<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1998
File No. 2-89729
File No. 811-3980
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 51 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 54 [x]
MAS FUNDS
-------------------------------
(Exact Name of Registrant)
c/o Miller Anderson & Sherrerd, LLP
One Tower Bridge
P.O. Box 868
West Conshohocken, PA 19428-0868
----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (610) 940-5065
--------------
Ms. Lorraine Truten
One Tower Bridge
West Conshohocken, PA 19428-0868
-----------------------------------------
(Name and Address of Agent for Service)
Copies to:
John H. Grady, Jr. Esquire
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
- --------------------------------------------------------------------------------
Title of Securities Being Registered . . . Units of Beneficial Interest
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
Immediately upon filing pursuant to paragraph (b), or
-----
On [date] pursuant to paragraph (b), or
-----
60 days after filing pursuant to paragraph (a), or
-----
X On January 31, 1999 pursuant to paragraph (a) of Rule 485, or
-----
75 days after filing pursuant to paragraph (a) of Rule 485.
-----
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<PAGE>
MAS INSTITUTIONAL CLASS PROSPECTUS
- ---------
MAS FUNDS
January 31, 1999
MAS FUNDS (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 28 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a subsidiary of Morgan Stanley Dean
Witter Investment Management, Inc., is the Fund's investment adviser. This
prospectus offers Institutional Class Shares of the following portfolios (each a
"Portfolio" and collectively the "Portfolios"):
<TABLE>
<CAPTION>
EQUITY FIXED INCOME BALANCED
PORTFOLIOS PORTFOLIOS PORTFOLIOS
---------- ---------- ----------
<S> <C> <C>
EMERGING MARKETS VALUE CASH RESERVES BALANCED
EQUITY DOMESTIC FIXED INCOME BALANCED PLUS
GROWTH FIXED INCOME MULTI-ASSET-CLASS
INTERNATIONAL EQUITY FIXED INCOME II
MID CAP GROWTH GLOBAL FIXED INCOME
MID CAP VALUE HIGH YIELD
SMALL CAP GROWTH INTERMEDIATE DURATION
SMALL CAP VALUE INTERNATIONAL FIXED INCOME
VALUE LIMITED DURATION
VALUE II MORTGAGE-BACKED SECURITIES
MULTI-MARKET FIXED INCOME
MUNICIPAL
NY MUNICIPAL
SPECIAL PURPOSE FIXED INCOME
TARGETED DURATION
</TABLE>
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the
adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Morgan Stanley Dean Witter Investment Management
One Tower Bridge, West Conshohocken, PA 19428.
For information, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
<PAGE>
TABLE OF CONTENTS PAGE
- ----------------- ----
INVESTMENT SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE.....................
o Investment Objectives, Principal Investment Strategies,
Risks and Performance
EQUITY PORTFOLIOS
Emerging Markets Value ...........................................
Equity ...........................................................
Growth ...........................................................
International Equity .............................................
Mid Cap Growth ...................................................
Mid Cap Value ....................................................
Small Cap Growth .................................................
Small Cap Value ..................................................
Value ............................................................
Value II .........................................................
FIXED INCOME PORTFOLIOS ..........................................
Cash Reserves ....................................................
Domestic Fixed Income ............................................
Fixed Income .....................................................
Fixed Income II ..................................................
Global Fixed Income ..............................................
High Yield .......................................................
Intermediate Duration ............................................
International Fixed Income .......................................
Limited Duration .................................................
Mortgage-Backed Securities .......................................
Multi-Market Fixed Income ........................................
Municipal ........................................................
NY Municipal .....................................................
Special Purpose Fixed Income .....................................
Targeted Duration ................................................
BALANCED PORTFOLIOS
Balanced .........................................................
Balanced Plus ....................................................
Multi-Asset-Class ................................................
o Important Investment Information .................................
FEES AND EXPENSES
o Shareholder Fees and Annual Portfolio Operating Expenses .........
SHAREHOLDER INFORMATION
o How to Purchase and Redeem Institutional Class Shares ............
o Dividends, Distributions and Taxes ...............................
MANAGEMENT
o Information About the Adviser and the Portfolio Managers .........
FINANCIAL HIGHLIGHTS ......................................................
2
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
o Investment Objective
o Principal Investment Strategy
o Principal Risks
The following discussions use a number of important investment terms. These
terms, printed in BOLD, are explained in the section entitled "Important
Investment Information," which follows the individual Portfolio summaries.
There is more information about the Portfolios in the Statement of Additional
Information ("SAI"), which legally is a part of this prospectus. For details
about how to obtain the SAI, and other reports and information, see the back
cover of this prospectus.
INVESTOR SUITABILITY
The Portfolios may be suitable for you if you are a long-term investor who can
accept the risks of investing in the stock and bond markets. The Portfolios are
designed principally for investment by fiduciary investors who are entrusted
with the responsibility of investing assets held for the benefit of others.
While the Portfolios consider whether their securities transactional will
generate distributions taxable at capital gains or ordinary income rates,
minimizing such taxes is not a principal investment strategy. The Municipal and
NY Municipal Portfolios may be suitable investments for persons who would
benefit from tax-exempt income.
3
<PAGE>
EQUITY PORTFOLIOS
EMERGING MARKETS VALUE PORTFOLIO
Objective: The Emerging Markets Value Portfolio seeks long-term capital growth.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES of issuers in emerging markets countries. The Adviser selects
securities that it believes are undervalued at the time of purchase, based on
its proprietary measures of value. While value stocks typically pay dividends,
the Portfolio may purchase stocks that do not pay dividends based on other value
characteristics. The Adviser may use DERIVATIVES in managing the Portfolio.
Process: The Adviser evaluates international economic trends, and the relative
attractiveness of the markets in different countries and individual issuers in
those markets. The Adviser emphasizes valuation and liquidity in selecting
countries in which to invest, and invests more in countries where common stocks
generally have relatively low price/earnings, price/cash flow and price/book
ratios.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Benchmark: MSCI Emerging
emerging markets equity securities Markets Free Index
o Focus on value securities o Ticker Symbol ________
o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
securities, particularly emerging market securities. News and events unique to a
country or region will affect those markets and their issuers, yet may have
little or no effect on the U.S. economy or similar issuers located in the U.S.
Emerging market countries are generally considered to be less economically
mature than developed nations. Emerging market countries may be more likely to
experience political turmoil or rapid changes in economic conditions, and
issuers in those countries may be in a more precarious financial condition.
These characteristics can cause securities in emerging market countries to
experience significant price volatility.
Many of the Portfolio's investments will be denominated in foreign currencies.
Changes in the values of those currencies compared to the U.S. dollar may affect
the value of the Portfolio's investments. These changes may happen separately
from and in response to events that do not otherwise affect the value of the
security in the issuer's home country. The Adviser may use derivatives and other
techniques to manage these risks. However, the Adviser cannot guarantee that it
will succeed in doing so. Hedging the Portfolio's currency risks involves
certain risks, including the possibility of mismatching the Portfolio's
obligations under a forward or futures contract with the value of securities
denominated in a particular currency.
4
<PAGE>
The prices of common stocks and other equity securities will rise and fall in
response to events that affect entire financial markets or industries, and to
events that affect a particular issuer. Certain market conditions may favor
value stocks, while other conditions may favor growth stocks. Accordingly, a
portfolio of value stocks may, over certain periods of time, underperform a
portfolio of growth stocks.
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. As a result, the Portfolio's performance may be
affected by the rise and fall in the stock prices of a relatively small number
of companies. The Portfolio also may be subject to the risks associated with
derivatives. Please read the section entitled "Important Investment Information"
for more information about these risks.
Portfolio Manager: Horacio A. Valeiras.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Value Portfolio
- --------------------------------------------------------------------------------------------------------
MSCI Emerging Markets Free Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
EQUITY PORTFOLIO
Objective: The Equity Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES of large companies. The Portfolio also makes targeted investments in
stocks of small companies and invests to a limited extent in FOREIGN EQUITY
SECURITIES. The Adviser may use DERIVATIVES in managing the Portfolio.
Process: A team of portfolio managers, organized into "value" and "growth"
units, manages the Portfolio. While the Portfolio's overall sector allocation is
driven by bottom-up stock selection, the Adviser tries to diversify the
Portfolio's investments across market sectors, seeking the best values within
each sector.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in equity o Benchmark: S&P 500 Index
securities o Ticker Symbol ___________
o Equity capitalization generally greater than o CUSIP No. __________
$1 billion
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. The Portfolio also may be subject to the
risks associated with derivatives. The Portfolio's investments in foreign
securities are subject to certain risks, including the risks associated with
fluctuating currency exchange rates. Please read the section entitled "Important
Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong, James J. Jolinger, Nicholas J. Kovich,
Brian Kramp, Robert J. Marcin and Gary G. Schlarbaum.
6
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio
- --------------------------------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
GROWTH PORTFOLIO
Objective: The Growth Portfolio seeks long-term capital growth.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES of large companies that the Adviser believes offer long-term growth
potential. The Portfolio may invest to a limited extent in FOREIGN EQUITY
SECURITIES. The Adviser may use DERIVATIVES in managing the Portfolio.
Process: The Adviser analyzes the fundamentals of large companies to identify
those stocks that are considered "growth stocks" by the Adviser using
proprietary measures of growth. The Portfolio will typically invest in stocks
having higher growth rates, betas, and price/earnings ratios and lower dividend
yields than the stock market in general as measured by the S&P 500 Index.
- --------------------------------------------------------------------------------
o Generally 65% invested in equity securities o Focus on growth securities
o Equity capitalization generally greater than o Benchmark: S&P 500 Index
$1 billion o CUSIP No. ________
o Ticker Symbol _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Certain market
conditions may favor growth stocks, while other conditions may favor value
stocks. Accordingly, a portfolio of growth stocks may, over certain periods of
time, underperform a portfolio of value stocks. The Portfolio also may be
subject to the risks associated with derivatives. The Portfolio's investments in
foreign securities are subject to certain risks, including the risks associated
with fluctuating currency exchange rates. Please read the section entitled
"Important Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong and Gary G. Schlarbaum.
8
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
Objective: The International Equity Portfolio seeks above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in FOREIGN EQUITY SECURITIES, i.e.,
common stock and other EQUITY SECURITIES issued by companies located or
conducting most of their business outside of the U.S. The Portfolio invests in
both industrialized countries and EMERGING MARKET COUNTRIES. The Adviser may use
DERIVATIVES in managing the Portfolio. The Portfolio may hedge some or all of
its foreign currency exposure when the Adviser believes it to be appropriate.
Process: The Adviser analyzes the economic conditions of countries around the
world, the relative values of foreign currencies and the U.S. dollar, and the
values of specific securities. The Adviser decides how much of the Portfolio's
assets to invest in each country based on the valuations and liquidity of each
market. The Adviser selects individual stocks based on their value
characteristics, emphasizing value relative to cash flow, and short-term
business dynamics. The Adviser diversifies the Portfolio's holdings across
countries and industry sectors.
- --------------------------------------------------------------------------------
o Generally 65% invested in foreign equity o Benchmark: MSCI World Ex-U.S.
securities in at least three countries Index
o Ticker Symbol __________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
equity securities. News and events unique to a country or region will affect
those markets and their issuers, yet may have little or no effect on the U.S.
economy or similar issuers located in the United States. The Portfolio's
investments in emerging market securities are subject to additional risks.
Emerging market countries are generally considered to be less economically
mature than developed nations. Emerging market countries may be more likely to
experience political turmoil or rapid changes in economic conditions, and
issuers in those countries may be in a more precarious financial condition.
These characteristics can cause securities in emerging market countries to
experience significant price volatility.
Many of the Portfolio's investments will be denominated in a foreign currency.
Changes in the values of those currencies compared to the U.S. dollar may affect
the value of the Portfolio's investments. These changes may happen separately
from and in response to events that do not otherwise affect the value of the
security in the issuer's home country. The Adviser may use derivatives and other
techniques to manage these risks. However, the Adviser cannot guarantee that it
will succeed in doing so. Hedging the Portfolio's currency risks involves
certain risks, including the possibility of mismatching the Portfolio's
obligations under a forward or futures contract with the value of securities
denominated in a particular currency.
The prices of common stocks and other equity securities will rise and fall in
response to events that affect entire financial markets or industries, and to
events that affect a particular issuer. The
9
<PAGE>
Portfolio also may be subject to the risks associated with derivatives. Please
read the section entitled "Important Investment Information" for more
information about these risks.
Portfolio Managers: Hassan Elmasry and Horacio A. Valeiras.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>>
International Equity Portfolio
- --------------------------------------------------------------------------------------------------------
MSCI World Ex-US Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
MID CAP GROWTH PORTFOLIO
Objective: The Mid Cap Growth Portfolio seeks long-term capital growth.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES having capitalizations in the range of companies included in the S&P
MidCap 400 Index. The Adviser particularly focuses on the expectations of stock
analysts and invests the Portfolio in stocks of companies that it believes will
report earnings growth exceeding analysts' expectations. The Portfolio may
invest to a limited extent in FOREIGN EQUITY SECURITIES. The Adviser may use
DERIVATIVES in managing the Portfolio.
Process: The Adviser uses a quantitative screen to sort stocks based on
revisions to analysts' earnings predictions. The Adviser then conducts extensive
fundamental research into those companies with the most attractive earnings
revisions. Finally, the Adviser evaluates the valuation of the stocks to
eliminate from consideration the most overvalued stocks. The Adviser also
follows a strict sell discipline. The Portfolio sells stocks when their earnings
revision scores fall to unacceptable levels, fundamental research reveals
unfavorable trends, or their valuations exceed levels that are reasonable in
relation to the stocks' growth prospects.
- --------------------------------------------------------------------------------
o Generally 65% invested in equity o Equity capitalization generally matching
securities of mid-cap companies the benchmark (currently $500 million to
o Focus on growth securities $5 billion)
o Ticker Symbol ________ o Benchmark: S&P MidCap 400 Index
o CUSIP No. ________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and events that affect a particular issuer. Investments in smaller
companies may involve greater risk than investments in larger, more established
companies, and smaller companies' securities may be subject to more abrupt or
erratic price movements. Certain market conditions may favor growth stocks or
stocks of mid-sized companies, while other conditions may favor value stocks or
stocks of larger or smaller companies. Accordingly, a portfolio of mid cap
growth stocks may, over certain periods of time, underperform a portfolio of
value stocks or stocks of larger or smaller companies. The Portfolio also may be
subject to the risks associated with derivatives. The Portfolio's investments in
foreign securities are subject to certain risks, including the risks associated
with fluctuating currency exchange rates. Please read the section entitled
"Important Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong and David P. Chu.
11
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------------------------------
S&P Mid Cap 400 Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
MID CAP VALUE PORTFOLIO
Objective: The Mid Cap Value Portfolio's objective is above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES having capitalizations in the range of companies included in the S&P
MidCap 400 Index. The Portfolio focuses on stocks that are undervalued based on
the Adviser's proprietary measures of value. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest to a limited extent in
FOREIGN EQUITY SECURITIES. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser continually measures the relative attractiveness of the
Portfolio's current holdings against potential purchases, analyzing each
security on a fundamental basis. The Portfolio's holdings typically will have
lower price/earnings ratios than the average stock included in the S&P MidCap
400 Index. Sector weightings normally are kept within 5% of those of the S&P
MidCap 400 Index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Equity capitalization generally
equity securities of mid cap companies matching the benchmark (currently
o Focus on value securities $500 million to $6 billion)
o Ticker Symbol ________ o Benchmark: S&P MidCap 400 Index
o CUSIP No. _______
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks or stocks of mid-sized companies, while other conditions may favor growth
stocks or stocks of larger or smaller companies. Accordingly, a portfolio of mid
cap value stocks may, over certain periods of time, underperform a portfolio of
growth stocks or stocks of larger or smaller companies. The Portfolio also may
be subject to the risks associated with derivatives. The Portfolio's investments
in foreign securities are subject to certain risks, including the risks
associated with fluctuating currency exchange rates. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Bradley S. Daniels, William B. Gerlach, Chris Leavy and Gary
G. Schlarbaum.
13
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Value Portfolio
- --------------------------------------------------------------------------------------------------------
S&P Mid Cap 400 Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
SMALL CAP GROWTH PORTFOLIO
Objective: The Small Cap Growth Portfolio's objective is long-term capital
growth.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations in the range of companies included in the
Russell 2000 Index. The Adviser particularly focuses on companies that
demonstrate high earnings growth rates, growth stability, and rising
profitability. In particular, the Portfolio invests in companies that appear to
be capable of producing earnings that consistently beat market expectations. The
Portfolio may invest to a limited extent in FOREIGN EQUITY SECURITIES. The
Adviser may use DERIVATIVES in managing the Portfolio.
