse Floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some Inverse
Floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result,
the yield to maturity of an Inverse Floater CMO is sensitive not only to changes
in interest rates but also to changes in prepayment rates on the related
underlying mortgage assets.
Investment Companies: The portfolios are permitted to invest in shares of other
open-end or closed-end investment companies. The Investment Company Act of 1940
(the "1940 Act") 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 or limit 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 (a) 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)); (b)
guaranteed by the U.S. Government or a private organization; or (c) considered
by the Adviser to be investment grade quality. 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 Securities, including
mortgage pass-throughs and 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. 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 Markets 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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MAS Fund - 28 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Mortgage Securitie--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), Fannie Mae, private issuers and other government agencies.
There can be no assurance that the private insurers can meet their obligations
under the policies. Mortgage 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 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 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 U.S. Treasuries), 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 29
<PAGE>
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
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 SEC, 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.
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MAS Fund - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 1940 Act. 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
the Adviser 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 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 31
<PAGE>
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.
Yankees: are U.S. dollar-denominated Fixed-Income Securities issued by a foreign
government and sold in the U.S.
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 Coupons 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 clients of the Adviser 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 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 General Shareholder
Information-Valuation of Shares each day that the portfolios are open for
business. See Other Information-Closed Holidays and General Shareholder
InformationCValuation 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, PA 19428-0868 together with
a check ($1,000,000 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, Please note that payments to investors who redeem shares
purchased by check will not be made 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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MAS Fund - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Initial Purchase by Wire: Subject to acceptance by the Fund, Investment 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. 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)
Additional Investments: Additional investments of Investment Class Shares at net
asset value may be made at any time (minimum additional 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, 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 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 additional investment amounts.
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.
Investment Class Shares of the Fund's portfolios are also sold to corporations
or other institutions such as trusts, foundations or broker-dealers purchasing
for the accounts of others (Shareholder Organizations). Investors purchasing and
redeeming shares of the portfolios through a Shareholder Organization may be
charged a transaction-based fee or other fee for the services of such
organization. Each Shareholder Organization is responsible for transmitting to
its customers a schedule of any such fees and information regarding any
additional or different conditions regarding purchases and redemptions.
Customers of Shareholder Organizations should read this Prospectus in light of
the terms governing accounts with their organization. The Fund does not pay
compensation to or receive compensation from Shareholder Organizations for the
sale of Investment Class Shares though Shareholder Organizations may receive a
fee for providing shareholder services to their clients who hold Investment
Class Shares.
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.
By Mail: Each portfolio will redeem 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 33
<PAGE>
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(c) Any required signature guarantees (see Signature Guarantees); and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.
Signature Guarantees: To protect your account, the Fund and the Administrator
from fraud, signature guarantees are required to enable the Fund to verify the
identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are to
be sent to someone other than the registered shareholder(s) and the registered
address, and (2) share transfer requests. Please contact MAS Funds' Client
Services Group for further details.
By Telephone: Provided the Telephone Redemption Option has been authorized by
the shareholder on the Account Registration Form, a redemption of shares may be
requested by calling MAS Funds' Client Services Group and requesting that the
redemption proceeds be mailed to the primary registration address or wired per
the authorized instructions. Shares cannot be redeemed by telephone if share
certificates are held for those shares.
By Facsimile: Written requests in good order (see above) for redemptions,
exchanges, and transfers may be forwarded to the Fund via facsimile. All
requests sent to the Fund via facsimile must be followed by a telephone call to
MAS Funds' Client Services Group to ensure that the instructions have been
properly received by the Fund. The original request must be promptly mailed to
MAS Funds, c/o 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 New York
Stock Exchange ("NYSE"), the Custodian, or the Fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as determined
by the SEC.
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 SEC. 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 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
qualified 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.
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MAS Fund - 34 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 values of other assets and securities for which no quotations are
readily available (including restricted securities), and, to the extent
permitted by the SEC, securities for which the value has been materially
affected by events occurring after the close of the market on which they
principally trade, are determined in good faith at fair value using methods
approved by the Trustees.
Domestic Fixed Income, Fixed Income and High Yield 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), and, to the extent permitted by the SEC,
securities for which the value has been materially affected by events occurring
after the close of the market on which they principally trade, will be valued in
good faith at fair value using methods approved by the Board of Trustees.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 35
<PAGE>
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.
All Portfolios: Net asset value per share for Investment Class Shares,
Institutional Class Shares and Adviser Class Shares may differ due to
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES: Dividends and Distributions: The Fund
maintains different dividend and capital gain distribution policies for each
portfolio. These are:
o The Equity, Value, Domestic Fixed Income, Fixed Income, High Yield, Balanced
and Multi-Asset-Class Portfolios normally distribute substantially all of
their net investment income to shareholders on a quarterly basis.
o The International Equity and Mid Cap Value Portfolios normally distribute
substantially all of their net investment income on an annual basis.
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 gains are realized from the sale of underlying securities, the
portfolios normally distribute such gains with the last distributions for the
calendar year.
All dividends and 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.
TAXES: The following is a summary of some important tax issues that affect the
portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its shareholders. More
information about taxes is in the Statement of Additional Information.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes.
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MAS Fund - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Federal Taxes: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax treatment
afforded regulated investment companies. As such, each portfolio will not be
subject to federal income tax to the extent it distributes net investment
company taxable income and net capital gains to shareholders. The Fund will
notify shareholders annually as to the tax classification of all distributions.
Income dividends received by shareholders will be taxable as ordinary income,
whether received in cash or in additional shares. In the case of the Equity,
Value, Balanced, Multi-Asset-Class and Mid Cap Value Portfolios, corporate
shareholders may be entitled to a dividends-received deduction for the portion
of dividends they receive which are attributable to dividends received by such
portfolios from U.S. corporations. Capital gains distributions are taxable to
shareholders at capital gains rates. Each portfolio will designate capital gains
distributions to individual shareholders as either subject to the federal
capital gains rate imposed on property held for more than 18 months or on
property held for more than 1 year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to shareholders in the previous
year.
Each portfolio intends to declare and pay dividends and distributions so as to
avoid imposition of the federal excise tax applicable to regulated investment
companies. Further discussion is included in the Statement of Additional
Information.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders must
certify on their Account Registration Forms that their Social Security Number or
Taxpayer Identification Number is correct, and that they are not subject to
backup withholding.
Exchanges and redemptions of shares in a portfolio are taxable events.
Foreign Income Taxes: Investment income received by the portfolios from sources
within foreign countries may be subject to foreign income taxes withheld at
source. The International Equity and Multi-Asset-Class Portfolios may be able to
file an election with the Internal Revenue Service to pass through to their
shareholders for foreign tax credit purposes the amount of foreign income taxes
paid by each portfolio. Further discussion is included in the Statement of
Additional Information. The other portfolios of the Fund will not be able to
make this election.
State and Local Income Taxes: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors for
the state and local income tax consequences of distributions from the portfolio.
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 Morgan Stanley, Dean
Witter, Discover & Co., and is located at One Tower Bridge, West Conshohocken,
PA 19428. The Adviser provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
December 31, 1997 had in excess of $59.4 billion in assets under management. On
May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. In connection with this transaction, the Adviser entered
into a new Investment Management Agreement ("Agreement") with MAS Funds dated
May 31, 1997, which Agreement was approved by the shareholders of each portfolio
at a special meeting held on May 1, 1997 or at an adjournment of such meeting
held on May 12, 1997. The Adviser will retain its name and remain at its current
location, One Tower Bridge, West Conshohocken, PA 19428. The Adviser will
continue to provide investment counseling services to employee benefit plans,
endowments, foundations and other institutional investors.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 37
<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. The following table shows the Adviser's contractual rate
(annualized) along with the Adviser's actual rate of compensation for the Fund's
1997 fiscal year.
FY 1997
Contractual Actual
Rate Compensation Rate
----------- -----------------
Equity Portfolio .500% .500%
International Equity Portfolio .500 .500
Mid Cap Value Portfolio .750 .727
Value Portfolio .500 .500
Domestic Fixed Income Portfolio .375 .364
Fixed Income Portfolio .375 .375
High Yield Portfolio .375 .375
Balanced Portfolio .450 .450
Multi-Asset-Class Portfolio .650 .528
The Adviser is, on a voluntary basis, waiving a portion of its fee and/or
reimbursing certain expenses for the Multi-Asset-Class Portfolio. Absent such
waivers and/or reimbursements by the Adviser, Total Operating Expenses would be
0.986%. These fee waivers and expense reimbursements are voluntary and may be
discontinued at any time at the Adviser's discretion.
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios 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 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. 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 Portfolio in
1992, the Balanced Plus Portfolio in 1996, the Multi-Asset-Class Portfolio in
1994 and the Multi-Market Fixed Income Portfolio in 1997.
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, PA Municipal Portfolios in 1994 and the Multi-Market Fixed Income
Portfolio in 1997.
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MAS Fund - 38 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 and the Multi-Market
Fixed Income Portfolio in 1997.
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
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Balanced Plus Portfolio in 1996, the
Multi-Asset-Class Portfolio in 1994 and the Multi-Market Fixed Income Portfolio
in 1997.
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.
James J. Jolinger, Vice President, Morgan Stanley, joined MAS in 1994. He served
as Equity Analyst for Oppenheimer Capital from 1987-1994. He assumed
responsibility for the Equity Portfolio in 1997.
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.
Brian Kramp, Vice President, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management, and its successor,
Corestates Investment Advisors from 1985 - 1997. He assumed responsibility for
the Equity Portfolio in 1998.
Chris Leavy joined Mas in 1997. He served as a Portfolio Manager for Capitoline
Investment Services from 1995-1997; a Portfolio Manager for Premium Trust
Company from 1994-1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. He assumed responsibility for the Mid Cap Value and
Small Cap Value Portfolios in 1998.
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
and Small Cap Value Portfolios in 1987, the Growth Portfolio in 1993, 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 assumed
responsibility for the International Equity Portfolio in 1992, the Emerging
Markets Value 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 Balanced Plus
Portfolio in 1996, the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the Multi-Market
Fixed Income Portfolio in 1997.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 39
<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.
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.
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 or markups on principal transactions 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 or dealer
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. The Adviser may
place a combined order for two or more accounts or portfolios for the purchase
or sale of one same security if, in its judgement, joint execution is in the
best interest of each participant and will result in best price and excution. 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. The Adviser may use its broker dealer affiliates, including Morgan
Stanley & Co., a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., 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-seven 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.
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MAS Fund - 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Meetings of shareholders will not be held except as required by the 1940 Act 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 5, 1998 Northern Trust Company (Chicago, IL) owned a controlling
interest (as that term is defined by the 1940 Act) 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 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, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 41
<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.; formerly
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,
Fannie Mae; Director, Reliance Group Holdings; Director, CVS Corporation;
Director, Union Carbide 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, 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.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius LLP;
formerly Attorney, Ropes & Gray.
- --------------------------------------------------------------------------------
MAS Fund - 42 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MAS ACCOUNT REGISTRATION FORM
- ---------
MAS FUNDS Mas Fund Distribution, Inc.
General Distribution Agent
- ------------------------------------------------------------------------------------------------------------------------------------
(1)
REGISTRATION/PRIMARY |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
MAILING ADDRESS
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Confirmations and month-end
statements will be mailed to Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
this address.
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 State Citizen |_| Resident Alien |_| Non-Resident Alien, Indicate Country of Residence __________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(2)
INTERESTED PARTY
OPTION Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
In addition to the account Company
statement sent to the above (If Applicable) |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
registered address, the Fund
is authorized to mail Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
duplicate statements to the
name and address provided at City |_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_|-|_|_|_|_|
right
For additional interested Telephone No. |_|_|_|-|_|_|_|_|-|_|_|_|_|
party mailings, please attach
a separate sheet.
- ------------------------------------------------------------------------------------------------------------------------------------
(3)
INVESTMENT |_| Equity Portfolio $__________________________________
For Purchase of: |_| International Equity Portfolio $__________________________________
|_| Mid Cap Value Portfolio $__________________________________
|_| Value Portfolio $__________________________________
|_| Domestic Fixed Income Portfolio $__________________________________
|_| Fixed Income Portfolio $__________________________________
|_| High Yield Portfolio $__________________________________
|_| Balanced Portfolio $__________________________________
|_| Multi-Asset-Class Portfolio $__________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(4) TAXPAYER IDENTIFICATION NUMBER IMPORTANT TAX INFORMATION
Part 1.
You (as a payee) are required by law to provide us (as payer)
Social Security Number 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
or and capital gains distribution as well as redemptions. Backup
withholding is not an additional tax; the tax liability of person
Employer Identification Number subjects to backup withholding will be reduced by the amount of
|_|_|-|_|_|_|_|_|_|_| tax withheld.
You may be notified that you are subject to backup withholding
Part 2. BACKUP WITHHOLDING under section 3406(a)(1)(C) because you have underreported
|_| Check the box if the account is interest or dividends or you were required to, but failed to,
subject to Backup Withholding under the file a return which would have included a reportable interest or
provisions of Section 340(a)(1)(C) of dividend payment. If you have been so notified, check the box in
the Internal Revenue Code. PART 2 at left.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- --------------------------------------------------------------------------------
SIDE ONE OF TWO
<PAGE>
- --------------------------------------------------------------------------------
MAS
- ---------
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.
- --------------------------------------------------------------------------------
(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>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 43
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Fund - 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 45
<PAGE>
MAS [LOGO] --------------------------------------
========== INVESTMENT CLASS PROSPECTUS
MAS FUNDS --------------------------------------
January 31, 1998
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 32
Financial Highlights 6 Redemption of Shares 33
Yield and Total Return 9 Shareholder Services 34
Suitability 9 Valuation of Shares 35
Investment Limitations 10 Dividends, Distributions and Taxes 36
Portfolio Summaries 11 Investment Adviser 37
Equity Investments 11 Portfolio Management 38
Fixed-Income Investments 14 Administrative Services 40
Prospectus Glossary General Distribution Agent 40
Strategies 19 Portfolio Transactions 40
Investments 22 Other Information 40
Trustees and Officers 42
Miller
Anderson
& Sherrerd, LLP ONE TOWER BRIDGE - WEST CONSHOHOCKEN, PA 19428 - 800-354-8185
- --------------------------------------------------------------------------------
<PAGE>
MAS
- ---------
MAS FUNDS
ADVISER CLASS PROSPECTUS
January 31, 1998
- --------------------------------------------------------------------------------
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-seven
portfolios, ten of which are described in this Prospectus. This Prospectus
offers the Adviser Class Shares of these ten portfolios.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO PAGE REFERENCE
------------------------
<S> <C> <C> <C> <C> <C>
How to Use This Prospectus: 3 Fixed Income:
Domestic Fixed Income 17 Balanced:
Fixed Income 18 Balanced 20
Portfolio Summaries: High Yield 19 Multi-Asset-Class 21
Equity:
Prospectus Glossary:
Equity 12 Strategies 22
International Equity 13 Investments 27
Mid Cap Growth 14
Mid Cap Value 15 General Shareholder
Value 16 Information: 40
Table of Contents: Back Cover
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus, which should be retained for future reference, sets forth
concisely information that you should know before you invest. A Statement of
Additional Information containing additional information about the Fund has been
filed with the Securities and Exchange Commission. Such Statement is dated
January 31, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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
in a portfolio will incur either directly or indirectly. 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%
Shareholder Servicing Fee None
<TABLE>
<CAPTION>
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity 0.500% 0.100% 0.850%
International Equity 0.500 0.150 0.900
Mid Cap Growth 0.500 0.130 0.880
Mid Cap Value 0.750 0.130 1.130
Value 0.500 0.100 0.850
Domestic Fixed Income 0.375 0.125 0.750
Fixed Income 0.375 0.105 0.730
High Yield 0.375 0.125 0.750
Balanced 0.450 0.130 0.830
Multi-Asset-Class 0.594* 0.186 1.030
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 expenses that otherwise would be deducted from portfolio assets. The
amounts in the above table have been restated to reflect current fees and expenses.