Process: The Adviser uses a quantitative screen to sort stocks based on
revisions to analysts' earnings predictions. The Adviser then conducts extensive
fundamental research into those companies with the most attractive earnings
revisions. Finally, the Adviser evaluates the valuation of the stocks to
eliminate the most overvalued stocks from consideration. The Adviser also
follows a strict sell discipline. The Portfolio sells stocks when their earnings
revision scores fall to unacceptable levels, fundamental research uncovers
unfavorable trends, or their valuations exceed levels that are reasonable in
relation to the stocks' growth prospects.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Equity capitalization range:
equities of small-cap companies $250 million to $2.5 billion
o Focus on growth securities o Benchmark: Russell 2000 Index
o Ticker Symbol ________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor growth
stocks or stocks of small companies, while other conditions may favor value
stocks or stocks of larger companies. Accordingly, a portfolio of small cap
growth stocks may, over certain periods of time, underperform a portfolio of
value stocks or stocks of larger companies. The Portfolio also may be subject to
the risks associated with derivatives. The Portfolio's investments in foreign
securities are subject to certain risks, including the risks associated with
fluctuating currency exchange rates. Please read the section entitled "Important
Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong and David P. Chu.
15
<PAGE>
SMALL CAP VALUE PORTFOLIO (Not currently being offered to new investors)
Objective: The Small Cap Value Portfolio's objective is above-average total
return over a market cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations in the range of companies included in the
Russell 2000 Index. The Portfolio focuses on stocks that are undervalued based
on the Adviser's proprietary measures of value. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest to a limited extent in
FOREIGN EQUITY SECURITIES. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser continually measures the relative attractiveness of the
Portfolio's current holdings against potential purchases, analyzing each
security on a fundamental basis. The Portfolio's holdings typically with have
lower price/earnings and price/book ratios than the stocks in the Russell 2000
Index. The Portfolio will normally keep its sector weightings within 5% of the
index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Equity capitalization generally
equities of small-cap companies matching the benchmark (currently
o Focus on value securities $100 million to $2 billion)
o Ticker Symbol ________ o Benchmark: Russell 2000 Index
o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks or stocks of small companies, while other conditions may favor growth
stocks or stocks of larger companies. Accordingly, a portfolio of small cap
value stocks may, over certain periods of time, underperform a portfolio of
growth stocks or stocks of larger companies. The Portfolio also may be subject
to the risks associated with derivatives. The Portfolio's investments in foreign
securities are subject to certain risks, including the risks associated with
fluctuating currency exchange rates. Please read the section entitled "Important
Investment Information" for more information about these risks.
Portfolio Managers: Bradley S. Daniels, William B. Gerlach, Chris Leavy and Gary
G. Schlarbaum.
16
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
- --------------------------------------------------------------------------------------------------------
Russell 2000 Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
VALUE PORTFOLIO
Objective: The Value Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations greater than $1.5 billion. The Portfolio
focuses on stocks that are undervalued in comparison with the stock market as a
whole, as measured by the S&P 500 Index. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest in FOREIGN EQUITY
SECURITIES to a limited extent. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser narrows the Portfolio's universe of possible investments
through a three part analysis. The Adviser selects stocks having the lowest
price/earnings ratios. The Adviser applies fundamental analysis and its
investment judgment to determine which of those securities are the most
attractive. The Adviser also may favor securities of companies that are in
undervalued industries. The Adviser employs a formal sell discipline, under
which the Portfolio sells securities when their price/earnings ratios rise.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in equities o Focus on value securities
o Equity capitalization generally greater o Benchmark: S&P 500 Index
than $1.5 billion o CUSIP No. _________
o Ticker Symbol _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks, while other conditions may favor growth stocks. Accordingly, a portfolio
of value stocks may, over periods of time, underperform a portfolio of growth
stocks. The Portfolio also may be subject to the risks associated with
derivatives. The Portfolio's investments in foreign securities are subject to
certain risks, including the risks associated with fluctuating currency exchange
rates. Please read the section entitled "Important Investment Information" for
more information about these risks.
Portfolio Managers: Richard M. Behler, Nicholas J. Kovich and Robert J. Marcin.
18
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value Portfolio
- --------------------------------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
VALUE II PORTFOLIO
Objective: The Value II Portfolio's objective is above-average total return over
a market cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations usually greater than $300 million. The
Portfolio focuses on stocks that are undervalued in comparison with the stock
market as a whole. While value stocks typically pay dividends, the Portfolio may
purchase stocks that do not pay dividends based on other value characteristics.
The Portfolio may invest in FOREIGN EQUITY SECURITIES to a limited extent. The
Adviser may use DERIVATIVES in managing the Portfolio.
Process: The Adviser selects investments for the Portfolio, and decides which
holdings to sell, based on value measures such as price/earnings ratios and
price/book ratios. The Adviser also employs fundamental research to determine
which undervalued securities are the most attractive. The Portfolio's sector
weightings generally will approximate those of the Russell 1000 Value Index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in equities o Focus on value securities
o Equity capitalization generally greater o Benchmark: Russell 1000
than $300 million Value Index
o Ticker Symbol _________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks, while other conditions may favor growth stocks. Accordingly, a portfolio
of value stocks may, over certain periods of time, underperform a portfolio of
growth stocks. The Portfolio also may be subject to the risks associated with
derivatives. The Portfolio's investments in foreign securities are subject to
certain risks, including the risks associated with fluctuating currency exchange
rates. Please read the section entitled "Important Investment Information" for
more information about these risks.
Portfolio Managers: Richard M. Behler, James J. Jolinger, Brian Kramp and Robert
J. Marcin.
20
<PAGE>
FIXED INCOME PORTFOLIOS
CASH RESERVES PORTFOLIO
Objective: The Cash Reserves Portfolio's objective is to realize maximum current
income, consistent with the preservation of capital and liquidity.
Approach: The Portfolio invests exclusively in liquid, high quality money market
instruments. These securities may include commercial paper, certificates of
deposit, U.S. Treasury bills, floating rate notes and repurchase agreements,
among others. The Portfolio's average weighted maturity will not exceed 90 days,
and no individual security may have an expected maturity in excess of 397 days.
Process: The Adviser determines the appropriate average maturity for the
Portfolio based on its view of the direction of short term interest rates over
the next one to six months. The Adviser invests in a variety of securities in
order to diversify credit risk, as well as interest rate risk. Securities are
selected on the basis of their value, adjusted for risk.
- --------------------------------------------------------------------------------
o Dollar weighted average maturity o 100% of non-U.S. Government securities
less than 90 days rated A-1/P-1 or better
o Individual maturities 397 days o Benchmark: Lipper Money Market Index
or less o CUSIP No. ___________
o Ticker Symbol _________
- --------------------------------------------------------------------------------
Principal Risks: The market prices of fixed income securities generally rise and
fall in response to changes in interest rates and the credit quality of
individual issuers. Please read the section entitled "Important Investment
Information" for more information about these risks. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Portfolio. An investment in the Portfolio is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Portfolio Managers: Abigail Jones Feder and Daniel M. Niland.
21
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
indices. The Lipper Money Market Average is an index that shows the performance
of other money market funds. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future. You may
obtain the Portfolio's SEC 7-day current yield by calling 1-800-522-1525.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Reserves Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon 1-Month Treasury Bill Index
- --------------------------------------------------------------------------------------------------------
Lipper Money Market Average
- --------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO
Objective: The Domestic Fixed Income Portfolio's objective is above-average
total return over a market cycle of three to five years.
Approach: The Portfolio invests exclusively in U.S. Government securities and
other investment grade FIXED INCOME SECURITIES of U.S. issuers, including
corporate bonds and MORTGAGE SECURITIES. The Adviser will use FUTURES, SWAPS and
other DERIVATIVES in managing the Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- --------------------------------------------------------------------------------
o 100% U.S. issuers o Average weighted maturity generally
o Generally at least 65% invested greater than 5 years
in fixed income securities o May invest over 50% in mortgage
o 80% of fixed income securities securities
rated A or higher (or equivalent) o Benchmarks: Salomon Broad Investment
o Up to 20% of fixed income Grade; Lehman Brothers Aggregate
securities rated BBB (or equivalent) o CUSIP No. _________
o Ticker Symbol ________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities. The Portfolio also is
subject to the risks associated with using derivatives. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
23
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
FIXED INCOME PORTFOLIO
Objective: The Fixed Income Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests in a diversified portfolio of FIXED INCOME
SECURITIES, including U.S. Government securities, corporate bonds, MORTGAGE
SECURITIES, and to a limited extent, FOREIGN FIXED INCOME SECURITIES. The
Portfolio invests primarily in investment grade securities, but also may invest
a portion of its assets in HIGH YIELD SECURITIES, also known as "junk bonds."
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o May invest over 50% in mortgage
in fixed income securities securities
o Average weighted maturity o Benchmarks: Salomon Broad Investment
generally greater than Grade; Lehman Brothers Aggregate
5 years o CUSIP No. ________
o 80% investment grade securities
o Up to 20% high yield securities
o Ticker Symbol ________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves.
The prices of mortgage securities may be particularly sensitive to changes in
interest rates because of the risk that borrowers will become more or less
likely to refinance their mortgages. For example, an increase in interest rates
generally will reduce prepayments, effectively lengthening the maturity of some
mortgage securities, and making them subject to more drastic price movements.
Because of prepayment issues, it is not possible to predict the ultimate
maturity of mortgage securities.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
25
<PAGE>
The Portfolio also is subject to the risks of investing in derivatives and, to a
limited extent, foreign fixed income securities. Foreign fixed income securities
may be denominated in foreign currencies, which will fluctuate in value relative
to the U.S. dollar. The Portfolio may use derivatives to hedge some or all of
the risks associated with foreign currencies. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
FIXED INCOME PORTFOLIO II
Objective: The Fixed Income Portfolio II seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests in U.S. Government securities and other
investment grade FIXED INCOME SECURITIES, including corporate bonds and MORTGAGE
SECURITIES. The Portfolio invests principally in securities of U.S. issuers, and
to a limited extent in foreign fixed income securities. The Adviser will use
FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o May invest over 50% in mortgage
in fixed income securities securities
o 100% investment grade securities o Benchmarks: Salomon Broad Investment
o Average weighted maturity generally Grade; Lehman Brothers Aggregate
greater than 5 years o CUSIP No. __________
o Ticker Symbol __________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities. The Portfolio also is
subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
27
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Income Portfolio II
- --------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
Objective: The Global Fixed Income Portfolio seeks above average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in high grade FIXED INCOME SECURITIES
of U.S. and foreign issuers. In the U.S., the Portfolio will invest primarily in
a combination of U.S. government, corporate and MORTGAGE SECURITIES offering
attractive values. The Portfolio may invest in HIGH YIELD SECURITIES and
emerging market fixed income securities to a limited extent. Most of the
Portfolio's FOREIGN FIXED INCOME SECURITIES will be issued by foreign
governments and international organizations (e.g., the World Bank). The Adviser
may use FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The Adviser uses fundamental research on relative values, together with
analysis of economic, interest rate and exchange rate trends, to determine the
desired country, currency and DURATION exposures for the Portfolio. The
portfolio managers then select particular securities for the Portfolio in
various sectors within the overall guidelines set by the management team.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Average weighted maturity generally
in fixed income securities of greater than 5 years
issuers in at least 3 countries, o Benchmark: Salomon World Government
including the U.S. Bond Index
o 95% investment grade securities o Ticker Symbol __________
o Up to 5% invested in high yield o CUSIP No. __________
securities
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
fixed income securities. News and events unique to a country or region will
affect those markets and their issuers, yet may have little or no effect on the
U.S. economy or similar issuers located in the United States. Many of the
Portfolio's investments will be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These changes may happen separately from and in
response to events that do not otherwise affect the value of the security in the
issuer's home country. The Adviser may use derivatives and other techniques to
manage these risks. However, the Adviser cannot guarantee that it will succeed
in doing so. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency.
Market prices of fixed income securities respond to economic developments,
especially changes in interest rates, and perceptions of the creditworthiness of
individual issuers. Generally, fixed income securities decrease in value as
interest rates rise and vice versa. Prices of fixed income securities also
generally will fall if an issuer's credit rating declines, and rise if it
improves.
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. As a result, the Portfolio's performance may be
affected by the rise and fall in the prices of fixed income securities of a
29
<PAGE>
relatively small number of companies. The Portfolio also is subject to the risks
associated with investing in derivatives and, to a limited extent, high yield
securities and emerging market securities. Please read the section entitled
"Important Investment Information" for more information about these risks.
Portfolio Managers: J. David Germany, Michael Kushma, Paul F. O'Brien, Ram
Willner and Richard B. Worley.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon World Government Bond Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
HIGH YIELD PORTFOLIO
Objective: The High Yield Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests primarily in HIGH YIELD SECURITIES (commonly
referred to as "junk bonds"). The Portfolio also may invest in other FIXED
INCOME SECURITIES, including U.S. Government securities, MORTGAGE SECURITIES,
and investment grade corporate bonds. The Portfolio may invest to a limited
extent in FOREIGN FIXED INCOME SECURITIES, including EMERGING MARKET SECURITIES.
The Adviser will use FUTURES, SWAPS and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser uses equity and fixed income valuation techniques, together
with analyses of economic and industry trends, to determine the Portfolio's
overall structure, sector allocation and desired maturity. The Adviser
emphasizes securities of companies that have strong industry positions and
favorable outlooks for cash flow and asset values. The Adviser conducts a credit
analysis for each security considered for investment to evaluate its
attractiveness relative to the level of risk it presents. The Portfolio
maintains a high level of diversification to minimize its exposure to the risks
associated with any particular issuer.
- --------------------------------------------------------------------------------
o Average weighted maturity generally o Benchmark: Salomon High Yield Market
greater than 5 years Index
o Generally at least 65% invested in o CUSIP No. ____________
high yield securities o Ticker Symbol ____________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's fixed income securities
holdings respond to economic developments, especially changes in interest rates,
as well as to perceptions of the creditworthiness of individual issuers. The
Portfolio's investments in HIGH YIELD SECURITIES expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Robert E. Angevine, Thomas L. Bennett and Stephen F. Esser.
31
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon High Yield Market Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
INTERMEDIATE DURATION PORTFOLIO
Objective: The Intermediate Duration Portfolio seeks above average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in U.S. Government securities and
investment grade corporate, MORTGAGE and other FIXED INCOME SECURITIES. The
Portfolio may invest to a limited extent in FOREIGN FIXED INCOME SECURITIES. The
Portfolio maintains an average duration of between two and five years. The
Adviser will use FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The Adviser actively manages the Portfolio's maturity and DURATION in
anticipation of long-term trends in interest rates and inflation. The Adviser
analyzes interest rates, the yield curve, the relative appeal of U.S. versus
foreign fixed income securities, credit quality and the likelihood of
prepayments. The Adviser perceives high real interest rates and a steep yield
curve as indicators of value. The portfolio management team selects individual
securities based on their relative values.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o May invest over 50% in mortgage
in fixed income securities securities
o 100% investment grade securities o Benchmark: Lehman Brothers Intermediate
o Average duration 2-5 years Government/Corporate Index
o Ticker Symbol _________ o CUSIP No. __________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also will fall if an issuer's credit rating declines, and rise if it
improves. The prices of mortgage securities may be particularly sensitive to
changes in interest rates because of the risk that borrowers will become more or
less likely to refinance their mortgages. For example, an increase in interest
rates generally will reduce prepayments, effectively lengthening the maturity of
some mortgage securities, and making them subject to more drastic price
movements. Because of prepayment issues, it is not possible to predict the
ultimate maturity of mortgage securities.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Angelo G. Manioudakis and Scott F. Richard.
33
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Duration Portfolio
- --------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate
Government/Corporate Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
INTERNATIONAL FIXED INCOME PORTFOLIO
Objective: The International Fixed Income Portfolio seeks above average total
return over a market cycle of three to five years.
Approach: The Portfolio invests primarily in high grade FOREIGN FIXED INCOME
SECURITIES. The Portfolio may invest to a limited degree IN HIGH YIELD
SECURITIES and EMERGING MARKET FIXED INCOME SECURITIES. The Adviser will use
FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The portfolio management team determines the desired country, currency
and duration exposures for the Portfolio. The Adviser manages the Portfolio's
DURATION and exposure to particular countries and currencies by conducting
fundamental research on relative values and analyzing economic, interest rate
and exchange rate trends. The portfolio managers select particular securities
for the Portfolio in various sectors within the overall guidelines set by the
team.
- --------------------------------------------------------------------------------
o Generally at least 80% invested o Average weighted maturity generally
in fixed income securities of greater than 5 years
issuers in at least 3 countries o Benchmark: Salomon World Government
other than than the U.S. Bond Ex-U.S. Index
o 95% investment grade securities o Ticker Symbol ___________
o Up to 5% invested in high yield o CUSIP No. _________
securities
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
fixed income securities. News and events unique to a country or region will
affect those markets and their issuers, yet may have little or no effect on the
U.S. economy or similar issuers located in the United States. Many of the
Portfolio's investments will be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These changes may happen separately from, and in
response to, events that do not otherwise affect the value of the security in
the issuer's home country. The Adviser may use derivatives and other techniques
to manage these risks. However, the Adviser cannot guarantee that it will
succeed in doing so. Hedging the Portfolio's currency risks involves certain
risks, including the possibility of mismatching the Portfolio's obligations
under a forward or futures contract with the value of securities denominated in
a particular currency.
Market prices of fixed income securities respond to economic developments,
especially changes in interest rates, and perceptions of the creditworthiness of
individual issuers. Generally, fixed income securities decrease in value as
interest rates rise and vice versa. Prices of fixed income securities also
generally will fall if an issuer's credit rating declines, and rise if it
improves.
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. As a result, the Portfolio's performance may be
affected by the rise and fall in the price of fixed income securities of a
relatively small number of companies. The Portfolio also is subject to the risks
associated with investing in derivatives, HIGH YIELD SECURITIES and emerging
market securities. Please read the section entitled "Important Investment
Information" for more information about these risks.
35
<PAGE>
Portfolio Managers: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon World Government Bond Ex-U.S. Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
LIMITED DURATION PORTFOLIO
Objective: The Limited Duration Portfolio seeks above average total return over
a market cycle of three to five years.
Approach: The Portfolio invests primarily in U.S. Government securities and
other investment grade FIXED INCOME SECURITIES, including corporate bonds and
mortgage securities. While the Portfolio generally does not invest in FOREIGN
SECURITIES, it may invest in BRADY BONDS The Portfolio maintains an average
duration of between one and three years. The Adviser will use FUTURES, SWAPS and
other DERIVATIVES in managing the Portfolio.
Process: The Adviser seeks to earn excess returns by actively managing the
interest rate risk of the portfolio and by selecting attractive individual
securities. The Adviser perceives times of high real interest rates and steep
curves as good times to have extra interest rate risk, and manages the
portfolio's DURATION accordingly. The Adviser selects specific securities based
on their relative as compared with U.S. Treasury securities, and taking into
account their yield spreads as adjusted to reflect option and credit risk.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Average duration 1-3 years
in fixed income securities o Benchmark: Salomon 1-3 Year
o 100% investment grade securities Treasury/Government Sponsored Index
o May invest in Brady Bonds o CUSIP No. _________
o Ticker Symbol _________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Michele A. Kreisler and Scott F. Richard.
37
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Duration Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon 1-3 Year Treasury/Government
Sponsored Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
MORTGAGE-BACKED SECURITIES PORTFOLIO
Objective: The Mortgage-Backed Securities Portfolio seeks above average total
return over a market cycle of three to five years.
Approach: The Portfolio invests primarily in MORTGAGE SECURITIES of U.S.
Government and private issuers, and in MORTGAGE DERIVATIVES. The Portfolio also
may invest in other U.S. Government securities and short term FIXED INCOME
SECURITIES. The Adviser will use FUTURES, SWAPS and other DERIVATIVES in
managing the Portfolio.
Process: The Adviser sets targets for how the Portfolio should respond to
changes in interest rates, the yield curve, and prepayment rates on underlying
mortgages. The Adviser may make the Portfolio more sensitive to changes in
interest rates when bonds offer greater value based on interest rates adjusted
for inflation. Similarly, the Adviser may increase the Portfolio's sensitivity
to changes in the yield curve when long maturity interest rates offer
exceptional value relative to short maturity interest rates. The Adviser also
may increase the Portfolio's exposure to prepayments on underlying mortgages
when mortgage yields, adjusted for the expected level of prepayments, indicate
unusual value in mortgage securities.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Average weighted maturity generally
in mortgage securities greater than 7 years
o 100% investment grade securities o Average duration generally 2-7 years
o Ticker Symbol _________ o Benchmark: Lehman Mortgage Index
o CUSIP No. __________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is primarily exposed to the risks associated with
investing in mortgage securities. Market prices of the Portfolio's holdings
respond to economic developments, especially changes in interest rates, as well
as to perceptions of the creditworthiness of individual issuers. Generally,
fixed income securities decrease in value as interest rates rise and vice versa.
Prices of fixed income securities also generally will fall if an issuer's credit
rating declines, and rise if it improves. The prices of mortgage securities may
be particularly sensitive to changes in interest rates because of the risk that
borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Kenneth B. Dunn, Scott F. Richard and Roberto Sella.
39
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-Backed Securities Portfolio
- --------------------------------------------------------------------------------------------------------
Lehman Mortgage Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
MULTI-MARKET FIXED INCOME PORTFOLIO
Objective: The Multi-Market Fixed Income Portfolio seeks above average total
return over a market cycle of three to five years.
Approach: The Portfolio invests in a diversified portfolio of U.S. and FOREIGN
FIXED INCOME SECURITIES, including HIGH YIELD SECURITIES (commonly referred to
as "junk bonds") and EMERGING MARKETS SECURITIES. The Adviser will use FUTURES,
SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The Adviser determines the Portfolio's overall maturity and DURATION
targets and sector allocations. The portfolio managers then select particular
securities for the Portfolio in various sectors within those overall guidelines.
The Adviser may increase or decrease the Portfolio's exposure to interest rate
changes based on its outlook for the economy, interest rates and inflation. The
Portfolio invests varying amounts in U.S. and foreign securities (including
emerging market securities), and investment grade and HIGH YIELD SECURITIES,
based on the Adviser's perception of their relative values.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Benchmark: weighted blend of quarterly
in fixed income securities returns of the following:
o Average weighted maturity generally 60% Salomon Broad Investment Grade
greater than 5 years Index
o CUSIP No. _________ 20% Salomon World Government Bond
o Ticker Symbol _________ Ex-U.S. Index
12% Salomon High Yield Market Index
8% J.P. Morgan Emerging Markets Bond
Index
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities.
The Portfolio is subject to the risks of investing in foreign fixed income
securities. News and events unique to a country or region will affect those
markets and their issuers, yet may have little or no effect on the U.S. economy
or similar issuers located in the United States. Many of the Portfolio's foreign
securities will be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These changes may happen separately from and in
response to events that do not otherwise affect the value of the security in the
issuer's home country. The Adviser may use derivatives and other techniques to
41
<PAGE>
manage these risks. However, the Adviser cannot guarantee that it will succeed
in doing so. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency.
Emerging market countries are generally considered to be less economically
mature than developed nations. Emerging market countries may be more likely to
experience political turmoil or rapid changes in economic conditions, and
issuers in those countries may be in more precarious financial condition. These
characteristics can cause securities in emerging market countries to experience
significant price volatility.
The Portfolio's investments in HIGH YIELD SECURITIES expose it to a substantial
degree of credit risk. Prices of HIGH YIELD SECURITIES will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions. The Portfolio also is subject to the risks of
using derivatives. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn, Stephen F. Esser, J.
David Germany and Richard B. Worley.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
indices. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
42
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multi-Market Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon Broad Index
- --------------------------------------------------------------------------------------------------------
Salomon World Government Bond Ex-U.S. Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
MUNICIPAL PORTFOLIO
Objective: The Municipal Portfolio's objective is 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.
Approach: The Portfolio invests principally in FIXED INCOME SECURITIES issued by
local, state and regional governments that provide income that is exempt from
federal income taxes (commonly called municipal securities). The Portfolio may
purchase municipal securities that pay interest that is subject to the
alternative minimum tax, and fixed income securities the interest on which is
taxable. The Portfolio may invest in HIGH YIELD municipal securities (commonly
called "junk bonds"). The Adviser will use FUTURES, SWAPS and other DERIVATIVES
in managing the Portfolio.
Process: The Adviser will vary the Portfolio's average DURATION and maturity and
the amount invested in particular types of securities based on its outlook for
the economy and interest rates and its analysis of the risks and rewards offered
by different investments. The Adviser analyzes the credit risk posed by specific
securities considered for investment. The Adviser also takes into consideration
the risk that an issuer may call specific securities for redemption, which could
force the Portfolio to reinvest the proceeds at a lower interest rate.
- ----------------------------------------------------------- --------------------
o Generally at least 80% of income o Benchmark: a weighted blend of
will be exempt from regular quarterly returns of the
federal income tax following:
o 80% investment grade securities 50% Lehman 5-Year Municipal Bond Index
o Up to 20% HIGH YIELD SECURITIES 50% Lehman 10-Year Municipal Bond Index
o Average weighted maturity generally o CUSIP No. ___________
5-10 years o Ticker Symbol _________
- ----------------------------------------------------------- --------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The Portfolio's investments in HIGH YIELD SECURITIES expose
it to a substantial degree of credit risk. Prices of HIGH YIELD SECURITIES will
rise and fall primarily in response to changes in the issuer's financial health,
although changes in market interest rates also will affect prices. High yield
securities may experience reduced liquidity, and sudden and substantial
decreases in price, during certain market conditions. The Portfolio also is
subject to the risks associated with using derivatives. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Steven K. Kreider and Neil Stone.
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
indices. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Portfolio
- --------------------------------------------------------------------------------------------------------
Lehman 5-Year Municipal Bond Index
- --------------------------------------------------------------------------------------------------------
Lehman 10-Year Municipal Bond Index
- --------------------------------------------------------------------------------------------------------
Blended Municipal Index **
- --------------------------------------------------------------------------------------------------------
</TABLE>
** The Blended Municipal Index is an unmanaged index comprised of the Lehman
Long Municipal Index from 10/1/92 to 3/31/96, and 50% Lehman 10 Year Municipal
Index and 50% Lehman 5 Year Municipal Index thereafter.
45
<PAGE>
NY MUNICIPAL PORTFOLIO
Objective: The NY Municipal Portfolio's objective is 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 and New York State and New York City personal income tax.
Approach: The Portfolio invests principally in FIXED INCOME SECURITIES issued by
local, state and regional governments that provide income that is exempt from
federal income taxes (commonly called municipal securities). The Portfolio may
purchase municipal securities that pay interest that is subject to the
alternative minimum tax, and securities the interest on which is taxable. The
Portfolio may invest in HIGH YIELD municipal securities (commonly called "junk
bonds"). The Adviser will use FUTURES, SWAPS and other DERIVATIVES in managing
the Portfolio.
Process: The Adviser will vary the Portfolio's average DURATION and maturity and
the amount invested in particular types of securities based on its outlook for
the economy and interest rates and its analysis of the risks and rewards offered
by different investments. The Adviser analyzes the credit risk posed by specific
securities considered for investment. The Adviser also takes into consideration
the risk that an issuer may call specific securities for redemption, which could
force the Portfolio to reinvest the proceeds at a lower interest rate.
- ----------------------------------------------------------- --------------------
o Generally at least 80% of assets o Average weighted maturity generally
invested in municipal securities 5-10 years
o Generally at least 65% invested o Benchmark: a weighted blend of quarterly
in NY municipal securities returns of the following:
o 80% investment grade securities 50% Lehman 5-Year Municipal Bond Index
o Up to 20% HIGH YIELD SECURITIES 50% Lehman 10-Year Municipal Bond Index
o CUSIP No. ___________ o Ticker Symbol _________
- ----------------------------------------------------------- --------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The Portfolio's concentration in New York State municipal
securities exposes it to greater credit risk that would be the case for a
nationally diversified fund. Economic or political changes in New York State may
affect municipal issuers' ability to repay principal and to make scheduled
interest payments on the Portfolio's securities. Changes in municipal issuers'
financial conditions or credit ratings also may adversely affect the value of
the Portfolio's holdings.
The Portfolio's investments in HIGH YIELD SECURITIES expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions. The Portfolio also is subject to the risks
associated with using derivatives.
46
<PAGE>
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. As a result, a single adverse economic or regulatory
occurrence may have a greater impact on the value of the Portfolio's holdings
than would be the case with a more diversified portfolio of municipal
securities. Please read the section entitled "Important Investment Information"
for more information about these risks.
Portfolio Managers: Kenneth B. Dunn, Steven K. Kreider and Scott F. Richard.
47
<PAGE>
SPECIAL PURPOSE FIXED INCOME PORTFOLIO
Objective: The Special Purpose Fixed Income Portfolio seeks above average total
return over a market cycle of three to five years.
Approach: The Portfolio invests primarily in U.S. FIXED INCOME SECURITIES,
including U.S. Government securities, corporate bonds, HIGH YIELD SECURITIES
(commonly called "junk bonds"), and MORTGAGE SECURITIES. It may also invest to a
limited extent in FOREIGN FIXED INCOME SECURITIES. The Adviser will use futures,
swaps and other DERIVATIVES in managing the Portfolio.
Process: The Portfolio's maturity and DURATION strategy and sector allocations
are based on the assumption that investors are combining an investment in this
Portfolio with an equity investment. The Adviser determines the Portfolio's
overall maturity and duration targets and sector allocations. The portfolio
managers then select particular securities for the Portfolio in various sectors
within those overall guidelines. The Adviser manages the Portfolio's average
maturity and duration in anticipation of long-term trends in the economy,
interest rates and inflation.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o May invest over 50% of assets in
fixed income securities mortgage securities
o Average weighted maturity generally o Benchmarks: Salomon Broad Investment
greater than 5 years Grade; Lehman Brothers Aggregate
o Ticker Symbol ________ o CUSIP No. _______
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities.
The Portfolio also is subject to the risks of investing in derivatives and, to a
limited extent, high yield securities and foreign fixed income securities.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
48
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Purpose Fixed Income Portfolio
- --------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
TARGETED DURATION PORTFOLIO
Objective: The Targeted Duration Portfolio seeks above average total return
consistent with reasonable risk.
Approach: The Portfolio invests in a broad range of FIXED INCOME SECURITIES,
including U.S. Government securities, corporate bonds, MORTGAGE SECURITIES, and
HIGH YIELD SECURITIES (commonly called "junk bonds"). The Portfolio intends to
approximate the duration of the Merrill Lynch 1-3 Year Government Bond Index
(currently 1.7 years). It may also invest to a limited extent in FOREIGN FIXED
INCOME SECURITIES. The Adviser will use FUTURES, SWAPS and other DERIVATIVES in
managing the Portfolio.
Process: The Adviser tries to achieve the Portfolio's objectives by allocating
its assets among broad fixed income sectors, as well as by selecting attractive
individual securities within each of those sectors. The portfolio management
team makes both the sector allocation decision and the security selections based
on relative value. The Adviser uses U.S. Treasury securities and Treasury
futures to try to have the Portfolio's sensitivity to changes in interest rates
equal to that of the Merrill Lynch 1-3 Year Government Bond Index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o May invest over 50% in mortgage
in fixed income securities securities
o Average duration will approximate the o Benchmark: Merrill Lynch 1-3 Year
benchmark (currently 1.7 years) Government Bond Index
o 80% investment grade securities o Ticker Symbol ____________
o Up to 20% high yield securities o CUSIP No. ____________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions. The Portfolio also is subject to the risks
associated with using derivatives. Foreign fixed income securities may be
denominated in foreign currencies, which will fluctuate in value relative to the
U.S. dollar. The Portfolio may use derivatives to hedge some or all of the risks
associated with foreign currencies. Hedging the Portfolio's currency risks
involves certain risks, including the possibility of mismatching the Portfolio's
obligations under a forward or futures contract with the value of securities
denominated in a particular currency. Please read the section entitled
"Important Investment Information" for more information about these risks.
Portfolio Managers: Michele A. Kreisler and Scott F. Richard.
50
<PAGE>
BALANCED PORTFOLIO
Objective: The Balanced Portfolio seeks above average total return over a market
cycle of three to five years.
Approach: The Portfolio invests in a mix of EQUITY and FIXED INCOME SECURITIES.
The Portfolio normally invests 45-75% of its assets in equity securities and
25-55% of its assets in fixed income securities. The Portfolio may invest up to
25% of its assets in FOREIGN EQUITY and FOREIGN FIXED INCOME SECURITIES,
including EMERGING MARKETS SECURITIES. Equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, corporate bonds, MORTGAGE SECURITIES, HIGH YIELD
SECURITIES (commonly called "junk bonds"), and foreign fixed income securities.
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser determines the Portfolio's equity and fixed income
investment strategies separately and then determines the mix of those strategies
that will maximize the return available from both the stock and bond markets,
based on proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities.
- --------------------------------------------------------------------------------
o Generally 45-75% invested in o Equity capitalization generally greater
equities,25-55% in fixed than $1 billion
income securities o Average weighted maturity of fixed income
o At least 25% invested in senior securities generally greater than 5 years
fixed income securities o Benchmark: weighted blend of quarterly
o Up to 25% invested in foreign returns of
equity and foreign fixed 60% S&P 500 Index
income securities 40% Salomon Broad Investment Grade Index
o Up to 10% invested in Brady o CUSIP No. ___________
Bonds (a type of emerging market
fixed income security)
o Ticker Symbol ___________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
52
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally consider
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A. Valeiras
and Richard B. Worley.
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
53
<PAGE>
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
indices. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
----------------- ----------------- ------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------------------------
Balanced Portfolio
--------------------------------------------------------------------------------------------------------
S&P 500 Index
--------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
--------------------------------------------------------------------------------------------------------
60/40 Blended Index **
--------------------------------------------------------------------------------------------------------
</TABLE>
- --------
** The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
54
<PAGE>
BALANCED PLUS PORTFOLIO
Objective: The Balanced Plus Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests in a mix of U.S. and FOREIGN EQUITY and FIXED
INCOME SECURITIES. The Portfolio normally invests 45-75% of its assets in equity
securities and 25-55% of its assets in fixed income securities. The Portfolio
generally will invest at least 65% of its assets in issuers located or doing
most of their business in at least three countries, including the U.S. Equity
securities generally will be issued by larger corporations. Fixed income
securities will include U.S. Government securities, corporate bonds, MORTGAGE
SECURITIES and HIGH YIELD SECURITIES (commonly called "junk bonds"). The Adviser
will use FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio.