* The Adviser is, on a voluntary basis, waiving a portion of its fee and/or reimbursing certain expenses
for the Multi-Asset-Class Portfolio. Absent such waivers and/or reimbursements by the Adviser, Total
Operating Expenses would be 1.086%. These fee waivers and expense reimbursements are voluntary and may
be discontinued at any time at the Adviser's discretion.
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 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 $9 $27 $47 $105
International Equity 9 29 50 111
Mid Cap Growth 9 28 49 108
Mid Cap Value 12 36 62 137
Value 9 27 47 105
Domestic Fixed Income 8 24 42 93
Fixed Income 7 23 41 91
High Yield 8 24 42 93
Balanced 8 26 46 103
Multi-Asset Class 11 33 57 126
- --------------------------------------------------------------------------------------------------------
</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
6;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all portfolios
begins on page 9;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin on
page 12;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on page
22; and
GENERAL SHAREHOLDER INFORMATION begins on page 40.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 3
<PAGE>
SUMMARY 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.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold type:
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which entails a
risk of loss should a borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest rates
resulting in increases or decreases in the value of the obligations held by a
portfolio. The value of Fixed-Income Securities can be expected to vary
inversely to changes in prevailing interest rates, i.e., as interest rates
decline, market value tends to increase and vice versa. Certain Fixed Income
Securities may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on
underlying mortgage assets). 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 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 Investments in foreign securities involve certain special considerations which
are not typically associated with investing in U.S. companies. Portfolios
investing in foreign securities may also engage in foreign currency exchange
transactions. See Forwards, Futures & Options, and Swaps;
- --------------------------------------------------------------------------------
MAS Fund - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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; and
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.
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")
is a Pennsylvania limited liability partnership founded in 1969, wholly owned by
indirect subsidiaries of Morgan Stanley, Dean Witter, Discover and Co., and is
located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser provides
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors, and as of December 31, 1997 had
in excess of $59.4 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor") provides
distribution services to the Fund.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 5
<PAGE>
Financial Highlights - Fiscal Years Ended September 30
Selected per share data and ratios for a share outstanding throughout
each period
The following should be read in conjunction with the Fund's financial statements
which are included in the Annual Report to Shareholders incorporated by
reference to the Statement of Additional Information. The Fund's financial
statements for the year ended September 30, 1997 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 Equity, International Equity, Mid Cap Value,
Domestic Fixed Income and Multi-Asset-Class Portfolios had not commenced
operations as of September 30, 1997, 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.
(Data is adjusted to reflect a 2.5 for 1 share split as of August 13, 1993 for
all portfolios in operation as of that date.)
<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 Institutional Class Operations 11/14/84)
1997 $25.67 $0.36 $8.22 $8.58 ($0.40) ($4.40) --
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) --
International Equity Portfolio (Commencement of Institutional Class Operations 11/25/88)
1997+++ $13.24 $0.25 $2.71 $2.96 ($0.26) ($0.27) --
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>
<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 Institutional Class Operations 11/14/84)
1997 ($4.80) $29.45 38.46% $1,312,547 0.60% 1.30% 85% $0.0294
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 --
International Equity Portfolio (Commencement of Institutional Class Operations 11/25/88)
1997+++ ($0.53) $15.67 23.16% $649,755 0.66% 1.81% 62% $0.0035
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>
- --------------------------------------------------------------------------------
MAS Fund - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Adviser Class Operations 01/31/97)
1997 $17.04 ($0.02) $4.79 $4.77 -- -- --
Mid Cap Value Portfolio (Commencement of Institutional Class Operations 12/30/94)
1997+++ $14.49 $0.05 $8.37 $8.42 ($0.10) ($1.01) --
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) --
1995 10.00 0.55### 2.90 3.45 -- -- --
Value Portfolio (Commencement of Adviser Class Operations 07/17/96)
1997+++ $15.61 $0.30 $5.74 $6.04 ($0.27) ($1.03) --
1996 14.11 0.01 1.49 1.50 -- -- --
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
1997 $10.89 $0.74 $0.33 $1.07 ($0.67) ($0.02) --
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) --
Fixed Income Portfolio (Commencement of Adviser Class Operations 11/07/96)
1997+++ $12.04 $0.70 $0.20 $0.90 ($0.59) ($0.13) --
High Yield Portfolio (Commencement of Adviser Class Operations 01/31/97)
1997+++ $9.39 $0.56 $0.59 $1.15 ($0.39) -- --
Balanced Portfolio (Commencement of Adviser Class Operations 11/01/96)
1997 $14.05 $0.42 $2.60 $3.02 ($0.38) ($1.39) --
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1997+++ $12.28 $0.38 $2.57 $2.95 ($0.51) ($1.08) --
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) -- -- --
</TABLE>
<PAGE>
<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 Adviser Class Operations 01/31/97)
1997 -- $21.81 27.99% $1,200 0.88%*++ (0.41%)* 134% $0.0514
Mid Cap Value Portfolio (Commencement of Institutional Class Operations 12/30/94)
1997+++ ($1.11) $21.80 61.40% $220,260 0.90%++ 0.28% 184% $0.0467
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*### 639### --
Value Portfolio (Commencement of Adviser Class Operations 07/17/96)
1997+++ ($1.30) $20.35 40.87 $201,253 0.90%++ 1.63% 46% $0.0577
1996 -- 15.61 10.63 15,493 0.86* 1.66* 53 0.0572
Domestic Fixed Income Portfolio (Commencement of Institutional Class Operations 9/30/87)
1997 ($0.69) $11.27 10.20% $96,954 0.51%++ 6.48% 217% --
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 --
Fixed Income Portfolio (Commencement of Adviser Class Operations 11/07/96)
1997+++ ($0.72) $12.22 7.79% $76,683 0.77%*++ 6.50%* 179% --
High Yield Portfolio (Commencement of Adviser Class Operations 01/31/97)
1997+++ ($0.39) $10.15 12.63% $4,327 0.78%* 8.68%* 96% --
Balanced Portfolio (Commencement of Adviser Class Operations 11/01/96)
1997 ($1.77) $15.30 23.82% $27,366 0.85%*++ 3.24%* 145% $0.0578
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1997+++ ($1.59) $13.64 26.50% $173,155 0.74%++ 3.07% 141% $0.0114
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>
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 7
<PAGE>
Notes to the Financial Highlights
<TABLE>
<CAPTION>
* Annualized
** Total return figures for partial years are not annualized.
*** For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission
rate per share paid for security transactions on which commissions were charged.
# Represents distribution in excess of net realized gains.
## Represents distributions in excess of net investment income.
### 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 the respective periods ended September 30, the Ratio of Expenses to Average Net Assets for the following
portfolios excludes the effect of expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
Portfolio 1995 1996 1997
Equity 0.60% 0.60% 0.59%
International Equity 0.66 0.65 0.63
Mid Cap Value 0.88* 0.88 0.88
Mid Cap Growth -- -- 0.86*
Value -- 0.85* 0.89
Domestic Fixed Income 0.50 0.50 0.50
Fixed Income -- -- 0.76*
High Yield -- -- 0.76*
Balanced -- -- 0.84*
Multi-Asset-Class 0.58 0.58 0.74
++ For the periods indicated, the Adviser voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to the extent necessary in order to keep total operating expenses actually deducted from portfolio assets for the
respective portfolios from exceeding voluntary expense limitations. For the respective periods ended September 30,
the voluntarily waived and reimbursed expenses totaled the below listed amounts.
Voluntarily waived and/or reimbursed expenses for:
<S> <C> <C> <C> <C>
Portfolio 1994 1995 1996 1997
Mid Cap Value -- 2.13%* 0.18% 0.02%
Domestic Fixed Income 0.03% 0.09 0.01 0.01
Fixed Income -- -- -- 0.01*
Balanced -- -- -- 0.03*
Multi-Asset-Class 0.26* 0.14 0.08 0.08
+++ Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
- --------------------------------------------------------------------------------
MAS Fund - 8 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).
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 a 30-day period 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 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.
GENRAL INFORMATION
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 capital gains and dividend income
under the Internal Revenue Code.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 9
<PAGE>
Securities Lending: Each portfolio may lend its securities to qualified brokers,
dealers, banks and other financial institutions for the purpose of realizing
additional income. Loans of securities will be collateralized by cash, letters
of credit, or securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current market value of
the loaned securities. In addition, a portfolio will not loan its portfolio
securities to the extent that greater than one-third of its total assets, at
fair market value, would be committed to loans at that time.
Illiquid Securities/Restricted Securities: Each of the portfolios may invest up
to 15% of its net assets in securities that are illiquid by virtue of the
absence of a readily available market, or because of legal or contractual
restrictions on resale. This policy does not limit the acquisition of (i)
restricted securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial paper
issued pursuant to Section 4(2) under the Securities Act of 1933, that are
determined to be liquid in accordance with guidelines established by the Fund's
Board of Trustees.
Turnover: The Adviser manages the portfolios generally without regard to
restrictions on annual turnover. 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 with respect to forward delivery mortgage-backed
securities. For the Balanced and Multi-Asset-Class Portfolios, annual turnover
rate is not expected to exceed 100% with respect to Equity Securities.
The following portfolios have annual turnover rates of 100% or more: Mid Cap
Growth, Mid Cap Value, Domestic Fixed Income, Fixed Income, Balanced and
Multi-Asset-Class. These high rates of annual 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, highe rates of annual 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. The annual turnover for each
portfolio is shown in the financial highlights under "Portfolio Turnover Rate".
Cash Equivalents/Temporary Defensive Investing: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets is 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.
- --------------------------------------------------------------------------------
MAS Fund - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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; and
(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.
Limitations (a) and (b), 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 portfolios. 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 i this prospectus or Statement
of Additional Information 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 portfolios' 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 Fund - 11
<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's investment process is designed to capture
value by identifying stocks that offer low but rising
expectations. To determine the level of expectations for
various companies and the direction of changes in those
expectations, the Adviser analyzes the companies' equity
valuations and changes in the companies' estimates of
future earnings. In addition, the Adviser diversifies
across sectors to preserve return while reducing risk,
seeking the best values within each sector of the
market. A group of senior investment professionals
invests the portfolio using a disciplined approach to
stock selection supported by fundamental research
analysts. Each investment professional makes his or her
own buy, sell and sector-allocation decisions. Overall
sector allocation is driven by bottom-up stock selection
and is reviewed regularly to preserve the benefits of
diversification.
Policies: Generally at least 65% invested in Equity Securities
Up to 5% 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 Stocks Foreign Equities Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategies: Core Equity Investing
Portfolio
Management Team: Arden C. Armstrong, James J. Jolinger, Nicholas J.
Kovich, Brian Kramp, Robert J. Marcin and Gary G.
Schlarbaum
- --------------------------------------------------------------------------------
MAS Fund - 12 Terms in bold type are defined in the Prospectus Glossary
<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 stocks of companies based outside
of the U.S.
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 Investments: ADRs Eastern European Issuers Investment Companies Structured Notes
Agencies Emerging Markets Issuers Investment Funds Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stocks Foreign Equities Repurchase Agreements When Issued Securities
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
Portfolio
Management Team: Hassan Elmasry and Horacio A. Valerias
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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 selling 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 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 matching the S&P MidCap 400 Index (currently
$500 million to $6 billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Foreign Currency Investment Companies Rights
Cash Equivalents Foreign Equities Preferred Stock Warrants
Common Stocks Futures & Options Repurchase Agreements When Issued Securities
Convertibles
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
Portfolio
Management Team: Arden C. Armstrong and Abhi Y. Kanitkar
- --------------------------------------------------------------------------------
MAS Fund - 14 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 of
three to five years, consistent with reasonable risk,
by investing in stocks with equity capitalizations in
the range of the companies in the S&P MidCap 400 Index
which are deemed by the Adviser to be undervalued based
on certain proprietary measures of value. The
portfolio will typically exhibit a lower price/earnings
value ratio than the S&P 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. portfolio will be
structured taking into account the economic sector
weights the S&P MidCap 400 Index, with sector weights
normally being within 5% of the weights of the Index.
Policies: Generally at least 65% invested in Equity Securities of
mid-cap companies, which are 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 Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Equities Preferred Stock Warrants
Common Stocks Foreign Currency Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 15
<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 stocks with equity
capitalizations usually greater than $300 million are
deemed by the Adviser to be relatively undervalued,
based on various such as price/earnings ratios and
price/book ratios. While capital will be emphasized
somewhat more than income return, the portfolio's
return will consist of both capital and income returns.
It is expected income return will be higher than that
of the Equity Portfolio because which are deemed to be
undervalued in the marketplace have, under most market
conditions, provided higher dividend income returns
than stocks which are to have long-term earnings growth
potential which normally sell at higher ratios.
Approach: The Adviser selects common stocks which are deemed to
be undervalued relative to the stock market in general
as measured by the & Poor's 500 Index, based on the
value measures such as price/earnings and price/book
ratios, as well as fundamental research.
Policies: Generally at least 65% invested in Equity Securities,
which are 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 Stocks Foreign Equities Repurchase Agreements When Issued Securities
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
Portfolio
Management Team: Richard M. Behler, Nicholas J. Kovich and Robert
J. Marcin
- --------------------------------------------------------------------------------
MAS Fund - 16 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 and other
investment grade fixed-income securities of domestic
issuers.