Process: The Adviser determines the Portfolio's equity and fixed income
investment strategies separately and then determines the mix of those strategies
that will maximize the return available from both the stock and bond markets
based on proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Average weighted maturity of fixed
in issuers located in at least income securities generally greater than
3 countries, including the U.S. 5 years
o Equity capitalization generally o Benchmark: a weighted blend of quarterly
greater than $1 billion billion returns of
o At least 25% senior fixed 54% S&P 500 Index
income securities 40% Salomon Broad Investment Grade Index
o Ticker Symbol __________ 6% MSCI World Ex U.S. Index
o CUSIP No. __________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are
55
<PAGE>
generally considered to be less economically mature than developed nations.
Emerging market countries may be more likely to experience political turmoil or
rapid changes in economic conditions, and issuers in those countries may be in
more precarious financial condition. These characteristics can cause securities
in emerging market countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley.
56
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO
Objective: The Multi-Asset-Class Portfolio seeks above average total return over
a market cycle of three to five years.
Approach: The Portfolio seeks to invest in a combination of asset classes that
do not move in tandem with each other in order to improve potential return and
control the Portfolio's overall risks. The Portfolio invests in EQUITY
SECURITIES and FIXED INCOME SECURITIES of U.S. and foreign issuers, including
EMERGING MARKET SECURITIES, in accordance with the Adviser's target allocation
among certain asset classes. The Portfolio's equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, foreign government securities, corporate bonds, MORTGAGE
SECURITIES and HIGH YIELD SECURITIES (commonly called "junk bonds"). The
Portfolio's neutral position is generally 50% domestic equity securities, 24%
domestic fixed income securities, 14% foreign equity securities, 6% foreign
fixed income securities and 6% high yield securities. The Adviser will use
futures, swaps and other DERIVATIVES in managing the Portfolio.
Process: The Adviser makes strategic judgments based on proprietary measures
used to compare the relative risks and returns of stock and bond markets around
the world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Benchmark: a weighted blend of
in issuers located in at least quarterly returns of
3 countries, including the U.S. 50% S&P 500 Index
o Equity capitalization generally 14% MSCI EAFE-GDP Weighted Index
greater than $1 billion 24% Salomon Broad Investment Grade Index
o Average weighted maturity of 6% Salomon World Government Bond
fixed income securities generally Ex-U.S. Index
greater than 5 years 6% Salomon High Yield Market Index
o Ticker Symbol __________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
57
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally considered
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in a more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley.
58
<PAGE>
The bar chart and table below show the Portfolio's performance year-by year and
the Portfolio's best and worst performance for a quarter. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio.
[Bar Chart]
*Total Return for the period October 1 - December 31, 1998 was __%.
-------------------------------------------------
High Quarter Low Quarter
-------------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
indices. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multi-Asset-Class Portfolio
--------------------------------------------------------------------------------------------------------
S&P 500 Index
--------------------------------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
--------------------------------------------------------------------------------------------------------
MSCI EAFE-GDP Weighted Index
--------------------------------------------------------------------------------------------------------
Blended Index **
--------------------------------------------------------------------------------------------------------
</TABLE>
** The Blended Index is an unmanaged index comprised of 50% S&P 500 Index, 24%
Salomon Broad Investment Grade Index, 14% MSCI EAFE-GDP Weighted Index, 6%
Salomon High Yield Index and 6% Salomon World Government Bond Ex-U.S.
Index.
<PAGE>
IMPORTANT INVESTMENT INFORMATION
This section describes the principal types of investments that various
Portfolios may make and some of the risks associated with those investments.
More information about these investments and risks is contained in the Statement
of Additional Information.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
ADRs, rights, warrants and shares of investment companies. Equity securities in
which the Portfolios may invest may be publicly traded on securities exchanges
or over-the-counter. The Portfolios also may invest in securities that are not
publicly traded. These securities may be more difficult to sell than other
equity securities and their value may fluctuate more dramatically than other
securities. Each Portfolio may purchase shares of other investment companies
subject to limits imposed by the Investment Company Act of 1940 ("1940 Act") and
any other applicable law.
Equity securities are subject to the risk that prices will fluctuate in response
to events affecting particular issuers, or entire industries or markets. Smaller
companies are subject to additional risks because they may have more limited
markets and financial resources, narrower product lines or lack of depth of
management. Smaller companies' securities also may be less liquid, and subject
to more abrupt or erratic price movements. ADRs are U.S. dollar-denominated
securities that represent claims to shares of foreign stocks. The Fund treats
ADRs as U.S. securities.
Growth stocks generally are 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 Index. Value stocks are those stocks that 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 ad price/book ratios. Value stocks are generally dividend paying common
stocks. However, non-dividend paying stocks may also be selected for their value
characteristics.
FIXED INCOME SECURITIES
Fixed income securities include a wide variety of investments, such as U.S.
Government securities; securities issued by federal or federally sponsored
agencies ("agencies"); corporate bonds; asset-backed securities; mortgage
securities; high yield securities; municipal bonds; loan participations and
assignments; zero coupon bonds; convertible securities; Yankee bonds; repurchase
agreements; commercial paper; and cash equivalents.
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers. The
value of a fixed income security typically moves in the opposite direction of
prevailing interest rates: if rates rise, the value of a fixed income security
falls; if rates fall, the value increases. The maturity and duration of a fixed
income instrument also affects the extent to which the price of the security
will change in response to these and other factors. Longer term securities tend
to experience larger changes
60
<PAGE>
than shorter term securities because they are more sensitive to changes in
interest rates or in the credit ratings of the issuers. Certain types of fixed
income securities, such as inverse floaters, are designed to respond differently
to changes in interest rates.
Certain fixed income securities pay a floating or variable rate of interest. The
interest rates on these securities will vary with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. The
variation in the interest rate may enable an investor to trade a floating or
variable rate security at par on a daily or periodic basis. Some obligations
carry a demand feature permitting the holder to tender them back to the issuer
or to a third party at par value before maturity. If the demand feature is an
obligation of a foreign entity, it will be subject to certain risks described
under FOREIGN SECURITIES, below.
Some fixed income securities may be called (redeemed by the issuer) prior to
final maturity. The risk of holding a callable security is that if it is called,
a Portfolio may have to reinvest the proceeds at a lower rate of interest.
Duration: The average duration of a fixed income portfolio measures its exposure
to the risk of changing interest rates. A Portfolio with a lower average
duration generally will experience less price volatility in response to changes
in interest rates as compared with a Portfolio with a higher average duration.
Mortgage Securities: Mortgage securities are subject to the risk that as
interest rates fall, borrowers will refinance their mortgages, resulting in
prepayment of principal. A Portfolio holding mortgage securities that are
experiencing prepayments will have to reinvest these principal payments at lower
prevailing interest rates. On the other hand, when interest rates rise,
borrowers are less likely to refinance, resulting in lower prepayments. This can
effectively extend the maturity of a Portfolio's mortgage securities, resulting
in greater price volatility.
High Yield Securities: Fixed income securities that are not investment grade are
commonly referred to as junk bonds or high yield, high risk securities. These
securities offer a higher yield than other, higher rated securities, but they
carry a greater degree of risk and are considered speculative by the major
credit rating agencies. High yield securities may be issued by companies that
are restructuring, are smaller and less credit worthy, or are more highly
indebted than other companies. This means that they may have more difficulty
making scheduled payments of principal and interest. Changes in the value of
high yield securities are influenced more by changes in the financial and
business position of the issuing company than by changes in interest rates when
compared to investment grade securities.
Yankee Bonds: Yankee bonds are U.S.-dollar denominated fixed income instruments
issued by foreign governments and corporations and sold in the U.S. They are
considered U.S. securities for purposes of the Portfolios' investment policies
(except for the Domestic Fixed Income Portfolio).
61
<PAGE>
FOREIGN SECURITIES
While many of the characteristics and risks of foreign equity and fixed income
securities are similar to those of domestic securities, investing in foreign
securities involves certain additional risks. Foreign issuers generally are
subject to different accounting, auditing and financial reporting standards than
U.S. companies. There may be less information available to the public about
foreign issuers. Securities of foreign issuers can be less liquid and experience
greater price movements. Foreign stock exchanges, broker-dealers, and listed
issuers may be subject to less government regulation and oversight. The cost of
investing in foreign securities, including brokerage commissions and custodial
expenses, can be higher than in the U.S. In some foreign countries, there is
also the risk of government expropriation, excessive taxation, political or
social instability, the imposition of currency controls, or diplomatic
developments that could affect the Portfolios' investments in those countries.
There also can be difficulty obtaining and enforcing judgments in foreign
countries.
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since the
Portfolios must convert the value of foreign securities into dollars, changes in
currency exchange rates can increase or decrease the U.S. dollar value of the
Portfolios' assets. The Adviser may use certain derivatives to offset this risk.
The risks of hedging currency risk are described below under FORWARDS and
FUTURES. The Adviser may in its discretion choose not to hedge against currency
risks. In addition, certain market conditions may make it impractical or
uneconomical to do so.
Emerging Markets Securities: Investing in emerging markets securities enhances
the risks of foreign investing. The risk of political or social upheaval,
expropriation, and restrictive controls on foreign investors' ability to
repatriate capital is greater in emerging markets. Emerging market securities
generally are less liquid and subject to wider price and currency fluctuations
than securities issued in more developed countries. In certain countries, there
may be few publicly traded securities, and the market may be dominated by a few
issuers or sectors. Fixed income securities issued by emerging markets issuers
are more likely to be considered equivalent to risky high yield securities.
Investment funds and structured investments are mechanisms for U.S. and other
investors to invest in certain emerging markets that have laws precluding or
limiting direct investments in their securities by foreign investors. Brady
Bonds are debt obligations created as part of the restructuring of commercial
bank loans to entities in emerging market countries. BRADY BONDS may be
collateralized or not, and may be issued in various currencies (most are
U.S.-dollar denominated).
DERIVATIVES AND OTHER INVESTMENTS
The Portfolios may use derivatives to pursue portfolio strategies and
objectives. Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include futures, options, forward contracts, swaps,
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), and structured notes.
62
<PAGE>
Derivatives sometimes offer the most economic way of pursuing a particular
investment strategy, limiting certain risks, or enhancing potential returns.
Forward contracts are used to protect against uncertainty in the level of future
foreign currency exchange rates. The Portfolios may use futures to gain exposure
to an entire market (e.g., stock index futures) or to control their exposure to
changing foreign currency exchange rates. Portfolios investing in fixed income
securities will use futures to control their exposure to changes in interest
rates and to manage the overall maturity and duration of their securities
holdings. If a Portfolio buys an option, it buys a legal contract giving it the
right to buy or sell a specific amount of a security or futures contract at an
agreed-upon price. If a Portfolio "writes" an option, it sells to another person
the right to buy from or sell to the Portfolio a specific amount of a security
or futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices and commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
Certain derivative instruments are publicly traded on exchanges or
over-the-counter, while others are privately negotiated. The Portfolios may
enter into public or private over-the-counter derivatives transactions with
counterparties that meet the Fund's requirements for credit quality and
collateral. A Portfolio will not use derivatives to increase a Portfolio's level
of risk above the level that could be achieved using only traditional investment
securities. A Portfolio will not use derivatives as an indirect way of investing
in assets that it cannot, as a matter of policy, invest in directly.
Risks of Derivatives: The primary risks of derivatives are: (i) changes in the
market value of securities held by a Portfolio, and of derivatives relating to
those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. See the Statement of Additional Information for more about the
risks of different types of derivatives.
63
<PAGE>
- --------------------------------------------------------------------------------
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio (except the Cash Reserves Portfolio) may enter into
futures contracts and options on futures contracts for bona fide hedging
purposes to an unlimited extent. It also can enter into futures contracts and
options thereon for other purposes, provided that no more than 5% of the
Portfolio's total assets at the time of the transaction are required as margin
and option premiums to secure the Portfolio's obligations under such contracts.
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as margin and option premiums to secure the Portfolio's obligations under
futures contracts and options thereon entered into for purposes other than bona
fide hedging.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Each Portfolio, except the Cash Reserves Portfolio, may invest in certain
derivatives, such as forwards, futures, options and mortgage derivatives as well
as when-issued securities which require the Portfolio to segregate some or all
of its cash or liquid securities to cover its obligations under those
instruments. At certain levels, this can cause a Portfolio to lose flexibility
in managing its investments properly, responding to shareholder redemption
requests, or meeting other obligations. A Portfolio in that position could be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
- --------------------------------------------------------------------------------
Mortgage Derivatives: CMOs and SMBS are derivatives based on mortgage
securities. CMOs are issued in a number of series (known as "tranches"), each of
which has a stated maturity. Cash flow from the underlying mortgages is
allocated to the tranches in a predetermined, specified order. SMBS are
multi-class mortgage securities issued by U.S. government agencies and
instrumentalities and financial institutions. They usually have two classes, one
receiving most of the principal payments from the mortgages, and one receiving
most of the interest. In some cases, classes may receive interest only (called
"IOs") or principal only (called "POs"). Both CMOs and SMBS are subject to the
risks of price movements in response to changing interest rates and the level of
prepayments made by borrowers. Depending on the class of CMO or SMBS that a
Portfolio holds, these price movements may be significantly greater than that
experienced by mortgage securities generally, depending on whether the payments
are predominantly based on principal or interest paid on the underlying
mortgages. In addition, the yield to maturity of IOs and POs is extremely
sensitive to prepayment levels. As a result, a high rate of prepayments can have
a material effect on a Portfolio's yield to maturity and could cause a Portfolio
to lose money on the investment.
64
<PAGE>
- --------------------------------------------------------------------------------
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in certain fixed
income securities for temporary defensive purposes. See the Statement of
Additional Information for more information about the types of fixed income
securities in which the Portfolios may invest. If the Adviser incorrectly
predicts the effects of these changes, such defensive investments may adversely
affect the Portfolios' performance. Consistent with their investment policies,
the Portfolios also will purchase and sell securities without regard to the
effect on portfolio turnover. Higher portfolio turnover (e.g., over 100% per
year) will cause the Portfolio to incur additional transaction costs and may
result in taxable gains being passed through to shareholders.
- --------------------------------------------------------------------------------
65
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table below the fees and expenses that you may pay if you buy
and hold shares of the Portfolios. The Portfolios do not charge any sales loads
or similar fees when you purchase or redeem shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Portfolio Management Distribution Other Total Annual Fund After MAS Waiver/
Fees* (12b-1) Fees Expenses Operating Expenses* Reimbursement
<S> <C> <C> <C> <C> <C.
Emerging Markets Value % None % % %
Portfolio
Equity Portfolio % None % % %
Growth Portfolio % None % % %
International Equity % None % % %
Portfolio
Mid Cap Growth Portfolio % None % % %
Mid Cap Value Portfolio % None % % %
Small Cap Growth Portfolio % None % % %
Small Cap Value Portfolio % None % % %
Value Portfolio % None % % %
Value II Portfolio % None % % %
Cash Reserves Portfolio % None % % %
Domestic Fixed Income % None % % %
Portfolio
Fixed Income Portfolio % None % % %
Fixed Income Portfolio II % None % % %
Global Fixed Income % None % % %
Portfolio
High Yield Portfolio % None % % %
Intermediate Duration % None % % %
Portfolio
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
International Fixed Income % None % % %
Portfolio
Limited Duration Portfolio % None % % %
Mortgage-Backed Securities % None % % %
Portfolio
Multi-Market Fixed Income % None % % %
Portfolio
Municipal Portfolio % None % % %
NY Municipal Portfolio % None % % %
Special Purpose Fixed % None % % %
Income Portfolio
Targeted Duration Portfolio % None % % %
Balanced Portfolio % None % % %
Balanced Plus Portfolio % None % % %
Multi-Asset-Class Portfolio % None % % %
</TABLE>
* The Adviser has voluntarily agreed to reduce its advisory fee and/or reimburse
the Portfolios so that total expenses will not exceed the rates shown. Fee
waivers and/or expense reimbursements are voluntary and the Adviser reserves
the right to terminate any waiver and/or reimbursement at any time and without
notice.
67
<PAGE>
Example
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
EQUITY 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Markets Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Growth Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
International Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Value II Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
FIXED INCOME 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Reserves Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
High Yield Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Municipal Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
BALANCED
- --------------------------------------------------------------------------------------------------------------------
Balanced Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASING SHARES
Institutional Class Shares are available to clients of the Adviser with combined
investments of $5,000,000 and corporations or other institutions such as trusts,
foundations or broker-dealers purchasing for the accounts of others (Shareholder
Organizations).
Institutional Class Shares of each portfolio, except for the Cash Reserves
Portfolio, may be purchased at the net asset value per share (NAV) next
determined after we receive your purchase order. Institutional Class Shares of
the Cash Reserves Portfolio may be purchased at the NAV next determined after we
receive your purchase order and the Fund's Custodian Bank, The Chase Manhattan
Bank ("Chase") receives monies credited by a Federal Reserve Bank ("Federal
Funds").
INITIAL PURCHASE BY MAIL: You may open an account by completing and signing an
Account Registration Form provided by MAS Funds' Client Services Group ("Client
Services") and mailing it to MAS Funds c/o Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868 together with a check payable to
MAS Funds.
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. You can avoid this delay by purchasing
shares by wire.