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 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: 80% of Fixed-Income Securities rated A or higher (or
its equivalent)
May invest up to 20% in Fixed-Income Securities rated
BBB (or its equivalent)
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 Securities
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
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 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 Investments: Agencies Floaters Investment Companies Structured Notes
Asset-Backeds Foreign Bonds Loan Participations Swaps
Brady Bonds Foreign Currency Mortgage Securities U.S. Governments
Cash Equivalents Forwards Municipals When Issued Securities
CMOs Futures & Options Preferred Stock Yankees
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters SMBS
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Investing
Foreign Fixed Income Investing
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
- --------------------------------------------------------------------------------
MAS Fund - 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 (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 Investments: Agencies Emerging Markets Issuers Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalents Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals When Issued Securities
Convertibles Forwards Preferred Stock Yankees
Corporates Futures & Options Repurchase Agreements Zero Coupons
Eastern European Issuers High Yield
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Investing
Foreign Fixed Income Investing
Emerging Markets Investing
Portfolio
Management Team: Robert E. Angevine, Thomas L. Bennett and Stephen F.
Esser
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 19
<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 Investment Companies SMBS
Agencies Floaters Investment Funds Structured Notes
Asset-Backeds Foreign Bonds Loan Participations Swaps
Brady Bonds Foreign Currency Mortgage Securities U.S. Governments
Cash Equivalents Foreign Equities Municipals Warrants
CMOs Forwards Preferred Stock When Issued Securities
Common Stocks Futures & Options Repurchase Agreements Yankees
Convertibles High Yield Rights Zero Coupons
Corporates Inverse Floaters
</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
<TABLE>
<CAPTION>
<S> <C> <C>
Strategies: Asset Allocation Management Mortgage Investing
Core Equity Investing High Yield Investing
Fixed Income Management and Asset Allocation Foreign Investing
Maturity and Duration Management Foreign Fixed Income Investing
Value Investing
</TABLE>
Portfolio
Management Team: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A.
Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
MAS Fund - 20 Terms in bold type are defined in the Prospectus Glossary
<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 U.S. 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 Equivalents Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stocks Forwards Preferred Stock When Issued Securities
Convertibles Futures & Options Repurchase Agreements Yankees
Corporates High Yield Rights Zero Coupons
</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 Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Mortgage Investing
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G.
Schlarbaum, Horacio A. Valeiras and Richard B. Worley
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 21
<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 the
Adviser'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).
- --------------------------------------------------------------------------------
MAS Fund - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 23
<PAGE>
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 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 Coupons 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 Fund - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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, 1997 (not including money market instruments).
These figures are dollar-weighted averages of month-end portfolio holdings and
do not necessarily indicate a portfolio's current or future debt holdings.
Portfolios whose debt holdings total less than 100% also invest in Equity
Securities.
High Yield Portfolio Multi-Asset-Class Portfolio
QUALITY QUALITY
TSY, AGY, AAA 9.06% TSY, AGY, AAA 26.22%
AA 0.05 AA 2.32
A 0.19 A 1.09
BBB 6.09 BBB 2.09
BB 42.51 BB 4.64
B 35.48 B 6.02
CCC 0.96 CCC 0.35
Not Rated: Not Rated:
BB 0.83* BB 0.06*
B 2.30* B 0.22*
NR 2.54 NR 0.17
---- ----
Total Not Rated 5.66 Total Not Rated 0.45
TOTAL 100.00% TOTAL 43.18%
* The Adviser believes that these non-rated securities are equivalent in quality
to the rating indicated.
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.
The Adviser 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
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 25
<PAGE>
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 greater than 50% of a fixed
income portfolio's assets may be invested in mortgage-related securities. These
include Mortgage 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), Fannie Mae, other government agencies, and private
issuers. It is expected that a portfolio's primary emphasis will be in Mortgage
Securities issued by the various government-related organizations. However, a
portfolio may invest, without limit, in Mortgage Securities issued by private
issuers when the Adviser deems that the quality of the investments, 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.
- --------------------------------------------------------------------------------
MAS Fund - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing, whereby the Adviser 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 the Adviser'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 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 27
<PAGE>
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 fairly 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).
Each portfolio may invest in obligations of U.S. banks and, except for the
Domestic Fixed Income Portfolio, in 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 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);
- --------------------------------------------------------------------------------
MAS Fund - 28 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, Fannie Mae,
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 weighte 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 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 29
<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 th 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. The portfolios may enter into
over-the-counter Derivatives transactions with counterparties 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
variou 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 a 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. As a result, 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
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MAS Fund - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
these 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.
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's listing of Allowable Investments
to determine which of these 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 o 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
mortgages 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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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 31
<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 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.
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MAS Fund - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Securities and
Exchange Commission's ("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 Corporates,
Preferred Stocks, and Convertibles rated Ba through by Moody's or BB through 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 bond 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." The rating C
is reserved for income bonds on which "no interest is being paid." Debt
rated D is in "default", and "payment of interest and/or repayment of
principal is in arrears."
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 33
<PAGE>
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
(the "1940 Act") 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 or limit 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 Fund - 34 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Investment Grade Securities: are those (a) 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)); (b)
guaranteed by the U.S. Government or a private organization; or (c) considered
by the Adviser to be investment grade quality 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 Securities, including
mortgage pass-throughs and 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. 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 Markets 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), Fannie Mae, private issuers and other government agencies.
There can be no assurance that the private insurers can meet their obligations
under the policies. Mortgage 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 35
<PAGE>
There are two methods of trading Mortgage 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 tim 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 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 U.S. Treasuries), 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. Municipals 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
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MAS Fund - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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 SEC, 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 37
<PAGE>
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 1940 Act. 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
the Adviser 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,
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MAS Fund - 38 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 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
swa 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.
Yankees: are U.S. dollar-denominated Fixed-Income Securities issued by a foreign
government or corporation and sold in the U.S.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 39
<PAGE>
Zero Coupons--Zero Coupon Obligations: are Fixed-Income Securities that do not
make regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
Zero Coupons 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
Adviser Class Shares are available to clients of the Adviser 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. The portfolios
determine net asset value as described under General Shareholder
Information--Valuation of Shares each day that the portfolios are open. See
Other Information--Closed Holidays and General Shareholder
Information--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, PA 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 payments to investors who redeem shares
purchased by check will not be made 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
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MAS Fund - 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 additional 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, 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 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 additional investment amounts.
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.
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
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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 41
<PAGE>
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 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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MAS Fund - 42 Terms in bold type are defined in the Prospectus Glossary
<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 New York
Stock Exchange ("NYSE"), the custodian, or the fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as determined
by the SEC.
If the Board of Trustees determines that it would be detrimental to the best
interest 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 SEC. 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 qualified 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 43
<PAGE>
VALUATION OF SHARES
Equity, International Equity, Mid Cap Growth, 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 values of other assets and securities for which no quotations are
readily available (including restricted securities), and, to the extent
permitted by the SEC, securities for which the value has been materially
affected by events occurring after the close of the market on which they
principally trade, are determined in good faith at fair value using methods
approved by the Trustees.
Domestic Fixed Income, Fixed Income and High Yield 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
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MAS Fund - 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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), and, to the extent permitted by the SEC,
securities for which the value has been materially affected by events occurring
after the close of the market on which they principally trade, 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 portfolio is open for
business. Equity, fixed-income and other securities hel by the portfolio will be
valued using the policies described above.
All Portfolios: Net asset value per share for Investment Class Shares,
Institutional Class Shares and Adviser Class Shares may differ due to
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES: Dividends and Distributions: The Fund
maintains different dividend and distribution policies for each portfolio. These
are:
o The Equity, Value, Domestic Fixed Income, Fixed Income, High Yield, Balanced
and Multi-Asset-Class Portfolios normally distribute substantially all of
their net investment income to shareholders on a quarterly basis.
o The International Equity, Mid Cap Growth and Mid Cap Value Portfolios normally
distribute substantially all of their net investment income on an annual
basis.
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 gains are realized from the sale of underlying securities, the
portfolios normally distribute such gains with the last distribution 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 45
<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 portfoli in accordance with its
investment objectives and policies.
TAXES: The following is a summary of some important tax issues that affect the
portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its shareholders. More
information about taxes is in the Statement of Additional Information.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes.
Federal Taxes: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax treatment
afforded regulated investment companies. As such, each portfolio will not be
subject to federal income tax to the extent it distributes net investment
company taxable income and net capital gains to shareholders. The Fund will
notify shareholders annually as to the tax classification of all distributions.
Income dividends received by shareholders will be taxable as ordinary income,
whether received in cash or in additional shares. In the case of the Equity,
Value, Mid Cap Value, Mid Cap Growth, Balanced and Multi-Asset-Class Portfolios,
corporate shareholders may be entitled to a dividends-received deduction for the
portion of dividends they receive which are attributable to dividends received
by such portfolios from U.S. corporations. Capital gains distributions are
taxable to shareholders at capital gain rates. Each portfolio will designate
capital gains distributions to individual shareholders as either subject to the
federal capital gains rate imposed on property held for more than 18 months or
on property held for more than 1 year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to shareholders in the previous
year.
Each portfolio intends to declare and pay dividends and distributions so as to
avoid imposition of the federal excise tax applicable to regulated investment
companies. Further discussion is included in the Statement of Additional
Information.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders must
certify on their Account Registration Forms that their Social Security Number or
Taxpayer Identification Number is correct, and that they are not subject to
backup withholding.
Exchanges and redemptions of shares in a portfolio are taxable events.
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MAS Fund - 46 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Foreign Income Taxes: Investment income received by the portfolios from sources
within foreign countries may be subject to foreign income taxes withheld at
source. The International Equity and Multi-Asset-Class Portfolios may be able to
file an election with the Internal Revenue Service to pass through to their
shareholders for foreign tax credit purposes, the amount of foreign income taxes
paid by each such portfolio. Further discussion is included in the Statement of
Additional Information. The other portfolios will not be able to make this
election.
State and Local Income Taxes: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors for
the state and local income tax consequences of distributions from the
portfolios.
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 Morgan Stanley, Dean
Witter, Discover & Co., and is located at One Tower Bridge, West Conshohocken,
PA 19428. The Adviser provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
December 31, 1997 had in excess of $59.4 billion in assets under management. On
May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. In connection with this transaction, the Adviser entered
into a new Investment Management Agreement ("Agreement") with MAS Funds dated
May 31, 1997, which Agreement was approved by the shareholders of each portfolio
at a special meeting held on May 1, 1997 or at an adjournment of such meeting
held on May 12, 1997. The Adviser will retain its name and remain at its current
location, One Tower Bridge, West Conshohocken, PA 19428. The Adviser will
continue to provide investment counseling services to employee benefit plans,
endowments, foundations and other institutional investors.
Under the Agreement with the Fund, the Adviser, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the stated
investment objectives and policies of each portfolio of the Fund, manages the
investment and reinvestment of the assets of each portfolio of the Fund. In this
regard, it is the responsibility of the Adviser to make investment decisions for
the Fund's portfolios and to place each portfolio's purchase and sales orders.
As compensation for the services rendered by the Adviser under the Agreement,
each portfolio pays the Adviser an advisory fee calculated by applying a
quarterly rate. The following table shows the Adviser's contractual rate
(annualized) along with the Adviser's actual rate of compensation for the Fund's
1997 fiscal year.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 47
<PAGE>
FY 1997
Contractual Actual
Rate Compensation Rate
----------- -----------------
Equity Portfolio .500% .500%
International Equity Portfolio .500 .500
Mid Cap Growth Portfolio .500 .500
Mid Cap Value Portfolio .750 .727
Value Portfolio .500 .500
Domestic Fixed Income Portfolio .375 .364
Fixed Income Portfolio .375 .375
High Yield Portfolio .375 .375
Balanced Portfolio .450 .450
Multi-Asset-Class Portfolio .650 .528
The Adviser is, on a voluntary basis, waiving a portion of its fee and/or
reimbursing certain expenses for the Multi-Asset-Class Portfolio. Absent such
waivers and/or reimbursements by the Adviser, Total Operating Expenses would be
1.086%. These fee waivers and expense reimbursements are voluntary and may be
discontinued at any time at the Adviser's discretion.
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios 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 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. 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 Portfolio in
1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in
1996 and the Multi-Market Fixed Income Portfolio in 1997.
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MAS Fund - 48 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 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 PA, Municipal Portfolios in 1994 and the Multi-Market Fixed Income
Portfolio in 1997.
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 and the Multi-Market
Fixed Income Portfolio in 1997.
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
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994, the Balanced
Plus Portfolio in 1996 and the Multi-Market Fixed Income Portfolio in 1997.
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.
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.
Brian Kramp, Vice President, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management, and its successor,
Corestates Investment Advisors from 1985-1997. He assumed responsibility for the
Equity Portfolio in 1998.
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the Municipal and the PA Municipal Portfolios in 1992.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 49
<PAGE>
Chris Leavy joined MAS in 1997. He served as a Portfolio Manager for Capitoline
Investment Services from 1995-1997; a Portfolio Manager for Premier Trust
Company from 1994 to 1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. He assumed responsibility for the Mid Cap Value and
Small Cap Value Portfolios in 1998.
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.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS 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 Growth Portfolio in 1993, 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 assumed
responsibility for the International Equity Portfolio in 1992, the Emerging
Markets Value Portfolioin 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 Balanced Plus
Portfolio in 1996, the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the Multi-Market
Fixed Income Portfolio in 1997.
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.
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MAS Fund - 50 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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.
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 or markups on principal transactions 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 or dealer
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. The Adviser may
place a combined order for two or more accounts or portfolios for the purchase
or sale of one same security if, in its judgement, joint execution is in the
best interest of each participant and will result in best price and execution.
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. The Adviser may use its broker dealer affiliates, including Morgan
Stanley & Co., a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., 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-seven 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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 51
<PAGE>
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 1940 Act 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 5, 1998 Northern Trust Company (Chicago, Il) owned a controlling
interest (as that term is defined under the 1940 Act) 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 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, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
- --------------------------------------------------------------------------------
MAS Fund - 52 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.; formerly
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,
Fannie Mae; Director, Reliance Group Holdings; Director, CVS Corporation;
Director, Union Carbide 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, 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.
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 Fund - 53
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Fund - 54 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MAS ACCOUNT REGISTRATION FORM
- ---------
MAS FUNDS Mas Fund Distribution, Inc.
General Distribution Agent
- ------------------------------------------------------------------------------------------------------------------------------------
(1)
REGISTRATION/PRIMARY |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
MAILING ADDRESS
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Confirmations and month-end
statements will be mailed to Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
this address.
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 State Citizen |_| Resident Alien |_| Non-Resident Alien, Indicate Country of Residence __________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(2)
INTERESTED PARTY
OPTION Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
In addition to the account Company
statement sent to the above (If Applicable) |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
registered address, the Fund
is authorized to mail Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_
duplicate statements to the
name and address provided at City |_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_|-|_|_|_|_|
right
For additional interested Telephone No. |_|_|_|-|_|_|_|_|-|_|_|_|_|
party mailings, please attach
a separate sheet.