INITIAL PURCHASE BY WIRE: You may purchase Institutional Class Shares of each
portfolio by wiring Federal Funds to Chase. You should forward a completed
Account Registration Form to Client Services in advance of the wire. For all
portfolios, except the Cash Reserves Portfolio, notification must be given to
Client Services at 1-800-354-8185 prior to the determination of NAV. (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 Chase
using the following wire 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)
You can also make purchases in the Cash Reserves Portfolio by Federal Funds wire
to Chase. If we receive notification of your order prior to 12:00 noon (Eastern
Time) and Chase receives the funds the same day, then your purchase will become
effective and begin to earn income on that day. If we receive notification of
your order after 12:00 noon (Eastern Time), then your purchase will be effective
on the next business day.
70
<PAGE>
Additional Investments: You may make additional investments of Institutional
Class Shares at the NAV (minimum additional investment $1,000) by mailing a
check (payable to MAS Funds) to Client Services at the address noted under
Initial Purchase by Mail or by wiring Federal Funds to Chase as outlined above.
For all portfolios, except the Cash Reserves Portfolio, notification must be
given to Client Services at 1-800-354-8185 prior to the determination of NAV.
For the Cash Reserves Portfolio, Client Services must receive notification of
your Federal Funds wire by 12:00 noon (Eastern Time). We normally credit
purchases made by check in the Cash Reserves Portfolio at the NAV determined two
business days after we receive the check.
OTHER PURCHASE INFORMATION: We may suspend the offering of shares, or any class
of shares, of any portfolio or reject any purchase orders when we think it is in
the best interest of the Fund. We may waive the minimum initial and additional
investment amounts in certain cases.
Purchases of a portfolio's shares will be made in full and fractional shares of
the portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each portfolio by mail, or, if authorized, by telephone
at no charge. The value of shares redeemed may be more or less than the purchase
price, depending on the NAV at the time of redemption.
BY MAIL: Each portfolio will redeem shares at the NAV 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. 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;
and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE: If you have authorized the Telephone Redemption Option on the
Account Registration Form, you may request a redemption of shares by calling MAS
Funds' Client
71
<PAGE>
Services Group at 1-800-354-8185 and requesting that the redemption proceeds be
mailed or wired to you. You cannot redeem shares by telephone if you hold share
certificates for those shares.
BY FACSIMILE: Written requests in good order for redemptions, exchanges, and
transfers may be forwarded to the Fund via facsimile at (610) 940-5284. If you
make a request via facsimile, you must call Client Services to ensure that the
Fund properly received your instructions. The original request must be promptly
mailed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0686.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We 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 or under any emergency circumstances.
In certain cases, we may determine that it is in the best interest of other
shareholders not to pay redemption proceeds in cash. We may pay you partly or
entirely by distributing to you readily marketable securities held by the
portfolio from which you are redeeming. You may incur brokerage charges when you
sell those securities.
VALUATION OF SHARES
We determine the NAV of the following portfolios at the following times on each
day the portfolio(s) is open for business:
o Equity portfolios as of the close of the NYSE (normally 4:00 p.m.
Eastern Time).
o Fixed-income portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
o Balanced, Balanced Plus and Multi-Asset-Class Portfolios as of the later of
the close of the NYSE or one hour after the close of the bond markets.
o Cash Reserves Portfolio as of 12:00 noon (Eastern Time).
When no quotations are readily available for securities or when the value of
securities has been materially affected by events occurring after the close of
the market, we will determine the value for those securities in good faith at
fair value using methods approved by the Board of Trustees.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. A
portfolio's NAV may change on a day when you can't purchase or redeem shares
because some portfolios invest in foreign securities that trade on days when the
Fund is closed. A fixed-income portfolio may be open on a day when U.S. bond
markets are closed, such as Columbus Day. On such a day, the NAV of the
72
<PAGE>
fixed-income portfolios will still be determined at 4:00 p.m. Eastern Time that
day, but purchase orders via wire will not be effective until the following day.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE: You may exchange each portfolio's Institutional Class Shares
for Institutional Class Shares of the Fund's other portfolios based on their
respective NAVs. The exchange privilege is only available with respect to
portfolios offering Institutional Class Shares that are qualified for sale in
your state of residence. We charge no fee for exchanges. You should send
exchange requests to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower
Bridge, West Conshohocken, PA 19428-0868.
We may not accept any request for an exchange when we think the exchange
privilege is being used as a tool for market timing. We reserve the right to
change the terms or conditions of the exchange privilege upon sixty days'
notice.
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Portfolio Monthly Quarterly Annually
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced X
- ------------------------------------------------------------------------------------------------
Balanced Plus X
- ------------------------------------------------------------------------------------------------
Cash Reserves X
- ------------------------------------------------------------------------------------------------
Domestic Fixed Income X
- ------------------------------------------------------------------------------------------------
Emerging Markets Value X
- ------------------------------------------------------------------------------------------------
Equity X
- ------------------------------------------------------------------------------------------------
Fixed Income X
- ------------------------------------------------------------------------------------------------
Fixed Income II X
- ------------------------------------------------------------------------------------------------
Global Fixed Income X
- ------------------------------------------------------------------------------------------------
Growth X
- ------------------------------------------------------------------------------------------------
High Yield X
- ------------------------------------------------------------------------------------------------
Intermediate Duration X
- ------------------------------------------------------------------------------------------------
International Equity X
- ------------------------------------------------------------------------------------------------
International Fixed Income X
- ------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Portfolio Monthly Quarterly Annually
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Duration X
- ------------------------------------------------------------------------------------------------
Mid Cap Growth X
- ------------------------------------------------------------------------------------------------
Mid Cap Value X
- ------------------------------------------------------------------------------------------------
Mortgage-Backed Securities X
- ------------------------------------------------------------------------------------------------
Multi-Asset-Class X
- ------------------------------------------------------------------------------------------------
Multi-Market Fixed Income X
- ------------------------------------------------------------------------------------------------
Municipal X
- ------------------------------------------------------------------------------------------------
NY Municipal X
- ------------------------------------------------------------------------------------------------
Small Cap Growth X
- ------------------------------------------------------------------------------------------------
Small Cap Value X
- ------------------------------------------------------------------------------------------------
Special Purpose Fixed Income X
- ------------------------------------------------------------------------------------------------
Targeted Duration X
- ------------------------------------------------------------------------------------------------
Value X
- ------------------------------------------------------------------------------------------------
Value II X
- ------------------------------------------------------------------------------------------------
</TABLE>
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the portfolio unless you elect otherwise in writing. If you
want to change how your dividends are paid you must notify MAS in writing.
TAXES
Income dividends you receive (except from the Municipal Portfolio) will be
taxable as ordinary income, whether you receive them in cash or in additional
shares. 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
may be taxable at different rates depending on the length of time the Fund holds
its assets.
The Municipal and NY Municipal Portfolios intend to pay "exempt-interest"
dividends which are excluded from your gross income for federal income tax
purposes. When you receive exempt-interest dividends they may be subject to
state and local taxes, although some states allow you to
74
<PAGE>
exclude that portion of a portfolio's tax-exempt income which is accountable to
municipal securities issued within your state of residence.
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign income
taxes that it paid.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP (the
"Adviser"), is a Pennsylvania limited liability partnership founded in 1969. The
Adviser is a subsidiary of Morgan Stanley Dean Witter Investment Management,
Inc. The Adviser is located at One Tower Bridge, West Conshohocken, PA 19428.
The Adviser provides investment advisory services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
________ had in excess of $___ billion in assets under management.
The Adviser makes investment decisions for the Fund's portfolios and places each
portfolio's purchase and sales orders. Each portfolio, in turn, pays the Adviser
an annual advisory fee calculated by applying a quarterly rate. The following
table shows the Adviser's contractual and actual rates of compensation for the
Fund's 1998 fiscal year.
Contractual FY 1998
Compensation Actual
Rate Compensation Rate
Emerging Markets Value Portfolio
Equity Portfolio
Growth Portfolio
International Equity Portfolio
Mid Cap Growth Portfolio
Mid Cap Value Portfolio
Small Cap Growth Portfolio
Small Cap Value Portfolio
Value Portfolio
Value II
Cash Reserves Portfolio
Domestic Fixed Income Portfolio
Fixed Income Portfolio
Fixed Income Portfolio II
Global Fixed Income Portfolio
High Yield Portfolio
75
<PAGE>
Intermediate Duration Portfolio
International Fixed Income Portfolio
Limited Duration Portfolio
Mortgage-Backed Securities Portfolio
Multi-Market Fixed Income Portfolio
Municipal Portfolio
NY Municipal
Special Purpose Fixed Income Portfolio
Targeted Duration
Balanced Portfolio
Balanced Plus Portfolio
Multi-Asset-Class Portfolio
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the_______________________ Portfolio, _______________
Portfolio, _________________ Portfolio, and _____________________ Portfolio
to keep Total Operating Expenses from exceeding ____%, ____%, ____%, and
____%, respectively.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
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 joined the management team for the High Yield Portfolio
in 1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986. She
joined the management team 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 joined
the management team for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
joined the management team for the Fixed Income Portfolio in 1984, the Domestic
Fixed Income Portfolio in 1987, the High Yield Portfolio in 1985, the Fixed
Income Portfolio II in 1990, the Special
76
<PAGE>
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.
David P. Chu, Vice President, Morgan Stanley, joined MAS in 1998. He served as
Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997 for
NationsBank and its subsidiary, TradeStreet Investment Associates. He joined the
management team for the Mid Cap Growth Portfolio in 1998.
Bradley S. Daniels, Vice President, Morgan Stanley, joined MAS in 1985. He
joined the management team 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
joined the management team 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
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 joined the management team for
the International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team 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 joined the management team for the Cash Reserves Portfolio in 1996.
William B. Gerlach, Principal, Morgan Stanley, joined MAS in 1991. He joined the
management team for the Small Cap Value and Mid Cap Value Portfolios in 1996.
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
joined the management team 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.
James J. Jolinger, Principal, Morgan Stanley, joined MAS in 1994. He served as
Equity Analyst for Oppenheimer Capital from 1987-1994. He joined the management
team for the Equity Portfolio in 1997.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team for the Equity Portfolio in 1994 and the Value
Portfolio in 1997.
77
<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 joined the management team for
the Equity Portfolio in 1998.
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He joined the
management team for the Municipal and the PA Municipal Portfolios in 1992.
Michele A. Kreisler, Vice President, joined MAS in 1994. She received her Ph.D.
in Finance from the Wharton School of the University of Pennsylvania in 1996.
She served as a Fixed Income Analyst from 1994 to 1995 and as a Portfolio
Manager from 1995 to 1998. She joined the Portfolio Management Teams of the
Targeted Duration and Limited Duration Portfolios in 1998.
Michael Kushma, Principal, Morgan Stanley, joined Morgan Stanley in 1988. He
joined the management team 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 joined the management team for the Mid Cap Value
and Small Cap Value Portfolio in 1998.
Angelo G. Manioudakis joined MAS in 1993. He attended Harvard Graduate School of
Business Administration from 1991 to 1993. He served as a Fixed Income Analyst
from 1993 to 1995. From 1995 to 1998, he served as a Fixed Income Portfolio
manager. He joined the Portfolio Management Team for the Intermediate Duration
Portfolio in 1998.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team for the Value Portfolio in 1990 and the Equity
Portfolio in 1994.
Daniel M. Niland, Vice President, Morgan Stanley, joined Morgan Stanley in 1997.
He served as Vice President/Portfolio Manager at J.P. Morgan & Co. from
1987-1996 and as Vice President/Senior Portfolio Manager at Citibank Global
Asset Management from 1996-1997. He joined the management team for the Cash
Reserves 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 J.P. Morgan. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1996.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS in 1992. He
joined the management team for the Mortgage-Backed Securities Portfolio in 1992,
the Limited Duration, Intermediate Duration and the Advisory Mortgage Portfolio
in 1995.
78
<PAGE>
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution, Inc.; joined MAS in 1987. He joined the management team 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 joined the
management team for the Mortgage-Backed Securities Portfolio in 1998.
Neil Stone, Vice President, joined MAS in 1996. He served as Director of Fixed
Income Research at CS First Boston Corporation from 1985 to 1995, and as Vice
President of Mortgage Research at Morgan Stanley from 1995 to 1996. He joined
the management team for the Municipal Portfolio in 1998.
Horacio A. Valeiras, Managing Director, Morgan Stanley, joined MAS in 1992. He
joined the management team 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.
Ram Willner, Principal, Morgan Stanley, joined MAS in 1998. He served as a
Market Strategist, Risk Control Manager and Director of International Bond
Research for Pacific Investment Management Company from 1994 to 1998; and as a
Senior Quantitative Analyst for Sanford C. Bernstein & Co. From 1992 to 1994. He
joined the management team for the Global Fixed Income Portfolio in 1998.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
joined the management team 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.
YEAR 2000 DISCLOSURE STATEMENT
The management and distribution services that the Adviser and Distributor
provide to the Fund depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser and Distributor
have been actively working on necessary changes to their own computer systems to
deal with the year 2000 problem and expect that their systems will be adapted
before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Adviser and Distributor are monitoring their remedial
efforts, however, there can be no assurance that they and the services they
provide will not be adversely affected.
79
<PAGE>
In addition, it is possible that the markets for securities in which the
portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the portfolios' investments may be
adversely affected.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. Certain information
reflects financial results for a single Portfolio share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by _____________ whose report,
along with the Fund's financial statements, are incorporated by reference into
the Fund's Statement of Additional Information and are included in the Fund's
September 30, 1998 Annual Report to Shareholders.
[Insert Financial Highlights here]
80
<PAGE>
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428
1-800-354-8185
INSTITUTIONAL CLASS PROSPECTUS
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January 31, 1999, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the Fund's
annual report, you will find a discussion of the market conditions and the
investment strategies that significantly affected each Portfolio's performance
during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number above. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without charge, by contacting
your Financial Intermediary.
You may obtain more information about the Fund through the Internet at
www.______.com.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
"http://www.sec.gov"; or (3) By mail: you may request documents, upon payment of
a duplicating fee, by writing to Securities Exchange Commission, Public
Reference Section, Washington, D.C. 20549-6009. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-03980.
81
<PAGE>
MAS INVESTMENT CLASS PROSPECTUS
MAS FUNDS
January 31, 1999
MAS FUNDS (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 9 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a subsidiary of Morgan Stanley Dean
Witter Investment Management, Inc., is the Fund's investment adviser. This
prospectus offers Investment Class Shares of the following portfolios (each a
"Portfolio" and collectively the "Portfolios"):
EQUITY FIXED INCOME BALANCED
PORTFOLIOS PORTFOLIOS PORTFOLIOS
---------- ------------ ----------
EQUITY DOMESTIC FIXED INCOME BALANCED
INTERNATIONAL EQUITY FIXED INCOME MULTI-ASSET-CLASS
MID CAP VALUE HIGH YIELD
VALUE
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Morgan Stanley Dean Witter Investment Management
One Tower Bridge, West Conshohocken, PA 19428.
For information, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
<PAGE>
TABLE OF CONTENTS PAGE
- ----------------- ----
INVESTMENT SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE..................
o Investment Objectives, Principal Investment Strategies, Risks
and Performance
EQUITY PORTFOLIOS
Equity.........................................................
International Equity...........................................
Mid Cap Value..................................................
Value..........................................................
FIXED INCOME PORTFOLIOS
Domestic Fixed Income..........................................
Fixed Income...................................................
High Yield.....................................................
BALANCED PORTFOLIOS
Balanced.......................................................
Multi-Asset-Class..............................................
o Important Investment Information...............................
FEES AND EXPENSES
o Shareholder Fees and Annual Portfolio Operating Expenses.......
SHAREHOLDER INFORMATION
o How to Purchase and Redeem Investment Class Shares.............
o Dividends, Distributions and Taxes.............................
MANAGEMENT
o Information About the Adviser and the Portfolio Managers.......
FINANCIAL HIGHLIGHTS....................................................
2
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
o Investment Objective
o Principal Investment Strategy
o Principal Risks
The following discussions use a number of important investment terms. These
terms, printed in BOLD, are explained in the section entitled "Important
Investment Information," which follows the individual Portfolio summaries.
There is more information about the Portfolios in the Statement of Additional
Information ("SAI"), which legally is a part of this prospectus. For details
about how to obtain the SAI, and other reports and information, see the back
cover of this prospectus.
INVESTOR SUITABILITY
The Portfolios may be suitable for you if you are a long-term investor who can
accept the risks of investing in the stock and bond markets. The Portfolios are
designed principally for investment by fiduciary investors who are entrusted
with the responsibility of investing assets held for the benefit of others.
While the Portfolios consider whether their securities transactional will
generate distributions taxable at capital gains or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
3
<PAGE>
EQUITY PORTFOLIOS
EQUITY PORTFOLIO
Objective: The Equity Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES of large companies. The Portfolio also makes targeted investments in
stocks of small companies and invests to a limited extent in FOREIGN EQUITY
SECURITIES. The Adviser may use DERIVATIVES in managing the Portfolio.
Process: A team of portfolio managers, organized into "value" and "growth"
units, manages the Portfolio. While the Portfolio's overall sector allocation is
driven by bottom-up stock selection, the Adviser tries to diversify the
Portfolio's investments across market sectors, seeking the best values within
each sector.