- ------------------------------------------------------------------------------------------------------------------------------------
(3)
INVESTMENT |_| Equity Portfolio $__________________________________
For Purchase of: |_| International Equity Portfolio $__________________________________
|_| Mid Cap Value Portfolio $__________________________________
|_| Value Portfolio $__________________________________
|_| Domestic Fixed Income Portfolio $__________________________________
|_| Fixed Income Portfolio $__________________________________
|_| High Yield Portfolio $__________________________________
|_| Balanced Portfolio $__________________________________
|_| Multi-Asset-Class Portfolio $__________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(4) TAXPAYER IDENTIFICATION NUMBER IMPORTANT TAX INFORMATION
Part 1.
You (as a payee) are required by law to provide us (as payer)
Social Security Number 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
or and capital gains distribution as well as redemptions. Backup
withholding is not an additional tax; the tax liability of person
Employer Identification Number subjects to backup withholding will be reduced by the amount of
|_|_|-|_|_|_|_|_|_|_| tax withheld.
You may be notified that you are subject to backup withholding
Part 2. BACKUP WITHHOLDING under section 3406(a)(1)(C) because you have underreported
|_| Check the box if the account is interest or dividends or you were required to, but failed to,
subject to Backup Withholding under the file a return which would have included a reportable interest or
provisions of Section 340(a)(1)(C) of dividend payment. If you have been so notified, check the box in
the Internal Revenue Code. PART 2 at left.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- --------------------------------------------------------------------------------
SIDE ONE OF TWO
<PAGE>
- --------------------------------------------------------------------------------
MAS
- ---------
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.
- --------------------------------------------------------------------------------
(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>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 55
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
MAS Fund - 56 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
- --------------------------------------------------------------------------------
MAS PROSPECTUS
- ---------
MAS FUNDS
ADVISER CLASS PROSPECTUS
January 31, 1998
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 40
Financial Highlights 6 Redemption of Shares 41
Yield and Total Return 9 Shareholder Services 43
Investment Suitability 9 Valuation of Shares 44
Investment Limitations 11 Dividends, Distributions and Taxes 45
Portfolio Summaries 12 Investment Adviser 47
Equity Investments 12 Portfolio Management 48
Fixed-Income Investments 17 Administrative Services 50
Prospectus Glossary General Distribution Agent 50
Strategies 22 Portfolio Transactions 51
Investments 27 Other Information 51
Trustees and Officers 53
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 57
<PAGE>
- --------------------------------------------------------------------------------
MAS [LOGO]
MAS FUNDS
--------------------------------------
ADVISER CLASS PROSPECTUS
--------------------------------------
Miller
Anderson
& Sherrerd, LLP
ONE TOWER BRIDGE - WEST CONSHOHOCKEN, PA 19428 - 800-354-8185
- --------------------------------------------------------------------------------
<PAGE>
MAS ADVISORY PORTFOLIOS PROSPECTUS
- ---
MAS FUNDS
January 31, 1998
- --------------------------------------------------------------------------------
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-seven
portfolios, two of which are described in this Prospectus. The Advisory Foreign
Fixed Income and Advisory Mortgage Portfolios are available only to private
advisory clients of Miller Anderson & Sherrerd, LLP (the "Adviser"), investment
adviser to MAS Funds.
- --------------------------------------------------------------------------------
PORTFOLIO PAGE REFERENCE
How to Use This Prospectus: 3
Portfolio Summaries:
Advisory Foreign Fixed Income 9
Advisory Mortgage 10
Prospectus Glossary:
Strategies 11
Investments 13
General Shareholder
Information: 24
Table of Contents 32
- --------------------------------------------------------------------------------
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, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MILLER
ANDERSON
& SHERRERD, LLP__ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
<PAGE>
EXPENSE SUMMARY
The following tables illustrate the various expenses and fees that a shareholder
in a portfolio will incur either directly or indirectly. 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 None
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income 0.000%* 0.150% 0.150%
Advisory Mortgage 0.000* 0.080 0.080
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 expenses that otherwise would be deducted from portfolio assets. Expenses
in the above table have been restated to reflect current expenses.
*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 Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios from exceeding 0.150% and
0.08%, respectively. Absent such waivers and/or reimbursements by the Adviser,
Total Operating Expenses would be 0.561% and 0.464% for the Advisory Foreign
Fixed Income and Advisory Mortgage Portfolios, respectively.
- --------------------------------------------------------------------------------
MAS Fund - 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.
Portfolio 1 year 3 year 5 year 10 year
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income $2 $5 $8 $19
Advisory Mortgage 1 3 5 10
- --------------------------------------------------------------------------------
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 all portfolios
begins on page 7;
SUMMARY PAGES for 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; and
GENERAL SHAREHOLDER INFORMATION begins on page 24
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 3
<PAGE>
SUMMARY 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.
The Advisory Foreign Fixed Income Portfolio is Non-Diversified for purposes of
the Investment Company Act of 1940 (the "1940 Act") meaning that it may invest a
greater percentage of assets in the securities of one issuer than other
portfolios. The Advisory Mortgage Portfolio is diversified.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold type:
o Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction;
o Each portfolio may participate in a Securities Lending program which
entails a risk of loss should a borrower fail financially;
o Fixed-Income Securities will be affected by general changes in interest
rates resulting in increases or decreases in the value of the obligations
held by a portfolio. The value of fixed-income securities can be expected
to vary inversely to changes in prevailing interest rates, i.e., as
interest rates decline, market value tends to increase and vice versa.
Certain Fixed Income Securities may be highly sensitive to interest rate
changes, and highly sensitive to the rate of principal payments (including
prepayments on underlying mortgage assets). 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.
Portfolios investing in foreign securities may also engage in foreign
currency exchange transactions. See Forwards, Futures & Options, and Swaps;
o Securities purchased on a When-Issued basis may decline or appreciate in
market value prior to their actual delivery to the portfolio;
- --------------------------------------------------------------------------------
MAS Fund - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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; and
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.
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. See
Redemption of Shares and Shareholder Services.
THE FUND'S INVESTMENT ADVISER: Miller Anderson & Sherrerd, LLP (the "Adviser")
is a Pennsylvania limited liability partnership founded in 1969, wholly owned by
indirect subsidiaries of Morgan Stanley, Dean Witter, Discover and Co., and is
located at One Tower Bridge, West Conshohocken, PA 19428. The Adviser provides
investment counseling services to employee benefit plans, endowments,
foundations and other institutional investors, and as of December 31, 1997 had
in excess of $59.4 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor") provides
distribution services to the Fund.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 5
<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 portfolios'
financial statements which are included in the Annual Report to Shareholders
incorporated by reference to the Statement of Additional Information. The
portfolios' financial statements for the year ended September 30, 1997 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 Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ---------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997+++ $11.73 $0.58 $0.80 $1.38 ($1.88) ($0.88) ($0.03)# ($2.79)
1996 10.80 0.68 1.02 1.70 (0.66) (0.11) -- (0.77)
1995 10.00 0.74 0.44 1.18 (0.38) -- -- (0.38)
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)
1997 $10.29 $0.75 $0.34 $1.09 ($0.71) ($0.08) -- ($0.79)
1996 10.41 0.72 (0.06) 0.66 (0.72) (0.03) ($0.03)# (0.78)
1995 10.00 0.25 0.35 0.60 (0.19) -- -- (0.19)
</TABLE>
<TABLE>
<CAPTION>
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return** (thousands) Net Assets+ Net Assets Rate
- ----------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio (Commencement of Operations 10/7/94)
<S> <C> <C> <C> <C> <C> <C>
1997+++ $10.32 14.08% $ 93,939 0.14%++ 5.68% 208%
1996 11.73 16.47 236,092 0.12++ 6.06 170
1995 10.80 12.12 537,133 0.16*++ 7.44* 96
Advisory Mortgage Portfolio (Commencement of Operations 4/12/95)
1997 $10.59 11.03% $3,071,427 0.09%++ 7.55% 144%
1996 10.29 6.56 1,974,592 0.09++ 7.17 139
1995 10.41 6.03 1,443,038 0.10*++ 6.72* 110
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
# Represents distribution in excess of net realized gains.
+ For the periods ended September 30, 1995, September 30, 1996 and September
30, 1997, 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,
0.12% and 0.08%, respectively, for 1996, and 0.14% and 0.08%, respectively,
for 1997.
++ The Adviser has voluntarily agreed to waive its advisory fees and/or
reimburse certain expenses to the extent necessary in order to keep the
Total Operating Expenses actually deducted from portfolio assets for the
Advisory Foreign Fixed Income and Advisory Mortgage Portfolios from
exceeding 0.15% and 0.08%, respectively. Voluntarily waived and/or
reimbursed expenses totaled 0.38%* and 0.49%*, respectively, for the period
ended September 30, 1995, 0.38% and 0.39%, respectively, for the year ended
September 30, 1996, and 0.38% and 0.40%, respectively, for the year ended
September 30, 1997.
+++ Per share amounts for the year ended September 30, 1997, are based on
average shares outstanding.
- --------------------------------------------------------------------------------
MAS Fund - 6 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).
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 a 30-day period 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 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 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
Suitability: The portfolios are designed for advisory clients of MAS who are
investing in the Fund as part of alarger investment and who, as long-term
investors, can accept the risks entailed in investing in the 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
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 annual turnover. 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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund -7
<PAGE>
Each portfolio has an annual turnover rate of 100% or more. These high rates of
annual 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 annual 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. The annual turnover rate for each portfolio is shown in the Financial
Highlights.
Cash Equivalents/Temporary Defensive Investing: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets is 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 either 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 Advisory Foreign Fixed Income Portfolio. However, this
portfolio will comply with the diversification requirements imposed by
Sub-Chapter M of the Internal Revenue Code and;
(b) with respect to 75% of its assets, a portfolio will not purchase a security
if, as a result, the portfolio would hold more than 10% of the outstanding
voting securities of any issuer. This limitation is not applicable to the
Advisory Foreign Fixed Income Portfolio. However, this portfolio will comply
with the diversification requirements imposed by Sub-Chapter M of the Internal
Revenue Code.
Limitations (a) and (b), 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 portfolios. 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 in this prospectus or the
Statement of Additional Information 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 portfolios' assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
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MAS Fund - 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% in securities that are Rated A or higher
Specifications: (or its equivalent)
Maturity and Duration: Average weighted maturity generally greater than 5
years.
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers Investment Companies Swaps
Investments: Asset-Backeds Floaters Mortgage Securities U.S. Governments
Brady Bonds Foreign Bonds Municipals When Issued Securities
Cash Equivalents Foreign Currency Preferred Stock Yankees
CMOs Forwards Repurchase Agreements Zero Coupons
Convertibles Futures & Options SMBS
Corporates Inverse Floaters Structured Notes
</TABLE>
Benchmark Index: Salomon Broad Investment Grade
Strategies: Foreign Investing
Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Non-Diversified Status
Mortgage Investing
Portfolio
Management Team: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 9
<PAGE>
Advisory Mortgage Portfolio
(available only to advisory clients of MAS)
Objective: To achieve returns consistent with returns generated by
the market for mortgage securities by investing
primarily (at least 65% of its assets under normal
circumstances) in mortgage securities.
Approach: The portfolio is available only to the Adviser's
private advisory clients
Policies: Generally at least 65% invested in Mortgage Securities
Derivatives may be used to pursue portfolio strategy.
Quality
Specifications: 100% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than
7 years.
Duration generally between 2 and 7 years.
<TABLE>
<S> <C> <C> <C> <C>
Allowable 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 Yankees Zero Coupons
</TABLE>
Benchmark Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
Portfolio
Management Team: Kenneth B. Dunn and Scott F. Richard
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MAS Fund - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
Foreign Fixed Income Investing: The Adviser invests in Foreign Bonds and other
Fixed-Income Securities denominated in foreign currencies, where, in the opinion
of the Adviser, the combination of current yield and currency value offer
attractive expected returns. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency Futures &
Options, Forwards and Swaps may be used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in Foreign Bonds
involves certain special considerations which are not typically associated with
investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign Bonds may be less
liquid and more volatile than securities of comparable U.S. companies. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed companies than in the U.S. With respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Additionally, there may be difficulty in
obtaining and enforcing judgments against foreign issuers.
Since Foreign Bonds may be denominated in foreign currencies, and since a
portfolio may temporarily hold uninvested reserves in bank deposits of foreign
currencies prior to reinvestment or conversion to U.S. dollars, a portfolio may
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies.
Although a portfolio will endeavor to achieve the most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of a portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a portfolio receives from the companies comprising the portfolio's
investments.
Maturity and Duration Management: One of two primary components of the Adviser's
fixed-income investment strategy is maturity and duration management. The
maturity and duration structure of a portfolio investing in Fixed-Income
Securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-day
movements in the market, but instead are implemented in anticipation of
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 11
<PAGE>
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.
Mortage 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 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), Fannie Mae, other government
agencies, and private issuers. It is expected that a portfolio's primary
emphasis will be in Mortgage Securities issued by
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MAS Fund - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
the various government-related organizations. However, a portfolio may invest,
without limit, in Mortgage 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: The Advisory Foreign Fixed Income Portfolio is
classified as a non-diversified investment company under the 1940.Act.
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 the Adviser 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 the Adviser'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.
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 13
<PAGE>
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 fairly 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).
Each 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 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);
- --------------------------------------------------------------------------------
MAS Fund - 14 Terms in bold type are defined in the Prospectus Glossary
<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, Fannie Mae,
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 weighte 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 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.
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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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 15
<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 th 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 portfolios may enter into
over-the-counter Derivatives transactions with counterparties 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
variou 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 a 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. As a result, there
can be no assurance that the portfolio's investments in Eastern Europe would not
be expropriated, nationalized or otherwise confiscated.
Fixed-Income Securities: Commonly include but are not limited to U.S.
Governments, Zero Coupons, Agencies, Corporates, 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's listing of Allowable Investments
to determine which of these 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 o 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,
- --------------------------------------------------------------------------------
MAS Fund - 16 Terms in bold type are defined in the Prospectus Glossary
<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; (3) non-government foreign
corporate debt securities; and (4) foreign Mortgage Securities and various other
mortgages 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).
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 these transactions create residual foreign currency exposure. When a
portfolio enters into a forward contract for purposes of creating a position
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 17
<PAGE>
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 Securities and
Exchange Commission's ("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.
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 1940 Act 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.
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MAS Fund - 18 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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 Grade Securities: are those (a) 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)); (b)
guaranteed by the U.S. Government or a private organization; or (c) considered
by the Adviser to be investment grade quality. 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 Securities, including
mortgage pass-throughs and CMOs, deemed investment grade by the Adviser, will
either carry a guarantee from an agency of the U.S. Government or a private
issuer of the timely payment of principal and interest (such guarantees do not
extend to the market value of such securities or the net asset value per share
of the portfolio) or, in the case of unrated securities, be sufficiently
seasoned that they are considered by the Adviser to be investment grade quality.