- -------------------------------------------------------------------------------
o Generally at least 65% invested in o Benchmark: S&P 500 Index
equity securities o Ticker Symbol ___________
o Equity capitalization generally greater o CUSIP No. __________
than $1 billion
- -------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. The Portfolio also may be subject to the
risks associated with derivatives. The Portfolio's investments in foreign
securities are subject to certain risks, including the risks associated with
fluctuating currency exchange rates. Please read the section entitled "Important
Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong, James J. Jolinger, Nicholas J. Kovich,
Brian Kramp, Robert J. Marcin and Gary G. Schlarbaum.
4
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Equity Portfolio
- -------------------------------------------------------------------------------
S&P 500 Index
- -------------------------------------------------------------------------------
5
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
Objective: The International Equity Portfolio seeks above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in FOREIGN EQUITY SECURITIES, i.e.,
common stock and other EQUITY SECURITIES issued by companies located or
conducting most of their business outside of the U.S. The Portfolio invests in
both industrialized countries and EMERGING MARKET COUNTRIES. The Adviser may use
DERIVATIVES in managing the Portfolio. The Portfolio may hedge some or all of
its foreign currency exposure when the Adviser believes it to be appropriate.
Process: The Adviser analyzes the economic conditions of countries around the
world, the relative values of foreign currencies and the U.S. dollar, and the
values of specific securities. The Adviser decides how much of the Portfolio's
assets to invest in each country based on the valuations and liquidity of each
market. The Adviser selects individual stocks based on their value
characteristics, emphasizing value relative to cash flow, and short-term
business dynamics. The Adviser diversifies the Portfolio's holdings across
countries and industry sectors.
- --------------------------------------------------------------------------------
o Generally 65% invested in foreign equity o Benchmark: MSCI World Ex-U.S.
securities in at least three countries Index
o Ticker Symbol __________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
equity securities. News and events unique to a country or region will affect
those markets and their issuers, yet may have little or no effect on the U.S.
economy or similar issuers located in the United States. The Portfolio's
investments in emerging market securities are subject to additional risks.
Emerging market countries are generally considered to be less economically
mature than developed nations. Emerging market countries may be more likely to
experience political turmoil or rapid changes in economic conditions, and
issuers in those countries may be in a more precarious financial condition.
These characteristics can cause securities in emerging market countries to
experience significant price volatility.
Many of the Portfolio's investments will be denominated in a foreign currency.
Changes in the values of those currencies compared to the U.S. dollar may affect
the value of the Portfolio's investments. These changes may happen separately
from and in response to events that do not otherwise affect the value of the
security in the issuer's home country. The Adviser may use derivatives and other
techniques to manage these risks. However, the Adviser cannot guarantee that it
will succeed in doing so. Hedging the Portfolio's currency risks involves
certain risks, including the possibility of mismatching the Portfolio's
obligations under a forward or futures contract with the value of securities
denominated in a particular currency.
The prices of common stocks and other equity securities will rise and fall in
response to events that affect entire financial markets or industries, and to
events that affect a particular issuer. The
6
<PAGE>
Portfolio also may be subject to the risks associated with derivatives. Please
read the section entitled "Important Investment Information" for more
information about these risks.
Portfolio Managers: Hassan Elmasry and Horacio A. Valeiras.
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
International Equity Portfolio
- -------------------------------------------------------------------------------
MSCI World Ex-US Index
- -------------------------------------------------------------------------------
7
<PAGE>
MID CAP VALUE PORTFOLIO
Objective: The Mid Cap Value Portfolio's objective is above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES having capitalizations in the range of companies included in the S&P
MidCap 400 Index. The Portfolio focuses on stocks that are undervalued based on
the Adviser's proprietary measures of value. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest to a limited extent in
FOREIGN EQUITY SECURITIES. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser continually measures the relative attractiveness of the
Portfolio's current holdings against potential purchases, analyzing each
security on a fundamental basis. The Portfolio's holdings typically will have
lower price/earnings ratios than the average stock included in the S&P MidCap
400 Index. Sector weightings normally are kept within 5% of those of the S&P
MidCap 400 Index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Equity capitalization generally
equity securities of mid cap matching the benchmark (currently
companies $500 million to $6 billion)
o Focus on value securities o Benchmark: S&P MidCap 400 Index
o Ticker Symbol ________ o CUSIP No. _______
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks or stocks of mid-sized companies, while other conditions may favor growth
stocks or stocks of larger or smaller companies. Accordingly, a portfolio of mid
cap value stocks may, over certain periods of time, underperform a portfolio of
growth stocks or stocks of larger or smaller companies. The Portfolio also may
be subject to the risks associated with derivatives. The Portfolio's investments
in foreign securities are subject to certain risks, including the risks
associated with fluctuating currency exchange rates. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Bradley S. Daniels, William B. Gerlach, Chris Leavy and Gary
G. Schlarbaum.
8
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mid Cap Value Portfolio
- -------------------------------------------------------------------------------
S&P Mid Cap 400 Index
- -------------------------------------------------------------------------------
9
<PAGE>
VALUE PORTFOLIO
Objective: The Value Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations greater than $1.5 billion. The Portfolio
focuses on stocks that are undervalued in comparison with the stock market as a
whole, as measured by the S&P 500 Index. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest in FOREIGN EQUITY
SECURITIES to a limited extent. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser narrows the Portfolio's universe of possible investments
through a three part analysis. The Adviser selects stocks having the lowest
price/earnings ratios. The Adviser applies fundamental analysis and its
investment judgment to determine which of those securities are the most
attractive. The Adviser also may favor securities of companies that are in
undervalued industries. The Adviser employs a formal sell discipline, under
which the Portfolio sells securities when their price/earnings ratios rise.
- -------------------------------------------------------------------------------
o Generally at least 65% invested in o Focus on value securities
equities o Benchmark: S&P 500 Index
o Equity capitalization generally greater o CUSIP No. _________
than $1.5 billion
o Ticker Symbol _________
- -------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks, while other conditions may favor growth stocks. Accordingly, a portfolio
of value stocks may, over periods of time, underperform a portfolio of growth
stocks. The Portfolio also may be subject to the risks associated with
derivatives. The Portfolio's investments in foreign securities are subject to
certain risks, including the risks associated with fluctuating currency exchange
rates. Please read the section entitled "Important Investment Information" for
more information about these risks.
Portfolio Managers: Richard M. Behler, Nicholas J. Kovich and Robert J. Marcin.
10
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Value Portfolio
- -------------------------------------------------------------------------------
S&P 500 Index
- -------------------------------------------------------------------------------
11
<PAGE>
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME PORTFOLIO
Objective: The Domestic Fixed Income Portfolio's objective is above-average
total return over a market cycle of three to five years.
Approach: The Portfolio invests exclusively in U.S. Government securities and
other investment grade FIXED INCOME SECURITIES of U.S. issuers, including
corporate bonds and MORTGAGE SECURITIES. The Adviser will use FUTURES, SWAPS and
other DERIVATIVES in managing the Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- -------------------------------------------------------------------------------
o 100% U.S. issuers o Average weighted maturity generally
o Generally at least 65% invested in greater than 5 years
fixed income securities o May invest over 50% in mortgage
o 80% of fixed income securities rated securities
A or higher (or equivalent) o Benchmarks: Salomon Broad
o Up to 20% of fixed income securities Investment Grade; Lehman Brothers
rated BBB (or equivalent) Aggregate
o Ticker Symbol ________ o CUSIP No. ________
- -------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities. The Portfolio also is
subject to the risks associated with using derivatives. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
12
<PAGE>
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Investment Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- -------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
13
<PAGE>
FIXED INCOME PORTFOLIO
Objective: The Fixed Income Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests in a diversified portfolio of FIXED INCOME
SECURITIES, including U.S. Government securities, corporate bonds, MORTGAGE
SECURITIES, and to a limited extent, FOREIGN FIXED INCOME SECURITIES. The
Portfolio invests primarily in investment grade securities, but also may invest
a portion of its assets in HIGH YIELD SECURITIES, also known as "junk bonds."
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- -------------------------------------------------------------------------------
o Generally at least 65% invested in o May invest over 50% in mortgage
fixed income securities securities
o Average weighted maturity generally o Benchmarks: Salomon Broad
greater than 5 years Investment Grade; Lehman Brothers
o 80% investment grade securities Aggregate
o Up to 20% high yield securities o CUSIP No. ___________
o Ticker Symbol ________
- -------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves.
The prices of mortgage securities may be particularly sensitive to changes in
interest rates because of the risk that borrowers will become more or less
likely to refinance their mortgages. For example, an increase in interest rates
generally will reduce prepayments, effectively lengthening the maturity of some
mortgage securities, and making them subject to more drastic price movements.
Because of prepayment issues, it is not possible to predict the ultimate
maturity of mortgage securities.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
14
<PAGE>
The Portfolio also is subject to the risks of investing in derivatives and, to a
limited extent, foreign fixed income securities. Foreign fixed income securities
may be denominated in foreign currencies, which will fluctuate in value relative
to the U.S. dollar. The Portfolio may use derivatives to hedge some or all of
the risks associated with foreign currencies. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Fixed Income Portfolio
- -------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
15
<PAGE>
HIGH YIELD PORTFOLIO
Objective: The High Yield Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests primarily in HIGH YIELD SECURITIES (commonly
referred to as "junk bonds"). The Portfolio also may invest in other FIXED
INCOME SECURITIES, including U.S. Government securities, MORTGAGE SECURITIES,
and investment grade corporate bonds. The Portfolio may invest to a limited
extent in FOREIGN FIXED INCOME SECURITIES, including EMERGING MARKET SECURITIES.
The Adviser will use FUTURES, SWAPS and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser uses equity and fixed income valuation techniques, together
with analyses of economic and industry trends, to determine the Portfolio's
overall structure, sector allocation and desired maturity. The Adviser
emphasizes securities of companies that have strong industry positions and
favorable outlooks for cash flow and asset values. The Adviser conducts a credit
analysis for each security considered for investment to evaluate its
attractiveness relative to the level of risk it presents. The Portfolio
maintains a high level of diversification to minimize its exposure to the risks
associated with any particular issuer.
- -------------------------------------------------------------------------------
o Average weighted maturity generally o Benchmark: Salomon High Yield
greater than 5 years Market Index
o Generally at least 65% invested in o CUSIP No. ____________
high yield securities o Ticker Symbol ____________
- -------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's fixed income securities
holdings respond to economic developments, especially changes in interest rates,
as well as to perceptions of the creditworthiness of individual issuers. The
Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Robert E. Angevine, Thomas L. Bennett and Stephen F. Esser.
16
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
High Yield Portfolio
- -------------------------------------------------------------------------------
Salomon High Yield Market Index
- -------------------------------------------------------------------------------
17
<PAGE>
BALANCED PORTFOLIOS
BALANCED PORTFOLIO
Objective: The Balanced Portfolio seeks above average total return over a market
cycle of three to five years.
Approach: The Portfolio invests in a mix of EQUITY and FIXED INCOME SECURITIES.
The Portfolio normally invests 45-75% of its assets in equity securities and
25-55% of its assets in fixed income securities. The Portfolio may invest up to
25% of its assets in FOREIGN EQUITY and FOREIGN FIXED INCOME SECURITIES,
including EMERGING MARKETS SECURITIES. Equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, corporate bonds, MORTGAGE SECURITIES, HIGH YIELD
SECURITIES (commonly called "junk bonds") and foreign fixed income securities.
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser determines the Portfolio's equity and fixed income
investment strategies separately and then determines the mix of those strategies
that will maximize the return available from both the stock and bond markets,
based on proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities.
- -------------------------------------------------------------------------------
o Generally 45-75% invested in o Equity capitalization generally
equities, 25-55% in fixed income greater than $1 billion
securities o Average weighted maturity of fixed
o At least 25% invested in senior fixed income securities generally greater
income securities than 5 years
o Up to 25% invested in foreign equity o Benchmark: weighted blend of
and foreign fixed income securities quarterly returns of
o Up to 10% invested in Brady Bonds (a 60% S&P 500 Index
type of emerging market fixed income 40% Salomon Broad Investment
security) Grade Index
o Ticker Symbol ___________ o CUSIP No. ___________
- -------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
18
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally consider
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A. Valeiras
and Richard B. Worley.
19
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark indices. How the Portfolio has performed
in the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Balanced Portfolio
- -------------------------------------------------------------------------------
S&P 500 Index
- -------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
60/40 Blended Index**
- -------------------------------------------------------------------------------
** The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
20
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO
Objective: The Multi-Asset-Class Portfolio seeks above average total return over
a market cycle of three to five years.
Approach: The Portfolio seeks to invest in a combination of asset classes that
do not move in tandem with each other in order to improve potential return and
control the Portfolio's overall risk. The Portfolio invests in EQUITY SECURITIES
and FIXED INCOME SECURITIES of U.S. and foreign issuers, including EMERGING
MARKET SECURITIES, in accordance with the Adviser's target allocation among
certain asset classes. The Portfolio's equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, foreign government securities, corporate bonds, MORTGAGE
SECURITIES and HIGH YIELD SECURITIES (commonly called "junk bonds"). The
Portfolio's neutral position is generally 50% domestic equity securities, 24%
domestic fixed income securities, 14% foreign equity securities, 6% foreign
fixed income securities and 6% high yield securities. The Adviser will use
futures, swaps and other DERIVATIVES in managing the Portfolio.
Process: The Adviser makes strategic judgments based on proprietary measures
used to compare the relative risks and returns of stock and bond markets around
the world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment.
- -------------------------------------------------------------------------------
o Generally at least 65% invested in o Benchmark: a weighted blend of
issuers located in at least 3 countries, quarterly returns of
including the U.S. 50% S&P 500 Index
o Equity capitalization generally greater 14% MSCI EAFE-GDP Weighted Index
than $1 billion 24% Salomon Broad Investment Grade
o Average weighted maturity of fixed Index
income securities generally greater 6% Salomon World Government Bond Ex
than 5 years U.S. Index
o Ticker Symbol __________ 6% Salomon High Yield Market Index
o CUSIP No. _________
- -------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
21
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally considered
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in a more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley.
22
<PAGE>
The bar chart and table below show the performance of the Portfolio's Investment
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
-----------------------------------------------
High Quarter Low Quarter
-----------------------------------------------
--/-- - --/-- --/-- - --/--
---% ---%
-----------------------------------------------
The following table shows the average annual total return of the Portfolio's
Investment Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark indices. How the Portfolio has performed
in the past does not necessarily indicate how the Portfolio will perform in the
future.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- -------------------------------------------------------------------------------
S&P 500 Index
- -------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
MSCI EAFE-GDP Weighted Index
- -------------------------------------------------------------------------------
Blended Index**
- -------------------------------------------------------------------------------
** The Blended Index is an unmanaged index comprised of 50% S&P 500 Index,
24% Salomon Broad Investment Index, 14% MSCI EAFE-GDP Weighted Index, 6%
Salomon High Yield Index and 6% Salomon World Government Bond Ex-U.S. Index
23
<PAGE>
IMPORTANT INVESTMENT INFORMATION
This section describes the principal types of investments that various
Portfolios may make and some of the risks associated with those investments.
More information about these investments and risks is contained in the Statement
of Additional Information.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
ADRs, rights, warrants and shares of investment companies. Equity securities in
which the Portfolios may invest may be publicly traded on securities exchanges
or over-the-counter. The Portfolios also may invest in securities that are not
publicly traded. These securities may be more difficult to sell than other
equity securities and their value may fluctuate more dramatically than other
securities. Each Portfolio may purchase shares of other investment companies
subject to limits imposed by the Investment Company Act of 1940 ("1940 Act") and
any other applicable law.
Equity securities are subject to the risk that prices will fluctuate in response
to events affecting particular issuers, or entire industries or markets. Smaller
companies are subject to additional risks because they may have more limited
markets and financial resources, narrower product lines or lack of depth of
management. Smaller companies' securities also may be less liquid, and subject
to more abrupt or erratic price movements. ADRs are U.S. dollar-denominated
securities that represent claims to shares of foreign stocks. The Fund treats
ADRs as U.S. securities.
Growth stocks generally are 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 Index. Value stocks are those stocks that 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 ad price/book ratios. Value stocks are generally dividend paying common
stocks. However, non-dividend paying stocks may also be selected for their value
characteristics.
FIXED INCOME SECURITIES
Fixed income securities include a wide variety of investments, such as U.S.
Government securities; securities issued by federal or federally sponsored
agencies ("agencies"); corporate bonds; asset-backed securities; mortgage
securities; high yield securities; municipal bonds; loan participations and
assignments; zero coupon bonds; convertible securities; Yankee bonds; repurchase
agreements; commercial paper; and cash equivalents.
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers. The
value of a fixed income security typically moves in the opposite direction of
prevailing interest rates: if rates rise, the value of a fixed income security
falls; if rates fall, the value increases. The maturity and duration of a fixed
income instrument also affects the extent to which the price of the security
will change in response to these and other factors. Longer term securities tend
to experience larger changes than shorter term securities because they are more
sensitive to changes in interest rates or in the credit ratings of the issuers.
Certain types of fixed income securities, such as inverse floaters, are designed
to respond differently to changes in interest rates.