The Adviser may retain securities if their ratings falls below investment grade
if it deems retention of the security to be in the best interests of the
portfolio. Any portfolio permitted to hold Investment Grade Securities may hold
unrated securities if the Adviser considers the risks involved in owning that
security to be equivalent to the risks involved in holding an Investment Grade
Security.
Mortgage Securities--Mortgage-backed securities represent an ownership interest
in a pool of residential and commercial mortgage loans. Generally, these
securities are designed to provide monthly payments of interest and principal to
the investor. The mortgagee's monthly payments to his/her lending institution
are passed through to investors such as the portfolio. Most issuers or poolers
provide guarantees of payments, regardless of whether the mortgagor actually
makes the payment. The guarantees made by issuers or poolers are supported by
various forms of credit, collateral, guarantees or insurance, including
individual loan, title, pool and hazard insurance purchased by the issuer. The
pools are assembled by various governmental, government-related and private
organizations. Portfolios may invest in securities issued or guaranteed by the
Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Fannie Mae, private issuers and other government agencies.
There can be no assurance that the private insurers can meet their obligations
under the policies. Mortgage 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 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 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
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 19
<PAGE>
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 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 U.S. Treasuries), 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. Municipals 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
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MAS Fund - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
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 SEC, 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.
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.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 21
<PAGE>
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 1940 Act. 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 retur 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
the Adviser 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 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 Fund - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
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
swa market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than Swaps.
The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the portfolios would be less favorable than it would have been if this
investment technique were not used.
U.S. Governments--U.S. Treasury securities: are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the payment
of both principal and interest.
When-Issued Securities: are securities purchased at a certain price even though
the securities may not be delivered for up to 90 days. No payment or delivery is
made by a portfolio in a when-issued transaction until the portfolio receives
payment or delivery from the other party to the transaction. Although a
portfolio receives no income from the above described securities prior to
delivery, the market value of such securities is still subject to change. As a
consequence, it is possible that the market price of the securities at the time
of delivery may be higher or lower than the purchase price. A portfolio will
maintain with the custodian a segregated account consisting of cash or liquid
securities in an amount at least equal to these commitments.
Yankees: are U.S. dollar-denominated Fixed-Income Securities issued by a foreign
government or corporation and sold in the U.S.
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 Coupons 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 Fund - 23
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
The Advisory Foreign Fixed Income and Advisory Mortgage Portfolios are available
only to private advisory clients of Miller Anderson & Sherrerd, LLP. investment
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 Shareholder 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 any of its portfolios or to reject any purchase
orders when, in the judgement 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 New York
Stock Exchange ("NYSE"), the Custodian, or the Fund is closed (see Other
Information-Closed Holidays) or under any emergency circumstances as determined
by the SEC.
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 SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in such payments
of redemptions.
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MAS Fund - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Valuation of Shares
Net asset value per share is computed by dividing the total value of the
investments and other assets of the portfolio, less any liabilities, by the
total outstanding shares of the portfolio. The net asset value per share is
determined as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day the portfolio is open for business (See Other
Information-Closed Holidays). Bonds and other Fixed-Income Securities listed on
a foreign exchange are valued at the latest quoted sales price available before
the time when assets are valued. For purposes of net asset value per share, all
assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars.
Net asset value includes interest on bonds and other Fixed-Income Securities
which is accrued daily. Bonds and other Fixed-Income Securities which are traded
over the counter and on 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), and, to the extent permitted by the SEC,
securities for which the value has been materially affected by events occurring
after the close of the market on which they principally trade, will be valued in
good faith at fair value using methods approved by the Board of Trustees.
Dividends, Distributions and Taxes
The Advisory Foreign Fixed Income and the Advisory Mortgage Portfolios will
normally distribute substantially all of their net investment income to
shareholders on a quarterly and monthly basis, respectively.
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 distribution for the
calendar year.
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Terms in bold type are defined in the Prospectus Glossary MAS Fund - 25
<PAGE>
All dividends and 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.
TAXES: The following is a summary of some important tax issues that affect the
portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its shareholders. More
information about taxes is in the Statement of Additional Information.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes.
Federal Taxes: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax treatment
afforded regulated investment companies. As such, each portfolio will not be
subject to federal income tax to the extent it distributes net investment
company taxable income and net capital gains to shareholders. The Fund will
notify shareholders annually as to the tax classification of all distributions.
Income dividends received by shareholders will be taxable as ordinary income,
whether received in cash or in additional shares. Capital gains distributions
are taxable to shareholders at capital gains rates. Each portfolio will
designate capital gains distributions to individual shareholders as either
subject to the federal capital gains rate imposed on property held for more than
18 months or on property held for more than 1 year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to shareholders in the previous
year.
Each portfolio intends to declare and pay dividends and distributions so as to
avoid imposition of the federal excise tax applicable to regulated investment
companies. Further discussion is included in the Statement of Additional
Information.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders must
certify on their Account Registration Forms that their Social Security Number or
Taxpayer Identification Number is correct, and that they are not subject to
backup withholding.
Exchanges and redemptions of shares in a portfolio are taxable events.
Foreign Income Taxes: Investment income received by the Advisory Foreign Fixed
Income Portfolio from sources within foreign countries may be subject to foreign
income taxes withheld at the source. The Advisory Foreign Fixed Income and the
Advisory Mortgage Portfolios may be able to file an election with the Internal
Revenue Service to pass through to its shareholders for foreign tax credit
purposes the amount of foreign income taxes paid by such portfolio. Further
discussion is included in the Statement of Additional Information.
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MAS Fund - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
State and Local Income Taxes: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors for
the state and local income tax consequences of distributions from the
portfolios.
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 Morgan Stanley, Dean
Witter, Discover & Co., and is located at One Tower Bridge, West Conshohocken,
PA 19428. The Adviser provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
December 31, 1997 had in excess of $59.4 billion in assets under management. On
May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. In connection with this transaction, the Adviser entered
into a new Investment Management Agreement ("Agreement") with MAS Funds dated
May 31, 1997, which Agreement was approved by the shareholders of each portfolio
at a special meeting held on May 1, 1997 or at an adjournment of such meeting
held on May 12, 1997. The Adviser will retain its name and remain at its current
location, One Tower Bridge, West Conshohocken, PA 19428. The Adviser will
continue to provide investment counseling services to employee benefit plans,
endowments, foundations and other institutional investors.
Under the Agreement with the Fund, the Adviser, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the stated
investment objectives and policies of each portfolio of the Fund, manages the
investment and reinvestment of the assets of each portfolio of the Fund. In this
regard, it is the responsibility of the Adviser to make investment decisions for
the Fund's portfolios and to place each portfolio's purchase and sales orders.
As compensation for the services rendered by the Adviser under the Agreement,
each portfolio pays the Adviser an advisory fee calculated by applying a
quarterly rate. The following table shows the Adviser's contractual rate
(annualized) along with the Adviser's actual rate of compensation for the Fund's
1997 fiscal year.
FY 1997
Contractual Actual
Rate Compensation Rate
----------- -----------------
Advisory Foreign Fixed Income .375% .000%
Advisory Mortgage .375 .000
Until further notice, the Adviser has voluntarily agreed to waive advisory fees
and/or reimburse certain expenses to the extent necessary to keep Total
Operating Expenses actually deducted from portfolio assets for the Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios from exceeding 0.15% and
0.08% respectively.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 27
<PAGE>
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios 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
assumed responsibility for the Advisory Foreign Fixed Income Portfolio in 1994.
Michael Kushma, Principal, Morgan Stanley, joined Morgan Stanley in 1988. He
assumed responsibility for the Advisory Foreign Fixed Income Portfolio in 1998.
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. He assumed
responsibility for the Advisory Foreign Fixed Income Portfolio in 1998.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS in 1992. He
assumed responsibility for the Advisory Mortgage Portfolio in 1995.
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 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 or markups on principal transactions 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 or dealer
effecting the transaction.
- --------------------------------------------------------------------------------
MAS Fund - 28 Terms in bold type are defined in the Prospectus Glossary
<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 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. The Adviser may
place a combined order for two or more accounts or portfolios for the purchase
or sale of one same security if, in its judgment, joint execution is in the best
interest of each participant and will result in best price and execution. 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. The Adviser may use its broker dealer affiliates, including Morgan
Stanley & Co., a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., 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-seven 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 1940 Act,
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.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Fund - 29
<PAGE>
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, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
- --------------------------------------------------------------------------------
MAS Fund - 30 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.; formerly
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,
Fannie Mae; Director, Reliance Group Holdings; Director, CVS Corporation;
Director, Union Carbide 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, 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.
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 Fund - 31
<PAGE>
PROSPECTUS
MAS
- ---
MAS FUNDS
January 31, 1998
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.................24
Financial Highlights.................6 Redemption of Shares...............24
Yield and Total Return...............7 Valuation of Shares................25
Investment Suitability...............7 Dividends, Distributions
Investment Limitations...............8 and Taxes........................25
Portfolio Summaries..................9 Investment Adviser.................27
Prospectus Glossary Portfolio Management.................28
Strategies.......................11 Administrative Services..............28
Investments......................13 General Distribution Agent...........28
Portfolio Transactions...............28
Trustees and Officers................31
MILLER
ANDERSON
& SHERRERD, LLP__ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1998
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-seven
portfolios offering a variety of investment alternatives. This Statement of
Additional Information sets forth information about the Fund applicable to all
twenty-seven portfolios.
This Statement is not a prospectus but should be read in conjunction with the
Fund's prospectuses dated January 31, 1998, each as revised from time to time.
To obtain any of these prospectuses, please call the Client Services Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
Page
----
Business History 3
Strategies and Investments 3
Repurchase Agreements 3
Securities Lending 3
Foreign Investments 4
Futures Contracts 5
Restrictions on the Use of Futures Contracts 6
Risk Factors in Futures Transactions 6
Options 7
Options on Foreign Currencies 8
Combined Transactions 9
Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies 9
Swap Contracts 10
Foreign Currency Exchange-Related Securities 11
Municipal Bonds 12
Duration 13
Mortgage-Backed Securities 14
Stripped Mortgage-Backed Securities 16
U.S. Government Securities 16
Zero Coupon Bonds 17
Eurodollar and Yankee Obligations 17
Brady Bonds 18
Cash Reserves Portfolio 18
Tax Considerations 19
Purchase of Shares 22
Redemption of Shares 22
Transactions with Broker/Dealers 22
Shareholder Services 23
Investment Limitations 23
<PAGE>
Management of the Fund 26
Distribution Plans 30
Shareholder Service Agreement 31
Investment Adviser 31
Administration 33
Distributor for Fund 34
Custodians 34
Portfolio Transactions 34
Annual Turnover 36
General Information 36
Performance Information 38
Comparative Indices 44
Financial Statements 50
Appendix-Description of Securities and Ratings 50
2
<PAGE>
BUSINESS HISTORY
MAS Funds (formerly MAS Pooled Trust Fund) is an open end management investment
company established under Pennsylvania law as a Pennsylvania business trust
under an Amended and Restated Agreement and Declaration of Trust dated November
18, 1993. The Fund was originally established as The MAS Pooled Trust Fund, a
Pennsylvania business trust, in February, 1984.
STRATEGIES AND INVESTMENTS
The following information supplements 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 ( the "1940 Act") or the
rules and regulations or interpretations of the Securities and Exchange
Commission (the "SEC") 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 U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
3
<PAGE>
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the portfolio at any time, and (d) the portfolio receive
reasonable interest on the loan (which may include the portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Trustees.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's 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 their 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 is 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 Value, International Fixed Income,
Advisory Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class, High
Yield, Municipal, PA Municipal, Balanced Plus, Balanced, and Multi-Market Fixed
Income Portfolios may invest in the securities of issuers in Eastern
4
<PAGE>
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 50 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. As a
result, there can be no assurance that a 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 come available. GDRs and
EDRs are typically issued by foreign 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 and EDRs generally bear all the costs associated
with establishing the unsponsored GDRs and EDRs. The depositary of unsponsored
GDRs and 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 and EDRs voting rights with respect to the deposited securities
or pool of securities. GDRs and 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 U.S.. The above portfolios may invest in sponsored and
unsponsored GDRs and EDRs. For purposes of the Funds' investment policies, a
portfolio's 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. Minimum 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 of Trustees.
5
<PAGE>
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets, and will maintain assets
sufficient to meet its obligations under such contracts in a segregated account
with the custodian bank or will otherwise comply with the SEC's position on
asset coverage.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a portfolio would continue to be required
to make daily cash payments to maintain its required margin. In such situations,
if the portfolio has insufficient cash, it may have to sell portfolio securities
to meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the portfolio may be required to make delivery of the
instruments underlying interest rate futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on a
portfolio's ability to effectively hedge. A portfolio will minimize the risk
that it will be unable to close out a futures contract by only entering into
futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
6
<PAGE>
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 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 each 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.
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OPTIONS ON FOREIGN CURRENCIES
All portfolios, except the Cash Reserves, Domestic Fixed Income, Limited
Duration, Mortgage-Backed Securities and Advisory Mortgage Portfolios, may
purchase and write options on foreign currencies in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminution in the value of portfolio securities, a
portfolio may purchase put options on the foreign currency. If the value of the
currency does decline, a portfolio will have the right to sell such currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a portfolio may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to a portfolio derived from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the portfolios could sustain losses on transactions in
foreign currency options which would require them to forego a portion or all of
the benefits of advantageous changes in such rates.
The portfolios may write options on foreign currencies for the same purposes.
For example, where a portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the portfolio 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
portfolio 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 or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account 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.
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
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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, 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, are
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.
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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 U.S. of
data on which to make trading decisions, (iii) delays in a portfolio's ability
to act upon economic events occurring in foreign markets during non business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S., and (v) lesser
trading volume.
SWAP CONTRACTS
All portfolios, except the Cash Reserves and Mid Cap Growth Portfolios, may
enter into Swap Contracts. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
payment streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes currencies, fixed interest
rates, prices, total return on interest rate indices, fixed income indices,
stock indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, a portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the portfolios may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon national amount.
The swaps in which the portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a portfolio is contractually
obligated to make. If the other party to a swap defaults, a portfolio's risk of
loss consists of the net amount of payments that a portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the Counterparty, the portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
portfolio) and any accrued but unpaid net amounts owed to a swap Counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities 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 1940 Act 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.
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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 the issuer an amount of cash (generally, for warrants
issued in the U.S., in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a 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"
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principal exchange rate linked securities are like the "standard" securities,
except that their return is enhanced by increases in the value of the U.S.
dollar and adversely impacted by increases in the value of foreign currency.