24
<PAGE>
Certain fixed income securities pay a floating or variable rate of interest. The
interest rates on these securities will vary with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. The
variation in the interest rate may enable an investor to trade a floating or
variable rate security at par on a daily or periodic basis. Some obligations
carry a demand feature permitting the holder to tender them back to the issuer
or to a third party at par value before maturity. If the demand feature is an
obligation of a foreign entity, it will be subject to certain risks described
under FOREIGN SECURITIES, below.
Some fixed income securities may be called (redeemed by the issuer) prior to
final maturity. The risk of holding a callable security is that if it is called,
a Portfolio may have to reinvest the proceeds at a lower rate of interest.
Duration: The average duration of a fixed income portfolio measures its exposure
to the risk of changing interest rates. A Portfolio with a lower average
duration generally will experience less price volatility in response to changes
in interest rates as compared with a Portfolio with a higher average duration.
Mortgage Securities: Mortgage securities are subject to the risk that as
interest rates fall, borrowers will refinance their mortgages, resulting in
prepayment of principal. A Portfolio holding mortgage securities that are
experiencing prepayments will have to reinvest these principal payments at lower
prevailing interest rates. On the other hand, when interest rates rise,
borrowers are less likely to refinance, resulting in lower prepayments. This can
effectively extend the maturity of a Portfolio's mortgage securities, resulting
in greater price volatility.
High Yield Securities: Fixed income securities that are not investment grade are
commonly referred to as junk bonds or high yield, high risk securities. These
securities offer a higher yield than other, higher rated securities, but they
carry a greater degree of risk and are considered speculative by the major
credit rating agencies. High yield securities may be issued by companies that
are restructuring, are smaller and less credit worthy, or are more highly
indebted than other companies. This means that they may have more difficulty
making scheduled payments of principal and interest. Changes in the value of
high yield securities are influenced more by changes in the financial and
business position of the issuing company than by changes in interest rates when
compared to investment grade securities.
Yankee Bonds: Yankee bonds are U.S.-dollar denominated fixed income instruments
issued by foreign governments and corporations and sold in the U.S. They are
considered U.S. securities for purposes of the Portfolios' investment policies
(except for the Domestic Fixed Income Portfolio).
25
<PAGE>
FOREIGN SECURITIES
While many of the characteristics and risks of foreign equity and fixed income
securities are similar to those of domestic securities, investing in foreign
securities involves certain additional risks. Foreign issuers generally are
subject to different accounting, auditing and financial reporting standards than
U.S. companies. There may be less information available to the public about
foreign issuers. Securities of foreign issuers can be less liquid and experience
greater price movements. Foreign stock exchanges, broker-dealers, and listed
issuers may be subject to less government regulation and oversight. The cost of
investing in foreign securities, including brokerage commissions and custodial
expenses, can be higher than in the U.S. In some foreign countries, there is
also the risk of government expropriation, excessive taxation, political or
social instability, the imposition of currency controls, or diplomatic
developments that could affect the Portfolios' investments in those countries.
There also can be difficulty obtaining and enforcing judgments in foreign
countries.
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since the
Portfolios must convert the value of foreign securities into dollars, changes in
currency exchange rates can increase or decrease the U.S. dollar value of the
Portfolios' assets. The Adviser may use certain derivatives to offset this risk.
The risks of hedging currency risk are described below under FORWARDS and
FUTURES. The Adviser may in its discretion choose not to hedge against currency
risks. In addition, certain market conditions may make it impractical or
uneconomical to do so.
Emerging Markets Securities: Investing in emerging markets securities enhances
the risks of foreign investing. The risk of political or social upheaval,
expropriation, and restrictive controls on foreign investors' ability to
repatriate capital is greater in emerging markets. Emerging market securities
generally are less liquid and subject to wider price and currency fluctuations
than securities issued in more developed countries. In certain countries, there
may be few publicly traded securities, and the market may be dominated by a few
issuers or sectors. Fixed income securities issued by emerging markets issuers
are more likely to be considered equivalent to risky high yield securities.
Investment funds and structured investments are mechanisms for U.S. and other
investors to invest in certain emerging markets that have laws precluding or
limiting direct investments in their securities by foreign investors. BRADY
BONDS are debt obligations created as part of the restructuring of commercial
bank loans to entities in emerging market countries. Brady Bonds may be
collateralized or not, and may be issued in various currencies (most are
U.S.-dollar denominated).
DERIVATIVES AND OTHER INVESTMENTS
The Portfolios may use derivatives to pursue portfolio strategies and
objectives. Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include futures, options, forward contracts, swaps,
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), and structured notes.
26
<PAGE>
Derivatives sometimes offer the most economic way of pursuing a particular
investment strategy, limiting certain risks, or enhancing potential returns.
Forward contracts are used to protect against uncertainty in the level of future
foreign currency exchange rates. The Portfolios may use futures to gain exposure
to an entire market (e.g., stock index futures) or to control their exposure to
changing foreign currency exchange rates. Portfolios investing in fixed income
securities will use futures to control their exposure to changes in interest
rates and to manage the overall maturity and duration of their securities
holdings. If a Portfolio buys an option, it buys a legal contract giving it the
right to buy or sell a specific amount of a security or futures contract at an
agreed-upon price. If a Portfolio "writes" an option, it sells to another person
the right to buy from or sell to the Portfolio a specific amount of a security
or futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices and commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
Certain derivative instruments are publicly traded on exchanges or
over-the-counter, while others are privately negotiated. The Portfolios may
enter into public or private over-the-counter derivatives transactions with
counterparties that meet the Fund's requirements for credit quality and
collateral. A Portfolio will not use derivatives to increase a Portfolio's level
of risk above the level that could be achieved using only traditional investment
securities. A Portfolio will not use derivatives as an indirect way of investing
in assets that it cannot, as a matter of policy, invest in directly.
Risks of Derivatives: The primary risks of derivatives are: (i) changes in the
market value of securities held by a Portfolio, and of derivatives relating to
those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. See the Statement of Additional Information for more about the
risks of different types of derivatives.
27
<PAGE>
- -------------------------------------------------------------------------------
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio (except the Cash Reserves Portfolio) may enter into
futures contracts and options on futures contracts for bona fide hedging
purposes to an unlimited extent. It also can enter into futures contracts and
options thereon for other purposes, provided that no more than 5% of the
Portfolio's total assets at the time of the transaction are required as margin
and option premiums to secure the Portfolio's obligations under such contracts.
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as margin and option premiums to secure the Portfolio's obligations under
futures contracts and options thereon entered into for purposes other than bona
fide hedging.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Each Portfolio, except the Cash Reserves Portfolio, may invest in certain
derivatives, such as forwards, futures, options and mortgage derivatives as well
as when-issued securities which require the Portfolio to segregate some or all
of its cash or liquid securities to cover its obligations under those
instruments. At certain levels, this can cause a Portfolio to lose flexibility
in managing its investments properly, responding to shareholder redemption
requests, or meeting other obligations. A Portfolio in that position could be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
- -------------------------------------------------------------------------------
Mortgage Derivatives. CMOs and SMBS are derivatives based on mortgage
securities. CMOs are issued in a number of series (known as "tranches"), each of
which has a stated maturity. Cash flow from the underlying mortgages is
allocated to the tranches in a predetermined, specified order. SMBS are
multi-class mortgage securities issued by U.S. government agencies and
instrumentalities and financial institutions. They usually have two classes, one
receiving most of the principal payments from the mortgages, and one receiving
most of the interest. In some cases, classes may receive interest only (called
"IOs") or principal only (called "POs"). Both CMOs and SMBS are subject to the
risks of price movements in response to changing interest rates and the level of
prepayments made by borrowers. Depending on the class of CMO or SMBS that a
Portfolio holds, these price movements may be significantly greater than that
experienced by mortgage securities generally, depending on whether the payments
are predominantly based on principal or interest paid on the underlying
mortgages. In addition, the yield to maturity of IOs and POs is extremely
sensitive to prepayment levels. As a result, a high rate of prepayments can have
a material effect on a Portfolio's yield to maturity and could cause a Portfolio
to lose money on the investment.
28
<PAGE>
- -------------------------------------------------------------------------------
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in certain fixed
income securities for temporary defensive purposes. See the Statement of
Additional Information for more information about the types of fixed income
securities in which the Portfolios may invest. If the Adviser incorrectly
predicts the effects of these changes, such defensive investments may adversely
affect the Portfolios' performance. Consistent with their investment policies,
the Portfolios also will purchase and sell securities without regard to the
effect on portfolio turnover. Higher portfolio turnover (e.g., over 100% per
year) will cause the Portfolio to incur additional transaction costs and may
result in taxable gains being passed through to shareholders.
- -------------------------------------------------------------------------------
29
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table below the fees and expenses that you may pay if you buy
and hold shares of the Portfolios. The Portfolios do not charge any sales loads
or similar fees when you purchase or redeem shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Portfolio Management Distribution Shareholder Other Total Annual Fund After MAS Waiver/
Fees* (12b-1) Fees Servicing Fees Expenses Operating Expenses* Reimbursement
<S> <C> <C> <C> <C> <C> <C>
Equity Portfolio % none 0.15% % % %
International Equity
Portfolio % none 0.15% % % %
Mid Cap Value Portfolio % none 0.15% % % %
Value Portfolio % none 0.15% % % %
Domestic Fixed Income
Portfolio % none 0.15% % % %
Fixed Income Portfolio % none 0.15% % % %
High Yield Portfolio % none 0.15% % % %
Balanced Portfolio % none 0.15% % % %
Multi-Asset-Class
Portfolio % none 0.15% % % %
</TABLE>
* The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown. Fee waivers and/or expense reimbursements are voluntary and the
Adviser reserves the right to terminate any waiver and/or reimbursement at
any time and without notice.
30
<PAGE>
Example
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
EQUITY 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
International Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
FIXED INCOME
- ------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
High Yield Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
BALANCED
- ------------------------------------------------------------------------------------------------------------------
Balanced Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASING SHARES
Investment Class Shares are available to clients of the Adviser with combined
investments of $1,000,000 and corporations or other institutions, such as
trusts, foundations or broker-dealers, who have a contractual arrangement with
the Fund or its Distributor and who purchase shares for the accounts of others
(Shareholder Organizations).
Investment Class Shares of each portfolio may be purchased at the net asset
value per share (NAV) next determined after we receive your purchase order.
INITIAL PURCHASE BY MAIL: You may open an account by completing and signing an
Account Registration Form provided by MAS Funds' Client Services Group ("Client
Services") and mailing it to MAS Funds c/o Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868 together with a check payable to
MAS Funds.
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. You can avoid this delay by purchasing
shares by wire.
INITIAL PURCHASE BY WIRE: You may purchase Investment Shares of each portfolio
by wiring Federal Funds to Chase. You should forward a completed Account
Registration Form to Client Services in advance of the wire. For all portfolios,
except the Cash Reserves Portfolio, notification must be given to Client
Services at 1-800-354-8185 prior to the determination of NAV. (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 Chase
using the following wire 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: You may make additional investments in Investment Class
Shares at the NAV (minimum additional investment $1,000) by mailing a check
(payable to MAS Funds) to Client Services at the address noted under Initial
Purchase by Mail or by wiring Federal Funds to Chase as outlined above.
OTHER PURCHASE INFORMATION: We may suspend the offering of shares, or any class
of shares, of any Portfolio or reject any purchase orders when we think it is in
the best interest of the Fund. We may waive the minimum initial and additional
investment amounts in certain cases.
32
<PAGE>
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each Portfolio by mail, or, if authorized, by telephone
at no charge. The value of shares redeemed may be more or less than the purchase
price, depending on the NAV at the time of redemption.
BY MAIL: Each Portfolio will redeem shares at the NAV 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. 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;
and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE: If you have authorized the Telephone Redemption Option on the
Account Registration Form, you may request a redemption of shares by calling MAS
Funds' Client Services Group at 1-800-354-8185 and requesting that the
redemption proceeds be mailed or wired to you. You cannot redeem shares by
telephone if you hold share certificates for those shares.
BY FACSIMILE: Written requests in good order for redemptions, exchanges, and
transfers may be forwarded to the Fund via facsimile at (610) 940-5284. If you
make a request via facsimile, you must call Client Services to ensure that the
Fund properly received your instructions. The original request must be promptly
mailed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0686.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We 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 or under any emergency circumstances.
33
<PAGE>
In certain cases, we may determine that it is in the best interest of other
shareholders not to pay redemption proceeds in cash. We may pay you partly or
entirely by distributing to you readily marketable securities held by the
portfolio from which you are redeeming. You may incur brokerage charges when you
sell those securities.
VALUATION OF SHARES
We determine the NAV of the following portfolios at the following times on each
day the portfolio(s) is open for business:
o Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
o Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
o Balanced and Multi-Asset-Class Portfolios as of the later of the close of
the NYSE or one hour after the close of the bond markets.
When no quotations are readily available for securities or when the value of
securities has been materially affected by events occurring after the close of
the market, we will determine the value for those securities in good faith at
fair value using methods approved by the Board of Trustees.
The NAV of Investment Class Shares may differ from that of other classes because
of class-specific expenses that each class may pay, the distribution fees
charged to Adviser Class Shares and the shareholder servicing fees charged to
Investment Class Shares.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. A
portfolio's NAV may change on a day when you can't purchase or redeem shares
because some portfolios invest in foreign securities that trade on days when the
Fund is closed. A fixed-income portfolio may be open on a day when U.S. bond
markets are closed, such as Columbus Day. On such a day, the NAV of the
fixed-income portfolios will still be determined at 4:00 p.m. Eastern Time that
day, but purchase orders via wire will not be effective until the following day.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE: You may exchange each Portfolio's Investment Class Shares
for Investment Class Shares of the Fund's other Portfolios based on their
respective NAVs. The exchange privilege is only available with respect to
Portfolios offering Investment Class Shares that are qualified for sale in your
state of residence. We charge no fee for exchanges. You should send exchange
requests to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge,
West Conshohocken, PA 19428-0868.
34
<PAGE>
We may not accept any request for an exchange when we think the exchange
privilege is being used as a tool for market timing. We reserve the right to
change the terms or conditions of the exchange privilege upon sixty days'
notice.
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Portfolio Monthly Quarterly Annually
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced T
-----------------------------------------------------------------------------------------------
Domestic Fixed Income T
-----------------------------------------------------------------------------------------------
Equity T
-----------------------------------------------------------------------------------------------
Fixed Income T
-----------------------------------------------------------------------------------------------
High Yield T
-----------------------------------------------------------------------------------------------
International Equity T
-----------------------------------------------------------------------------------------------
Mid Cap Value T
-----------------------------------------------------------------------------------------------
Multi-Asset-Class T
-----------------------------------------------------------------------------------------------
Value T
-----------------------------------------------------------------------------------------------
</TABLE>
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the portfolio unless you elect otherwise in writing. If you
want to change how your dividends are paid you must notify MAS in writing.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. 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 may be taxable at different rates
depending on the length of time the Fund holds its assets.
35
<PAGE>
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign income
taxes that it paid.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP (the
"Adviser"), is a Pennsylvania limited liability partnership founded in 1969. The
Adviser is a subsidiary of Morgan Stanley Dean Witter Investment Management,
Inc. The Adviser is located at One Tower Bridge, West Conshohocken, PA 19428.
The Adviser provides investment advisory services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
________ had in excess of $___ billion in assets under management.
The Adviser makes investment decisions for the Fund's portfolios and places each
portfolio's purchase and sales orders. Each portfolio, in turn, pays the Adviser
an annual advisory fee calculated by applying a quarterly rate. The following
table shows the Adviser's contractual and actual rates of compensation for the
Fund's 1998 fiscal year.
Contractual FY 1998
Compensation Actual
Rate Compensation Rate
------------ -----------------
Equity Portfolio
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
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the ____________Portfolio to keep Total Operating
Expenses from exceeding ___%.
36
<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:
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He joined the management team for the High Yield Portfolio
in 1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986. She
joined the management team 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 joined
the management team for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
joined the management team for the Fixed Income Portfolio in 1984, the Domestic
Fixed Income Portfolio in 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
joined the management team 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
joined the management team 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
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 joined the management team for
the International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team for the High Yield Portfolio in 1989 and the
Multi-Market Fixed Income Portfolio in 1997.
William B. Gerlach, Principal, Morgan Stanley, joined MAS in 1991. He joined the
management team for the Small Cap Value and Mid Cap Value Portfolios in 1996.
37
<PAGE>
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
joined the management team 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.
James J. Jolinger, Principal, Morgan Stanley, joined MAS in 1994. He served as
Equity Analyst for Oppenheimer Capital from 1987-1994. He joined the management
team for the Equity Portfolio in 1997.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team 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 joined the management team 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 Premier Trust
Company from 1994 to 1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. He joined the management team for the Mid Cap Value
and Small Cap Value Portfolio in 1998.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team 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 joined the management team 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, Managing Director, Morgan Stanley, joined MAS in 1992. He
joined the management team 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
joined the management team 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.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
38
<PAGE>
SERVICE PLAN
The Fund has adopted a Service Plan (the "Service Plan") for each Portfolio's
Investment Class Shares. Under the Service Plan, each Portfolio pays the
Distributor a monthly shareholder servicing fee at an annual rate of 0.15% of
the Portfolio's average daily net assets attributable to Investment Class
Shares. The Distributor may compensate other parties for providing shareholder
support services to investors who purchase Investment Class Shares. Shareholder
servicing fees 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.