Interest payments on the securities are generally made in U.S. dollars at rates
that reflect the degree of foreign currency risk assumed or given up by the
purchaser of the notes (i.e., at relatively higher interest rates if the
purchaser has assumed some of the foreign exchange risk, or relatively lower
interest rates if the issuer has assumed some of the foreign exchange risk,
based of the expectations of the current market). Principal exchange rate linked
securities may in limited cases be subject to acceleration of maturity
(generally, not without the consent of the holders of the securities), which may
have an adverse impact on the value of the principal payment to be made at
maturity.
Performance indexed paper--Performance indexed paper is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues. The Municipal and PA Municipal Portfolios ("the
portfolios") may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper.
Industrial revenue bonds in most cases are revenue bonds and generally do not
have the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes. Project Notes are instruments issued by the
Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, they are also secured by the full faith and credit of the U.S..
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.
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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 investment objectives and policies and consider recommending to
shareholders changes in such objectives and policies.
Similarly, from time to time proposals have been introduced before state and
local legislatures to restrict or eliminate the state and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of a portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate investment objectives and
policies and consider recommending to shareholders changes in such objectives
and policies.
DURATION
The Limited Duration and Intermediate Duration Portfolios seek to achieve their
objectives 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
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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, in the
case of mortgage-backed securities, the current prepayment rates are more
critical than their stated final maturities in determining their 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. Most
issuers or poolers provide guarantees of payments, regardless of whether or not
the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are individual loan, title, pool and hazard insurance purchased by the
issuer. There can be no assurance that the private issuers can meet their
obligations under the policies. Mortgage-backed securities issued by private
issuers, whether or not such securities are subject to guarantees, may entail
greater risk. If there is no guarantee provided by the issuer, mortgage-backed
securities purchased by the portfolios will be rated investment grade by Moody's
or Standard & Poor's, or, if unrated, deemed by the Adviser to be of investment
grade quality.
Underlying Mortgages
Pools consist of whole mortgage loans or participation in loans. The majority of
these loans are made to purchasers of 1-4 family homes. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. For example, in addition to fixed-rate fixed-term
mortgages, the portfolios may purchase pools of adjustable rate mortgages (ARM),
growing equity mortgages (GEM), graduated payment mortgage (GPM) and other types
where the principal and interest payment procedures vary. ARM's are mortgages
which reset the mortgage's interest rate with changes in open market interest
rates. The portfolios' interest income will vary with changes in the applicable
interest rate on pools of ARM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
portfolios' net asset values since the prices at which these securities are
valued each day will reflect the payment procedures.
All poolers apply standards for qualifications to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
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.
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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 prepayment experience may cause the realized return to
differ from the assumed yield. Reinvestment of prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the
realized returns of the portfolios. The compounding effect from reinvestment of
monthly payments received by each portfolio will increase its return to
shareholders, compared to bonds that pay interest semi-annually.
About Mortgage-Backed Securities
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments resulting from the sale of the
underlying residential property, refinancing or foreclosure net of fees or costs
which may be incurred. Some mortgage-backed securities are described as
"modified pass-through." These securities entitle the holders to receive all
interest and principal payments owed on the mortgages in the pool, net of
certain fees, regardless of whether or not the mortgagors actually make payment.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation (FHLMC). FHLMC is a corporate instrumentality of the U.S. Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. FHLMC issues
Participation Certificates ("PC's") which represent interests in mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal.
Fannie Mae is a Government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae 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 Fannie Mae are
guaranteed as to timely payment of principal and interest by Fannie Mae.
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.
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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 on a portfolio's 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.
SMBS are generally purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers. Certain of these
securities may be deemed "illiquid" and subject to each portfolio's limitation
on investing 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 U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the "full faith and credit"
of the U.S.
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 U.S. In the case of securities not backed by the full
faith and credit of the U.S., 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 U.S. 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 U.S. 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
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National Mortgage Association, are, in effect, backed by the full faith and
credit of the U.S. 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 Fannie Mae, are not guaranteed by the U.S., 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 Fannie Mae.
ZERO COUPON BONDS
Zero Coupon Bonds is 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 issuer.
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 other 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
Each portfolio, except the Domestic Fixed Income Portfolio, can invest in
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
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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 fairly recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury Zero Coupon Obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury Zero Coupon
Obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
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
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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. 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 addition, (i) a portfolio must distribute annually to its
shareholders at least the sum of 90% of its net interest income excludable from
gross income plus 90% of its investment company taxable income; (ii) at the
close of each quarter of a portfolio's taxable year, at least 50% of its total
assets must be represented by cash and cash items, vs. government securities,
securities of other regulated investment companies and such other securities
with limitations; and (iii) at the close of each quarter of a portfolio's
taxable year, not more than 25% of the value of its assets may be invested in
securities of any one issuer, or of two or more issuers engaged in same or
similar businesses if the portfolio owns at least 20% of the voting power of
such issuers.
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 Taxpayer Relief Act of 1997 provides various capital gains rates which
pertain to shareholders who are individuals. Each portfolio will, therefore,
designate distributions derived from capital gains of the portfolio (whether
such distributions are paid in cash or additional shares) as a "20% rate gain
distribution" or a "28% rate gain distribution" in accordance with guidance
issued by the Internal Revenue Service. The Fund will notify shareholders
annually as to the federal tax classification of dividends and distributions
paid by a portfolio including, but not limited to notifying individuals as to
the amount of capital gain distributions subject to the 20% and 28% federal
capital gain tax rates. Distributions of dividends or capital gains may also be
subject to state and local taxes.
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
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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.
The Taxpayer Relief Act of 1997 provides constructive sales treatment for
appreciated financial positions such as stock which has increased in value in
the hands of a portfolio. Under this constructive sales treatment, the portfolio
may be treated as having sold such stock and be required to recognize gain if it
enters into a short sale, an offsetting notional principal contract, a futures
or forward contract, or a similar transaction with respect to such stock or
substantially identical property.
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 for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year.
Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. Each portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of a portfolio by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than
eighteen months, mid-term if the shares have been held for over one year but not
for over eighteen months, and short-term if for a year or less. Long-term
capital gains are currently taxed at a maximum rate of 20%; mid-term capital
gains are currently taxed at a maximum rate of 28%; and short-term gains are
currently taxed at ordinary income tax rates. If shares held for six months or
less are sold or redeemed for a loss, two special rules apply: First, if shares
on which a net capital gain distribution has been received are subsequently sold
or redeemed, and such shares have been held for six months or less, any loss
recognized will be treated as long-term capital loss to the extent of the
long-term capital gain distributions. Second, any loss recognized by a
shareholder upon the sale or redemption of shares of a municipal portfolio fund
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the Shareholder with respect to such
shares.
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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
would entitle the 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.
If more than 50% of a portfolio's assets are represented by foreign securities,
then such portfolio may file an election with the Internal Revenue Service to
pass through to shareholders the amount of foreign income taxes paid by such
portfolio. A portfolio will make such an election only if it is deemed to be in
the best interests of such shareholders.
If a portfolio makes the above-described election, the portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the portfolio. The shareholders of
the portfolios 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;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the portfolio
which represents income from sources within foreign countries; and (iv) 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 (the
"Code") as a foreign tax credit against U.S. income taxes (but not both). In no
event shall a shareholder be allowed a foreign tax credit if the shareholder
holds shares in a portfolio for 15 days or less during the 30-day period
beginning on the date which is 15 days before the date on which such shares
become ex-dividend with respect to such dividends.
Each shareholder of a 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. The notice from the
portfolio to shareholders will also include the amount of foreign taxes paid by
the portfolio which are not allowable as a foreign tax credit because the
portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because and to the extent that the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
Special Tax Considerations for the Municipal and PA Municipal Portfolios: Each
of the Municipal and PA Municipal Portfolio intends that at the close of each
quarter of its taxable year, at least 50% of the value of the portfolio's total
assets will consist of obligations the interest on which is excludable from
gross income (i.e., municipal bonds and notes), so that it may pay
"exempt-interest" dividends to shareholders. Exempt-interest dividends, which
are defined in the Code, are excluded from a shareholder's gross income for
federal income tax purposes, but may nevertheless be subject to the alternative
minimum tax (imposed at a rate of 26%-28% in the case of non-corporate taxpayers
and at the rate of 20% in the case of corporate taxpayers). A shareholder may,
however, lose the federal tax-exempt status of the accrued income of the
portfolio if the shareholder redeems its shares before a dividend has been
declared. Exempt-interest dividends received by shareholders from the
above-referenced portfolios may be subject to state and local taxes, although
some states allow a shareholder 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.
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These 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. These portfolios 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. A
"substantial user" is defined generally to include certain persons who regularly
use in a trade or business or facility financed from the proceeds of industrial
development bonds or private activity bonds. Such persons should consult their
tax advisers before purchasing shares.
Any distributions received by individual shareholders which are derived from
capital gains of the portfolio will be designated by either portfolio as a "20%
rate gain distribution" or a "28% rate gain distribution" in accordance with
guidance issued by the Internal Revenue Service.
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of these portfolios is not deductible for federal
income tax purposes to the extent that it relates to exempt-interest dividends
distributed to the shareholder during the taxable year.
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, and (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.
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 ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for a portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit.
The Fund has made an election with the SEC pursuant to Rule 18f-1 under the 1940
Act 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 SEC. 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 prospectuses 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.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, accepts the order. In
other words, orders will be priced at the net asset value net computed after
such orders are accepted by an authorized broker or the broker's authorized
designee.
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SHAREHOLDER SERVICES
Exchange Privilege
The exchange privilege is only available with respect to portfolios that are
qualified 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 the time at which each
portfolio determines its net asset value, as described in the prospectus 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. It is
likely, therefore, that a capital gain or loss would be realized on an exchange
between portfolios; you may want to consult your tax adviser for further
information in this regard. The exchange privilege may be modified or terminated
at any time.
Transfer of Shares
Shareholders may transfer shares of the Fund's portfolios to another person by
written request to the Client Services Group at the address noted above. The
request should clearly identify the account and number of shares to be
transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or any stock power must be guaranteed
in the same manner as described under "Redemption of Shares." As in the case of
redemptions, the written request must be received in good order before any
transfer can be made.
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;
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(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 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 1940 Act, or the rules and regulations, or interpretations or orders of the
SEC 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 Value 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 Value 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); and
(8) 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 (i) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(ii) the Cash Reserves Portfolio may invest without limitation in certificates
of deposit or bankers' acceptances of domestic banks; (iii) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iv)
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; (v) asset-backed securities
will be classified according to the underlying assets securing such securities;
and (vi) the Mortgage-Backed Securities and Advisory Mortgage Portfolios will
concentrate in mortgage-backed securities.
24
<PAGE>
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
Trustees;
(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.
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.
25
<PAGE>
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.; formerly
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, Fannie
Mae; Director, Reliance Group Holdings; Director, CVS Corporation; Director,
Union Carbide 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, 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 1940 Act.
- ------------------------------------------------------------------------------
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.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius LLP;
formerly Attorney, Ropes & Gray.
26
<PAGE>
Remuneration of Trustees and Officers
The Fund pays each Trustee, who is not also an officer or interested 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
interested persons receive no remuneration for their service as Trustees. The
Fund's officers and employees are paid by the Adviser or Sub-Administrator.
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 1940 Act) 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 three (3) or more 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, 1997.
As of the fiscal year ended September 30, 1997, the Trustees and officers of the
Fund owned, in the aggregate, less than 1% of the outstanding shares of the
Fund. The aggregate compensation paid by the Fund to each of the Trustees during
its fiscal year ended September 30, 1997 is set forth below.
<TABLE>
<CAPTION>
Aggregate Pension or Benefits
Compensation from Accrued as Part of Total Compensation
Name of Trustee the Fund# Fund Expenses from the Fund
- --------------- --------- ------------- -------------
<S> <C> <C> <C>
Thomas L. Bennett* -0- -0- -0-
Thomas P. Gerrity $57,000## $64,942 $57,000
Joseph P. Healey $57,000## $30,173 $57,000
Joseph J. Kearns $57,000## $60,102 $57,000
C. Oscar Morong, Jr. $57,000## $89,534 $57,000
Vincent R. McLean $57,000## $96,238 $57,000
</TABLE>
27
<PAGE>
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act.
# 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 5, 1998 the following persons owned of record or beneficially 5%
or more of the shares of a portfolio:
Equity Portfolio: Los Angeles County Deferred Compensation & Thrift Plan,
Englewood, CO, 7.4%.
Value Portfolio: Charles Schwab & Co., Inc., Special Custody Account for the
Exclusive Benefit of Customers, San Francisco, CA, 13.7%; Donaldson Lufkin &
Jenrette, Jersey City, NJ, 6.0%.
Small Cap Value Portfolio: The J. Paul Getty Trust, c/o The Northern Trust
Company, Chicago, IL, 10.6%; The Northern Trust Company, FBO Silicon Graphics,
Chicago, IL, 9.5%; Fishnet & Company, FBO The Hearst Foundation, Boston, MA,
5.1%.
Mid Cap Growth Portfolio: The J. Paul Getty Trust, c/o The Northern Trust
Company, Chicago, IL, 23.5%; Morgan Stanley, c/o MAS Team, Boston, MA, 6.2%; MAC
& Co., Pittsburgh, PA, 5.4%.
Domestic Fixed Income Portfolio: Fleet National Bank, Rochester, NY, 11.7%; The
Philadelphia Orchestra Unrestricted Endowment Fund, Philadelphia, PA, 11.0%;
Saxon & Company, FBO Weirton Medical Center Retirement Income Plan,
Philadelphia, PA, 9.2%; Strafe & Co., Marion General Hospital Retirement Plan,
Westerville, OH, 9.0%; Paintmakers Money Accumulation Pension Plan-B, Portland,
OR, 8.6%; Patterson & Co., c/o CoreStates Bank, N.A., Philadelphia, PA, 6.8%;
Key Trust Danis Industries, Cleveland, OH, 6.2%; Delta Dental Plan of NH, Inc.,
Concord, NH, 5.9%.
Cash Reserves Portfolio: The Northern Trust Company, Chicago, IL, 32.3%; The
Taft School, Watertown, CT, 13.1%; Skadden ARPS Slate Meagher & Flom LLP, New
York, NY, 11.2%; Association for Information and Image Management, Silver
Spring, MD, 5.2%.
International Equity Portfolio: Western Metal Industry, c/o Miller Andersen &
Sherrerd, West Conshohocken, PA, 11.8%; Ministers & Missionaries Benefit Board
of American Baptist Churches, New York, NY, 11.0%; Carnegie Corporation of New
York, New York, NY, 6.8%; Puerto Rico Telephone Company Pension Plan, San Juan,
PR, 6.3%.
Fixed Income Portfolio II: Diocese of Camden, Camden, NJ, 10.4%; Bankers Trust
Co., Jersey City, NJ, 9.9%; Board of Trustees of Sheet Metal Workers Local #100
Pension Plan, Suitland, MD, 9.5%; The Northern Trust Company, Chicago, IL, 6.5%;
Saul & Co., c/o First Union National Bank, Charlotte, NC, 6.2%.
High Yield Securities Portfolio: Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, San Francisco, CA, 8.5%; Western
Metal Industry, c/o Miller Andersen & Sherrerd, West Conshohocken, PA, 7.0%;
Donaldson Lufkin & Jenrette, Jersey City, NJ, 6.2%; Armco Master Pension Trust,
Pittsburgh, PA, 5.3%.
28
<PAGE>
Special Purpose Fixed Income Portfolio: Robertson Research Fund, Cold Spring
Harbor, NY, 5.2%.
Limited Duration Portfolio: Bankers Trust Company, Los Angeles, CA, 14.4%; Boys
& Girls Club of America Pension Trust, Atlanta, GA, 11.9%; Citibank, NA,
Fieldcrest Cannon Hourly Retirement Plan, Tampa, FL, 8.6%; Northern California
Bakery Drivers Security Fund, Alameda, CA 7.0%; Batrus & Co., c/o Bankers Trust
Company, New York, NY, 6.4%; Sheet Metal Workers Local # 100, Washington, DC,
5.8%.
Mortgage-Backed Securities Portfolio: Northwestern University Investment
Department, Evanston, IL, 30.6%; John S. Donovan, Trustee for Cives Corporation
Savings and Profit-Sharing Retirement Trust, Roswell, GA, 25.3%; The Paper Magic
Group, Inc., Scranton, PA, 16.3%; Melhorn & Co., c/o PNC Bank 641 Teamster
Pension, Philadelphia, PA 16.3%.
International Fixed Income Portfolio: Armco Master Pension Trust, Pittsburgh,
PA, 16.4%; CoreStates Bank, Childrens Hospital, Philadelphia, PA, 15.5%;
Northern Trust Co. as Custodian FBO: The J. Paul Getty Trust, Chicago, IL,
12.7%; The Skillman Foundation, Detroit, MI, 11.4%; Western Metal Industry
Pension Fund, c/o Miller Anderson & Sherrerd, West Conshohocken, PA, 9.6%;
Syntex (U.S.A.) Inc., Pension Trust, Palo Alto, CA, 6.7%; Chemical Bank as
Custodian for Smithsonian Institution, New York, NY, 6.1%; Wellesley College,
Wellesley, MA, 5.4%.
Emerging Markets Value Portfolio: Ministers & Missionaries Benefit Board of the
American Baptist Churches, New York, NY, 34.9%; Chemical Bank as Custodian for
Smithsonian Institution, New York, NY, 33.0%; Richard B. Worley, c/o Miller
Anderson & Sherrerd, West Conshohocken, PA, 7.7%; Philadelphia Orchestra
Association, Employee Pension & Retirement Plan, Philadelphia, PA 6.0%.
PA Municipal Portfolio: Kenneth B. Dunn & Pamela R. Dunn, Bala Cynwyd, PA 20.7%;
R. & S. Roberts, Philadelphia, PA, 17.9%; Southwest National Bank of PA,
Greensburg, PA 11.7%; John J. F. Sherrerd, Bryn Mawr, PA, 9.3%; A. Morris
Williams, Jr. & Ruth W. Williams, Gladwyne, PA, 6.9%; Sanford C. Bernstein & Co.
Inc., FBO Cook Family Fund, New York, NY, 5.2%.
Municipal Portfolio: Bost &Co., FBO Union Electric Employees Benefit Trust for
Union Retirees, Pittsburgh, PA, 21.2%; Bost & Co., FBO Union Electric Employee
Benefit Trust for Management Retirees, Pittsburgh, PA, 12.2%; Batrus & Co., c/o
Bankers Trust Company, New York, NY, 8.6%; Robert A. Fox, Jenkintown, PA, 8.4%;
Jesse J. Thompson, Charlotte, NC, 8.4%.
Balanced Portfolio: Northern Trust Co., Chicago, IL, 30.2%; Wendel & Co.,
Trustee for A&P Savings Plan, New York, NY, 8.7%; Wendel & Co., c/o The Bank of
New York, New York, NY, 7.3%; Wendel & Co.,c/o The Bank of New York, New York,
NY, 6.7%; Wendel & Co., FAO Aramark Corporation, New York, NY, 5.9%; Fidelity
Investments Institutional Operations Co., Covington, KY, 6.5%.
Global Fixed Income Portfolio: The Charles A. Dana Foundation, Inc., New York,
NY, 31.1%; "All for Her" Fund, c/o Rosary Inc., Albany, NY, 13.9%; Hudson-Webber
Foundation, Detroit, MI, 13.0%; Abilene Christian University, Abilene, TX,
10.2%; State Street Bank & Trust, Forest Oil Corporation Pension Trust, Boston,
MA, 8.4%; Rockefeller Family Fund Inc., New York, NY, 5.8%.
Intermediate Duration Portfolio: Southwest National Bank of PA, Greensburg, PA,
30.8%; Bankers Trust Company, the Los Angeles Hotel-Restaurant Employer Union
Welfare Fund, Los Angeles, CA, 19.2%; Jaffe Foundation, Suffern, NY, 11.5%;
Northumberland County Employees Retirement Fund, Altoona, PA, 8.1%; Nyack
Hospital, Nyack, NY, 6.5%.
29
<PAGE>
Multi-Asset-Class-Portfolio: Albany Medical College, Albany, NY, 17.8%; Chase
Manhattan Bank, Milbank Tweed Hadley & McCloy Master trust, Brooklyn, NY, 11.5%;
The Library Company of Philadelphia, Philadelphia, PA, 8.7%; Wachovia Bank, NA,
The W-S Foundation, Winston-Salem, NC, 5.3%; The National Center for State
Courts, Williamsburg, VA, 5.2%.
Advisory Foreign Fixed Income Portfolio: Minnesota State Board of Investments,
St. Paul, MN, 8.4%; Ford Motor Company Master Trust, Dearborn, MI, 7.0%; Kaiser
Foundation, Oakland, CA, 6.0%.
Mid Cap Value Portfolio: Charles Schwab & Co., Inc., Special Custody Account for
the Exclusive Benefit of Customers, San Francisco, CA, 10.7%; Georgetown
Memorial Hospital Funded Depreciation Account, Georgetown, SC, 9.3%; Fishnet &
Co., Boston, MA, 7.8%; The Chase Manhattan Bank, FAO Hearst Corporation, New
York, NY, 7.8%; Berklee College of Music, Boston, MA, 7.0%; The Northern Trust
Company, FBO Morgan Stanley Plan, Chicago, IL, 5.3%.
Advisory Mortgage Portfolio: Ford Motor Company Master Trust, Dearborn, MI,
9.8%; Public School Teachers of Chicago, Chicago, IL, 5.1%.
Multi-Market Fixed Income Portfolio: Connelly Foundation, West Conshohocken, PA,
73.4%; The Greenwall Foundation, New York, NY, 18.0%; Paperworkers Union Local
#286, Philadelphia, PA, 5.1%.
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 1940 Act)
such portfolios. As a result, those persons would have the ability to vote a
majority of the shares of the portfolios on any matter requiring the approval of
shareholders of such portfolios.
DISTRIBUTION PLANS
The Fund's Distribution Plan provides that the Adviser Class Shares will pay 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 1940 Act. 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, 1997, the Mid Cap Growth,
Value, Fixed Income, High Yield and Balanced Portfolios paid $665, $201,647,
$67,500, $3,009 and $37,084, respectively, in distribution fees pursuant to the
Distribution Plan. Other than $4,492 of fees retained by the Distributor, fees
paid to the Distributor during the fiscal year were used to reimburse
third-parties for distribution-related services performed on behalf of the Fund.
30
<PAGE>
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, 1997, the Fund paid $61, 244 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 Value Portfolio 0.750%
Equity Portfolio 0.500
Growth Portfolio 0.500
International Equity Portfolio 0.500
Mid Cap Growth Portfolio 0.500
Mid Cap Value Portfolio 0.750
Small Cap Value Portfolio 0.750
Value Portfolio 0.500
Cash Reserves Portfolio 0.250
Domestic Fixed Income Portfolio 0.375
Fixed Income Portfolio 0.375
Fixed Income II Portfolio 0.375
Global Fixed Income Portfolio 0.375
Multi-Market Fixed Income Portfolio 0.450
High Yield Portfolio 0.375
Intermediate Duration Portfolio 0.375
International Fixed Income Portfolio 0.375
Limited Duration Portfolio 0.300
Mortgage-Backed Securities Portfolio 0.375
Municipal Portfolio 0.375
PA Municipal Portfolio 0.375
Special Purpose Fixed Income Portfolio 0.375
Balanced Portfolio 0.450
Multi-Asset-Class Portfolio 0.650
Balanced Plus Portfolio 0.550
Advisory Foreign Fixed Income Portfolio 0.375
Advisory Mortgage Portfolio 0.375
31
<PAGE>
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 and/or reimburse certain expenses
to the extent necessary, if any, to keep total annual operating expenses
actually deducted from portfolio assets for the Institutional Class of the
Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities, Municipal, PA
Municipal, Multi-Market Fixed Income, Advisory Foreign Fixed Income and Advisory
Mortgage Portfolios from exceeding 1.180%, .320%, .500%, .500%, .500%, .580%,
.150% and .080% of its average daily net assets, respectively. With respect to
the Investment Class and the Adviser Class of the Multi-Asset-Class Portfolio,
the Adviser is, on a voluntary basis, waiving its fees and/or reimbursing
certain expenses. The fee waivers and expense reimbursements for the Investment
Class and Adviser Class of the Multi-Asset-Class Portfolio are voluntary and may
be discontinues at any time at the Adviser's discretion. With respect to the
Institutional Class of the Multi-Asset-Class Portfolio, the Adviser has
voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to keep total operating expenses from exceeding 0.780%.
For the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
1995 1996 1997 1995 1996 1997
Portfolio (000) (000) (000) (000) (000) (000)
- --------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio $ 85 $ 286 $ 195 $ 52 $ 42 $ 30
Equity Portfolio 6,840 7,785 6,928 0 0 0
Growth Portfolio * * * * * *
International Equity Portfolio 5,437 3,458 3,236 0 0 0
Mid Cap Growth Portfolio 1,504 1,986 1,961 0 0 0
Mid Cap Value Portfolio 0 188 896 14 46 28
Small Cap Value Portfolio 2,683 3,464 5,161 0 0 0
Value Portfolio 5,078 7,716 14,010 0 0 0
Cash Reserves Portfolio 51 138 166 39 52 65
Domestic Fixed Income Portfolio 75 257 372 23 8 11
Fixed Income Portfolio 4,893 5,917 9,431 0 0 0
Fixed Income II Portfolio 567 773 776 0 0 0
Global Fixed Income Portfolio 190 205 289 0 0 0
Multi-Market Fixed Income Portfolio * * * * * *
High Yield Portfolio 764 1,073 1,558 0 0 0
Intermediate Duration Portfolio 57 52 144 17 18 23
International Fixed Income Portfolio 395 555 549 0 0 0
Limited Duration Portfolio 206 351 404 11 0 4
Mortgage-Backed Securities Portfolio 348 177 173 5 21 22
Municipal Portfolio 110 167 211 37 38 30
PA Municipal Portfolio 32 77 79 31 30 26
Special Purpose Fixed Income Portfolio 1,574 1,517 1,816 0 0 0
Balanced Portfolio 1,385 1,521 1,527 0 0 0
Multi-Asset-Class Portfolio 220 635 797 100 112 126
Balanced Plus Portfolio * * * * * *
Advisory Foreign Fixed Income Portfolio 0 1,933 0 1,631 1,933 713
Advisory Mortgage Portfolio 0 6,056 0 1,711 6,056 9,155
</TABLE>
* Not in operation during the period.
32
<PAGE>
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) 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 or (2) on 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 Company
(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, 1995, 1996 and 1997, the Fund paid the
following administrative fees:
<TABLE>
<CAPTION>
Administrative Fees Paid
1995 1996 1997
(000) (000) (000)
--------------------------------
<S> <C> <C> <C>
Emerging Markets Value Portfolio $ 14 $ 38 $ 24
Equity Portfolio 1,094 1,246 1,136
Growth Portfolio * * *
International Equity Portfolio 870 553 544
Mid Cap Growth Portfolio 241 318 314
Mid Cap Value Portfolio 1 20 123
Small Cap Value Portfolio 286 369 550
Value Portfolio 812 1,235 2,285
Cash Reserves Portfolio 29 44 74
Domestic Fixed Income Portfolio 21 55 82
Fixed Income Portfolio 1,044 1,262 2,030
Fixed Income II Portfolio 121 165 165
Global Fixed Income Portfolio 41 44 62
Multi-Market Fixed Income Portfolio * * *
High Yield Portfolio 163 229 356
Intermediate Duration Portfolio 16 11 36
International Fixed Income Portfolio 84 118 117
Limited Duration Portfolio 58 93 109
Mortgage-Backed Securities Portfolio 75 38 42
Municipal Portfolio 31 36 51
PA Municipal Portfolio 13 16 22
Special Purpose Fixed Income Portfolio 336 323 414
Balanced Portfolio 246 271 280
Multi-Asset-Class Portfolio 57 113 143
Balanced Plus Portfolio * * *
Advisory Foreign Fixed Income Portfolio 357 412 152
Advisory Mortgage Portfolio 374 1,292 1,954
</TABLE>
* Not in operation during the period.
33
<PAGE>
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 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. 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
34
<PAGE>
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 or markups 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 or dealer
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 or markups 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, 1995, 1996 and 1997, the Fund paid brokerage commissions of
$13,457,075, $18,252,335 and $19,134,219, respectively.
Some securities considered for investment by each of the Fund's portfolios may
also be appropriate for other clients serviced by the Adviser. The Adviser may
place a combined order for two or more accounts or portfolios for the purchase
or sale of the same security if, in its judgment, joint execution is in the best
interest of each participant and will result in best price execution.
Transactions involving commingled orders are allocated in a manner deemed to be
equitable to each account or portfolio. Although it is recognized that, in some
cases, joint execution of orders could adversely affect the price or volume of
the security that a particular account or fund may obtain, it is the opinion of
the Adviser and the Fund's Board of Trustees that combining such orders
generally will be more advantageous to the Fund than effecting such transactions
separately.
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 May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. As an indirect subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., the Adviser is affiliated with certain U.S.-registered
broker-dealers and foreign broker-dealers (collectively, the AAffiliated
Brokers@). 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 the Affiliated Brokers. The Fund paid $132,104
in brokerage commissions to affiliates for $75,128,827 of brokered transactions
for the fiscal year ended September 30, 1997.
35
<PAGE>
ANNUAL TURNOVER
The annual turnover rate for each portfolio for the past two fiscal years ended
September 30 was as follows:
Portfolio 1996 1997
- --------- ---- ----
Emerging Markets Value 108% 64%
Equity 67% 85%
Growth N/A N/A
International Equity 78% 62%
Mid Cap Growth 141% 134%
Mid Cap Value 377% 184%
Small Cap Value 145% 107%
Value 53% 46%
Domestic Fixed Income 168% 217%
Fixed Income 162% 179%
Fixed Income II 165% 182%
Global Fixed Income 133% 137%
Multi-Market Fixed Income N/A N/A
High Yield 115% 96%
Intermediate Duration 251% 204%
International Fixed Income 124% 107%
Limited Duration 174% 130%
Mortgage-Backed Securities 116% 164%
Municipal 78% 54%
PA Municipal 51% 64%
Special Purpose Fixed Income 151% 198%
Balanced 110% 145%
Multi-Asset-Class 122% 141%
Balanced Plus N/A N/A
Advisory Mortgage 139% 144%
Advisory Foreign Fixed Income 170% 208%
N/A -- Portfolio had not commenced operations as of September 30, 1997.
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-seven 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) in
the shareholder's name on the books of the Fund. Shareholders of a class have
36
<PAGE>
exclusive voting rights regarding any matter submitted to shareholders that
relates solely to that class of shares (such as a distribution plan or service
agreement relating to that class), and separate voting rights on any other
matter submitted to shareholders in which the interests of the shareholders of
that class differ from the interests of holders of any other class.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such portfolio;
2) Subject to the majority vote of shares of any portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
portfolio and distribute such assets ratably among the shareholders of such
portfolio; and
3) Without the approval of the shareholders of any portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
portfolios into a single portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any portfolio as provided in paragraphs 1), 2), and 3) above, that
portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that portfolio.
Dividends and 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, 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 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 a dividend or 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.
37
<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 Fund's
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 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 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.
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
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
38
<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
9/30/97 9/30/97 9/30/97 9/30/97 Date
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio 18.08 -- -- 15.71 02/28/95
Equity Portfolio 38.46 18.66 14.74 17.56 11/14/84
Growth Portfolio* N/A N/A N/A N/A N/A
International Equity Portfolio 23.16 12.30 -- 9.54 11/25/88
Mid Cap Growth Portfolio 28.05 22.77 -- 21.44 03/30/90
Mid Cap Value Portfolio 61.40 -- -- 42.61 12/30/94
Small Cap Value Portfolio 49.81 26.75 17.15 15.44 07/01/86
Value Portfolio 41.25 23.31 16.39 18.59 11/05/84
Cash Reserves Portfolio 5.32 4.48 -- 4.75 08/29/90
Domestic Fixed Income Portfolio 10.20 7.83 10.02 10.01 09/30/87
Fixed Income Portfolio 11.47 8.39 10.30 10.96 11/14/84
Fixed Income Portfolio II 10.58 7.69 -- 10.08 08/31/90
Global Fixed Income Portfolio 3.53 -- -- 7.36 04/30/93
Multi-Market Fixed Income Portfolio* N/A N/A N/A N/A N/A
High Yield Portfolio 19.90 14.03 -- 12.40 02/28/89
Intermediate Duration Portfolio 8.93 -- -- 8.87 10/03/94
International Fixed Income Portfolio 0.44 -- -- 6.81 04/29/94
Limited Duration Portfolio 6.98 5.19 -- 5.99 03/31/92
Mortgage-Backed Securities Portfolio 10.70 7.32 -- 7.50 01/31/92
Municipal Portfolio 8.47 -- -- 7.95 10/01/92
PA Municipal Portfolio 8.01 -- -- 8.28 10/01/92
Special Purpose Fixed Income Portfolio 11.78 8.90 -- 9.84 03/31/92
Balanced Portfolio 27.44 -- -- 14.53 12/31/92
Multi-Asset-Class Portfolio 26.50 -- -- 18.14 07/29/94
Balanced Plus Portfolio* N/A N/A N/A N/A N/A
Advisory Foreign Fixed Income Portfolio 14.08 -- -- 14.31 10/07/94
Advisory Mortgage Portfolio 11.03 -- -- 9.63 04/12/95
</TABLE>
* The Growth, Balanced Plus and Multi-Market Fixed Income Portfolios had not
commenced operations as of September 30, 1997.
The average annual total return of each Investment Class portfolio of the Fund
for the periods noted is set forth below:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Inception Date of
ended ended ended to Investment
9/30/97 9/30/97 9/30/97 9/30/97 Class
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Equity Portfolio 38.12 -- -- 29.53 04/10/96
International Equity Portfolio 22.85 -- -- 16.24 04/10/96
Mid Cap Value Portfolio 61.05 -- -- 46.01 05/10/96
Value Portfolio 41.01 -- -- 32.09 05/06/96
Fixed Income Portfolio -- -- -- 10.07 10/15/96
High Yield Portfolio 19.77 -- -- 18.61 05/21/96
Special Purpose Fixed Income Portfolio 11.62 -- -- 10.83 04/10/96
Balanced Portfolio -- -- -- 18.40 04/04/97
Multi-Asset-Class Portfolio 26.32 -- -- 21.18 06/10/96
Balanced Plus Portfolio* -- -- -- -- N/A
</TABLE>
* The Balanced Plus Portfolio had not commenced operations as of September 30,
1997.
39
<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
9/30/97 9/30/97 9/30/97 9/30/97 Class
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio -- -- -- 27.99 01/31/97
Value Portfolio 40.87 -- -- 44.49 07/17/96
Fixed Income Portfolio -- -- -- 7.79 11/07/96
High Yield Portfolio -- -- -- 12.63 01/31/97
Balanced Portfolio -- -- -- 23.82 11/01/96
</TABLE>
The portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
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 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
9/30/97 9/30/97
------- -------
<S> <C> <C>
Emerging Markets Value Portfolio N/A 45.86%
Equity Portfolio 135.21% 702.87
Growth Portfolio** -- --
International Equity Portfolio 78.62 123.96
Mid Cap Growth Portfolio 178.94 329.47
Mid Cap Value Portfolio N/A 165.50
Small Cap Value Portfolio 227.21 403.11
Value Portfolio 185.13 802.03
Cash Reserves Portfolio 24.52 38.96
Domestic Fixed Income Portfolio 45.76 159.92
Fixed Income Portfolio 49.60 281.77
Fixed Income Portfolio II 44.81 97.47
Global Fixed Income Portfolio N/A 36.90
Multi-Market Fixed Income Portfolio** -- --
High Yield Portfolio 92.83 172.84
Intermediate Duration Portfolio N/A 28.94
International Fixed Income Portfolio N/A 25.29
Limited Duration Portfolio 28.81 37.70
Mortgage-Backed Securities Portfolio 42.40 50.58
Municipal Portfolio N/A 46.59
PA Municipal Portfolio N/A 48.80
Special Purpose Fixed Income Portfolio 53.13 67.63
Balanced Portfolio N/A 90.44
Multi-Asset-Class Portfolio N/A 69.69
Balanced Plus Portfolio** -- --
Advisory Foreign Fixed Income Portfolio N/A 48.97
Advisory Mortgage Portfolio N/A 25.44
</TABLE>
40
<PAGE>
* 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, Balanced Plus and Multi-Market Fixed Income Portfolios had not
commenced operations as of September 30, 1997.
The portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Fund's portfolios
are set forth below:
<TABLE>
<CAPTION>
Annualized Since
Inception
Period Ended:
9/30/97
MAS EQUITY FUNDS (Gross of Fees)*
<S> <C> <C>
Inception Date
- --------------
11/14/84 Equity Portfolio 18.29%
N/A Growth Portfolio --
11/05/84 Value Portfolio 19.33
07/01/86 Small Cap Value Portfolio 16.44
03/30/90 Mid Cap Growth Portfolio 22.17
11/25/88 International Equity Portfolio 10.22
12/30/94 Mid Cap Value Portfolio 43.71
02/28/95 Emerging Markets Value Portfolio 17.10
MAS FIXED INCOME FUNDS
11/14/84 Fixed Income Portfolio 11.50%
09/30/87 Domestic Fixed Income Portfolio 10.54
03/31/92 Special Purpose Income Portfolio 10.36
03/31/92 Limited Duration Portfolio 6.41
01/31/92 Mortgage-Backed Portfolio 8.12
02/28/89 High Yield Portfolio 13.07
10/01/92 Municipal Portfolio 8.56
10/01/92 PA Municipal Portfolio 8.82
04/30/93 Global Fixed Income Portfolio 8.02
N/A Multi-Market Fixed Income Portfolio --
04/29/94 International Fixed Income Portfolio 7.40
10/07/94 Advisory Foreign Fixed Income Portfolio 16.64
10/03/94 Intermediate Duration Portfolio 9.46
04/12/95 Advisory Mortgage Portfolio 9.72
MAS BALANCED FUNDS
12/31/92 Balanced Portfolio 15.16%
N/A Balanced Plus Portfolio --
07/29/94 Multi-Asset-Class Portfolio 18.90
</TABLE>
*Annualized
41
<PAGE>
As of September 30, 1997, the Growth, Multi-Market Fixed Income and Balanced
Plus Portfolios had not commenced operations.
The Municipal and 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 and PA Municipal
Portfolios for the period 10/1/92 (inception of the Funds) through 9/30/97:
Pre-tax return Post-tax return
Municipal Portfolio 7.95*/46.59** 7.86*/45.98**
PA Municipal Portfolio 8.28*/48.80** 7.98*/46.79**
*Annualized
**Cumulative
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
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 portfolios's reports to shareholders. A
portfolio may also advertise or quote a yield which is gross of expenses. The
yield figures provided will be calculated according to a formula prescribed by
the SEC 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:
42
<PAGE>
Period ending
9/30/97
-------
Emerging Markets Value Portfolio 1.02
Equity Portfolio 1.15
International Equity Portfolio 1.60
Mid Cap Growth Portfolio 0.00
Mid Cap Value Portfolio 0.08
Small Cap Value Portfolio 0.45
Value Portfolio 1.93
Domestic Fixed Income Portfolio 6.32
Fixed Income Portfolio 6.37
Fixed Income Portfolio II 6.66
Global Fixed Income Portfolio 5.30
High Yield Portfolio 8.60
Intermediate Duration Portfolio 6.34
International Fixed Income Portfolio 4.65
Limited Duration Portfolio 5.74
Mortgage-Backed Securities Portfolio 9.96
Municipal Portfolio 4.42
PA Municipal Portfolio 4.78
Special Purpose Fixed Income Portfolio 7.08
Balanced Portfolio 3.27
Multi-Asset-Class Portfolio 2.57
Advisory Foreign Fixed Income Portfolio 5.44
Advisory Mortgage Portfolio 7.39
As of September 30, 1997, the Growth, Balanced Plus and Multi-Market Fixed
Income 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, 1997.
Period ending
9/30/97
-------
Value at beginning of period $1.00
Value at end of period $1.00
Current yield 5.61%
Effective yield 5.46%
43
<PAGE>
The net asset value per share 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
Business Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall
Street Journal and USA Today.
COMPARATIVE INDICES
Each portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
Consumer Price Index
The Consumer Price Index is published by the US Department of Labor and is a
measure of inflation.
Financial Times Actuaries World Ex US Index
The FT-A World Ex US Index is a capitalization-weighted price index, expressed
in dollars, after dividend withholding taxes, of foreign stock prices. This
index is calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
Co., and County NatWest/Wood Mackenzie in conjunction with the Institute of
Actuaries and the Faculty of Actuaries. 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.
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J.P. Morgan Emerging Markets Bond Index
The J.P. Morgan Emerging Markets bond Index is a market-weighted index composed
of all Brady Bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.
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
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.
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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 U.S. The index has been constructed
with the aim of choosing "an inclusive" universe of institutionally traded fixed
rate bonds. The selection of security types to be included in the index is made
with the aim of being as comprehensive as possible, while satisfying the
criterion of reasonable availability to domestic and international institutions
and the existence of complete pricing and market profile data.
International Finance Corporation Emerging Markets Index
The IFC Emerging Markets Index is an index designed to measure the total return
in either US or local currency terms of developing markets as defined by the
World Bank. The selection of stocks is made based on size, liquidity and
industry. The weight given to any stock is determined by its market
capitalization.
Lipper Money Market Average
The Lipper Money Market Average reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market Funds
for any given period. The number of Funds tracked varies. As a result, reported
returns for longer time periods do not always match the linked product of
shorter period returns.
Merrill Lynch Corporate & Government Bond Index
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
Morgan Stanley Capital International World ex USA Index
The Morgan Stanley Capital International World ex USA Index is a
capitalization-weighted price index expressed in dollars. The index reflects the
performance of over 1,100 companies in 19 foreign equity markets. The index
includes dividends, net of foreign withholding taxes.
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Morgan Stanley Capital International EAFE Index
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morgan Stanley Capital International EAFE-GDP Weighted Index
The EAFE-GDP index is an arithmetic average of the performance of over 900
securities listed on the stock exchanges of countries in Europe, Australia and
the Far East. The index is weighted by the Grow Domestic Product of the various
countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
The MSCI Emerging Markets Free Index is a capitalization weighted index of over
800 stocks from 17 different emerging market countries.
Nasdaq Industrials Index
The Nasdaq Industrials Index is a measure of all Nasdaq National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive of
warrants, and all domestic common stocks traded in the regular Nasdaq market
which are not part of the Nasdaq National Market System. The Nasdaq Industrials
Index is market value weighted.
Russell 1000
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
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.
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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.
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.
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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 mid cap 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.
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FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1997,
including notes thereto and the report of Price Waterhouse LLP thereon are
incorporated herein by reference. A copy of the 1997 Annual Report will
accompany the delivery of this Statement of Additional Information. In the 1997
Annual Report, the Emerging Markets Value Portfolio is referred to as the
Emerging Markets Portfolio. The portfolio changed its name following the
printing of the Annual Report. In addition, the 1997 Annual Report includes
financial information for the Investment Class of the Special Purpose Fixed
Income Portfolio. Following the printing of the Annual Report, the Fund closed
the Investment Class of this portfolio. Accordingly, this portfolio has been
removed from the Investment Class prospectus.
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.
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Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
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Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
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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 overwhelming as for issues rated AAA. A: An
issue rated A is backed by a sound capacity to pay the preferred stock
obligations , although it is somewhat more susceptible to the adverse effect of
the changes in circumstances and economic conditions. BBB: An issue rated BBB is
regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameter, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB,B,CCC: Preferred stock rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. Bb indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse conditions. CC: The
rating CC is reserved for a preferred stock in arrears on dividends or sinking
fund payments but that is currently paying. C: A preferred stock rated C is a
non-paying issue. D: A preferred stock rated D is a non-paying issue with the
issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
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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.