YEAR 2000 DISCLOSURE STATEMENT
The management and distribution services that the Adviser and Distributor
provide to the Fund depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser and Distributor
have been actively working on necessary changes to their own computer systems to
deal with the year 2000 problem and expect that their systems will be adapted
before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Adviser and Distributor are monitoring their remedial
efforts, however, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the portfolios' investments may be
adversely affected.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. Certain information
reflects financial results for a single Portfolio share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by _____________, whose
report, along with the Fund's financial statements, are incorporated by
reference into the Fund's Statement of Additional Information and are included
in the Fund's September 30, 1998 Annual Report to Shareholders.
39
<PAGE>
As of September 30, 1998, the Investment Class Shares of the __ Portfolios had
not commenced operation. We have provided historical financial information for
International Class Shares of these Portfolios for your information.
[Insert Financial Highlights here]
40
<PAGE>
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428
1-800-354-8185
INVESTMENT PROSPECTUS
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January __, 1999, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the Fund's
annual report, you will find a discussion of the market conditions and the
investment strategies that significantly affected each Portfolio's performance
during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number above. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without charge, by contacting
your Financial Intermediary.
You may obtain more information about the Fund through the Internet at
www.______.com.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
"http://www.sec.gov"; or (3) By mail: you may request documents, upon payment of
a duplicating fee, by writing to Securities Exchange Commission, Public
Reference Section, Washington, D.C. 20549-6009. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-03980.
41
<PAGE>
MAS ADVISER CLASS PROSPECTUS
- ---
MAS FUNDS
January 31, 1999
MAS Funds (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 10 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a subsidiary of Morgan Stanley Dean
Witter Investment Management, Inc., is the Fund's investment adviser. This
prospectus offers Adviser Class Shares of the following portfolios (each a
"Portfolio" and collectively the "Portfolios"):
EQUITY FIXED INCOME BALANCED
PORTFOLIOS PORTFOLIOS PORTFOLIOS
---------- ---------- ----------
EQUITY DOMESTIC FIXED INCOME BALANCED
INTERNATIONAL EQUITY FIXED INCOME MULTI-ASSET-CLASS
MID CAP GROWTH HIGH YIELD
MID CAP VALUE
VALUE
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Morgan Stanley Dean Witter Investment Management
One Tower Bridge, West Conshohocken, PA 19428.
For information, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
<PAGE>
TABLE OF CONTENTS PAGE
- ----------------- ----
INVESTMENT SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE ................
o Investment Objectives, Principal Investment Strategies,
Risks and Performance
EQUITY PORTFOLIOS
Equity .......................................................
International Equity .........................................
Mid Cap Growth ...............................................
Mid Cap Value ................................................
Value ........................................................
FIXED INCOME PORTFOLIOS
Domestic Fixed Income ........................................
Fixed Income .................................................
High Yield ...................................................
BALANCED PORTFOLIOS
Balanced .....................................................
Multi-Asset-Class ............................................
o Important Investment Information .............................
FEES AND EXPENSES
o Shareholder Fees and Annual Portfolio Operating Expenses .....
SHAREHOLDER INFORMATION
o How to Purchase and Redeem Adviser Class Shares ..............
o Dividends, Distributions and Taxes ...........................
MANAGEMENT
o Information About the Adviser and the Portfolio Managers .....
FINANCIAL HIGHLIGHTS ..................................................
2
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
o Investment Objective
o Principal Investment Strategy
o Principal Risks
The following discussions use a number of important investment terms. These
terms, printed in bold, are explained in the section entitled "Important
Investment Information," which follows the individual Portfolio summaries.
There is more information about the Portfolios in the Statement of Additional
Information ("SAI"), which legally is a part of this prospectus. For details
about how to obtain the SAI, and other reports and information, see the back
cover of this prospectus.
INVESTOR SUITABILITY
The Portfolios may be suitable for you if you are a long-term investor who can
accept the risks of investing in the stock and bond markets. The Portfolios are
designed principally for investment by fiduciary investors who are entrusted
with the responsibility of investing assets held for the benefit of others.
While the Portfolios consider whether their securities transactional will
generate distributions taxable at capital gains or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
3
<PAGE>
EQUITY PORTFOLIOS
EQUITY PORTFOLIO
Objective: The Equity Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES of large companies. The Portfolio also makes targeted investments in
stocks of small companies and invests to a limited extent in FOREIGN EQUITY
SECURITIES. The Adviser may use DERIVATIVES in managing the Portfolio.
Process: A team of portfolio managers, organized into "value" and "growth"
units, manages the Portfolio. While the Portfolio's overall sector allocation is
driven by bottom-up stock selection, the Adviser tries to diversify the
Portfolio's investments across market sectors, seeking the best values within
each sector.
- --------------------------------------------------------------------------------
o Generally at least 65% invested o Benchmark: S&P 500 Index
in equity securities o Ticker Symbol ___________
o Equity capitalization generally greater o CUSIP No. __________
than $1 billion
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. The Portfolio also may be subject to the
risks associated with derivatives. The Portfolio's investments in foreign
securities are subject to certain risks, including the risks associated with
fluctuating currency exchange rates. Please read the section entitled "Important
Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong, James J. Jolinger, Nicholas J. Kovich,
Brian Kramp, Robert J. Marcin and Gary G. Schlarbaum.
4
<PAGE>
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Adviser Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Equity Portfolio
- --------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------
5
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
Objective: The International Equity Portfolio seeks above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in FOREIGN EQUITY SECURITIES, i.e.,
common stock and other EQUITY SECURITIES issued by companies located or
conducting most of their business outside of the U.S. The Portfolio invests in
both industrialized countries and EMERGING MARKET COUNTRIES. The Adviser may use
DERIVATIVES in managing the Portfolio. The Portfolio may hedge some or all of
its foreign currency exposure when the Adviser believes it to be appropriate.
Process: The Adviser analyzes the economic conditions of countries around the
world, the relative values of foreign currencies and the U.S. dollar, and the
values of specific securities. The Adviser decides how much of the Portfolio's
assets to invest in each country based on the valuations and liquidity of each
market. The Adviser selects individual stocks based on their value
characteristics, emphasizing value relative to cash flow, and short-term
business dynamics. The Adviser diversifies the Portfolio's holdings across
countries and industry sectors.
- --------------------------------------------------------------------------------
o Generally 65% invested in foreign o Benchmark: MSCI World Ex-U.S.
equity securities in at least three Index
countries o CUSIP No. _________
o Ticker Symbol __________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
equity securities. News and events unique to a country or region will affect
those markets and their issuers, yet may have little or no effect on the U.S.
economy or similar issuers located in the United States. The Portfolio's
investments in emerging market securities are subject to additional risks.
Emerging market countries are generally considered to be less economically
mature than developed nations. Emerging market countries may be more likely to
experience political turmoil or rapid changes in economic conditions, and
issuers in those countries may be in a more precarious financial condition.
These characteristics can cause securities in emerging market countries to
experience significant price volatility.
Many of the Portfolio's investments will be denominated in a foreign currency.
Changes in the values of those currencies compared to the U.S. dollar may affect
the value of the Portfolio's investments. These changes may happen separately
from and in response to events that do not otherwise affect the value of the
security in the issuer's home country. The Adviser may use derivatives and other
techniques to manage these risks. However, the Adviser cannot guarantee that it
will succeed in doing so. Hedging the Portfolio's currency risks involves
certain risks, including the possibility of mismatching the Portfolio's
obligations under a forward or futures contract with the value of securities
denominated in a particular currency.
The prices of common stocks and other equity securities will rise and fall in
response to events that affect entire financial markets or industries, and to
events that affect a particular issuer. The
6
<PAGE>
Portfolio also may be subject to the risks associated with derivatives. Please
read the section entitled "Important Investment Information" for more
information about these risks.
Portfolio Managers: Hassan Elmasry and Horacio A. Valeiras.
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Adviser Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
International Equity Portfolio
- --------------------------------------------------------------------------------
MSCI World Ex-US Index
- --------------------------------------------------------------------------------
7
<PAGE>
MID CAP GROWTH PORTFOLIO
Objective: The Mid Cap Growth Portfolio seeks long-term capital growth.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES having capitalizations in the range of companies included in the S&P
MidCap 400 Index. The Adviser particularly focuses on the expectations of stock
analysts and invests the Portfolio in stocks of companies that it believes will
report earnings growth exceeding analysts' expectations. The Portfolio may
invest to a limited extent in FOREIGN EQUITY SECURITIES. The Adviser may use
derivatives in managing the Portfolio.
Process: The Adviser uses a quantitative screen to sort stocks based on
revisions to analysts' earnings predictions. The Adviser then conducts extensive
fundamental research into those companies with the most attractive earnings
revisions. Finally, the Adviser evaluates the valuation of the stocks to
eliminate from consideration the most overvalued stocks. The Adviser also
follows a strict sell discipline. The Portfolio sells stocks when their earnings
revision scores fall to unacceptable levels, fundamental research reveals
unfavorable trends, or their valuations exceed levels that are reasonable in
relation to the stocks' growth prospects.
- --------------------------------------------------------------------------------
o Generally 65% invested in equity o Equity capitalization generally
securities of mid-cap companies matching the benchmark (currently
o Focus on growth securities $500 million to $6 billion)
o Ticker Symbol ________ o Benchmark: S&P MidCap 400 Index
o CUSIP No. ________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and events that affect a particular issuer. Investments in smaller
companies may involve greater risk than investments in larger, more established
companies, and smaller companies' securities may be subject to more abrupt or
erratic price movements. Certain market conditions may favor growth stocks or
stocks of mid-sized companies, while other conditions may favor value stocks or
stocks of larger or smaller companies. Accordingly, a portfolio of mid cap
growth stocks may, over certain periods of time, underperform a portfolio of
value stocks or stocks of larger or smaller companies. The Portfolio also may be
subject to the risks associated with derivatives. The Portfolio's investments in
foreign securities are subject to certain risks, including the risks associated
with fluctuating currency exchange rates. Please read the section entitled
"Important Investment Information" for more information about these risks.
Portfolio Managers: Arden C. Armstrong and David P. Chu.
8
<PAGE>
The bar chart and table below show the performance of the Portfolio's Adviser
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Adviser Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------
S&P Mid Cap 400 Index
- --------------------------------------------------------------------------------
9
<PAGE>
MID CAP VALUE PORTFOLIO
Objective: The Mid Cap Value Portfolio's objective is above-average total return
over a market cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES having capitalizations in the range of companies included in the S&P
MidCap 400 Index. The Portfolio focuses on stocks that are undervalued based on
the Adviser's proprietary measures of value. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest to a limited extent in
FOREIGN EQUITY SECURITIES. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser continually measures the relative attractiveness of the
Portfolio's current holdings against potential purchases, analyzing each
security on a fundamental basis. The Portfolio's holdings typically will have
lower price/earnings ratios than the average stock included in the S&P MidCap
400 Index. Sector weightings normally are kept within 5% of those of the S&P
MidCap 400 Index.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Equity capitalization generally
equity securities of mid cap matching the benchmark (currently
companies $500 million to $6 billion)
o Focus on value securities o Benchmark: S&P MidCap 400 Index
o Ticker Symbol ________ o CUSIP No. _______
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks or stocks of mid-sized companies, while other conditions may favor growth
stocks or stocks of larger or smaller companies. Accordingly, a portfolio of mid
cap value stocks may, over certain periods of time, underperform a portfolio of
growth stocks or stocks of larger or smaller companies. The Portfolio also may
be subject to the risks associated with derivatives. The Portfolio's investments
in foreign securities are subject to certain risks, including the risks
associated with fluctuating currency exchange rates. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum.
10
<PAGE>
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Adviser Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------
S&P Mid Cap 400 Index
- --------------------------------------------------------------------------------
11
<PAGE>
VALUE PORTFOLIO
Objective: The Value Portfolio seeks above-average total return over a market
cycle of three to five years.
Approach: The Portfolio invests primarily in common stocks and other EQUITY
SECURITIES with equity capitalizations greater than $1.5 billion. The Portfolio
focuses on stocks that are undervalued in comparison with the stock market as a
whole, as measured by the S&P 500 Index. While value stocks typically pay
dividends, the Portfolio may purchase stocks that do not pay dividends based on
other value characteristics. The Portfolio may invest in FOREIGN EQUITY
SECURITIES to a limited extent. The Adviser may use DERIVATIVES in managing the
Portfolio.
Process: The Adviser narrows the Portfolio's universe of possible investments
through a three part analysis. The Adviser selects stocks having the lowest
price/earnings ratios. The Adviser applies fundamental analysis and its
investment judgment to determine which of those securities are the most
attractive. The Adviser also may favor securities of companies that are in
undervalued industries. The Adviser employs a formal sell discipline, under
which the Portfolio sells securities when their price/earnings ratios rise.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Focus on value securities
equities o Benchmark: S&P 500 Index
o Equity capitalization generally greater o CUSIP No. _________
than $1.5 billion
o Ticker Symbol _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer. Investments in
smaller companies may involve greater risk than investments in larger, more
established companies, and smaller companies' securities may be subject to more
abrupt or erratic price movements. Certain market conditions may favor value
stocks, while other conditions may favor growth stocks. Accordingly, a portfolio
of value stocks may, over periods of time, underperform a portfolio of growth
stocks. The Portfolio also may be subject to the risks associated with
derivatives. The Portfolio's investments in foreign securities are subject to
certain risks, including the risks associated with fluctuating currency exchange
rates. Please read the section entitled "Important Investment Information" for
more information about these risks.
Portfolio Managers: Richard M. Behler, Nicholas J. Kovich and Robert J. Marcin.
12
<PAGE>
The bar chart and table below show the performance of the Portfolio's Adviser
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Adviser Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Value Portfolio
- --------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------
13
<PAGE>
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME PORTFOLIO
Objective: The Domestic Fixed Income Portfolio's objective is above-average
total return over a market cycle of three to five years.
Approach: The Portfolio invests exclusively in U.S. Government securities and
other investment grade FIXED INCOME SECURITIES of U.S. issuers, including
corporate bonds and MORTGAGE SECURITIES. The Adviser will use FUTURES, SWAPS and
other DERIVATIVES in managing the Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- --------------------------------------------------------------------------------
o 100% U.S. issuers o Average weighted maturity generally
o Generally at least 65% invested in greate than 5 years
fixed income securities o May invest over 50% in mortgage
o 80% of fixed income securities rated securities
A or higher(or equivalent) o Benchmarks: Salomon Broad
o Up to 20% of fixed income securities Investment Grade; Lehman Brothers
rated BBB (or equivalent) Aggregate
o Ticker Symbol ________ o CUSIP No. ________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves. The prices of mortgage securities may be particularly
sensitive to changes in interest rates because of the risk that borrowers will
become more or less likely to refinance their mortgages. For example, an
increase in interest rates generally will reduce prepayments, effectively
lengthening the maturity of some mortgage securities, and making them subject to
more drastic price movements. Because of prepayment issues, it is not possible
to predict the ultimate maturity of mortgage securities. The Portfolio also is
subject to the risks associated with using derivatives. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
14
<PAGE>
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Adviser Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- --------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------
15
<PAGE>
FIXED INCOME PORTFOLIO
Objective: The Fixed Income Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests in a diversified portfolio of FIXED INCOME
SECURITIES, including U.S. Government securities, corporate bonds, MORTGAGE
SECURITIES, and to a limited extent, FOREIGN FIXED INCOME SECURITIES. The
Portfolio invests primarily in investment grade securities, but also may invest
a portion of its assets in HIGH YIELD SECURITIES, also known as "junk bonds."
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser actively manages the maturity and DURATION of the Portfolio
in anticipation of long-term trends in interest rates and inflation. Depending
on the Adviser's outlook for the economy, interest rates and inflation, the
Adviser may lengthen or shorten the Portfolio's average maturity or duration.
The portfolio managers as a team determine the Portfolio's overall maturity and
duration targets and sector allocations. The portfolio managers then
individually select particular securities for the Portfolio in various sectors
within those overall guidelines.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o May invest over 50% in mortgage
fixed income securities securities
o Average weighted maturity generally o Benchmarks: Salomon Broad
greater than 5 years Investment Grade; Lehman Brothers
o 80% investment grade securities Aggregate
o Up to 20% high yield securities o CUSIP No. ___________
o Ticker Symbol _______
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's holdings respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. Prices of fixed income
securities also generally will fall if an issuer's credit rating declines, and
rise if it improves.
The prices of mortgage securities may be particularly sensitive to changes in
interest rates because of the risk that borrowers will become more or less
likely to refinance their mortgages. For example, an increase in interest rates
generally will reduce prepayments, effectively lengthening the maturity of some
mortgage securities, and making them subject to more drastic price movements.
Because of prepayment issues, it is not possible to predict the ultimate
maturity of mortgage securities.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
16
<PAGE>
The Portfolio also is subject to the risks of investing in derivatives and, to a
limited extent, foreign fixed income securities. Foreign fixed income securities
may be denominated in foreign currencies, which will fluctuate in value relative
to the U.S. dollar. The Portfolio may use derivatives to hedge some or all of
the risks associated with foreign currencies. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency. Please read the section
entitled "Important Investment Information" for more information about these
risks.
Portfolio Managers: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley.
The bar chart and table below show the performance of the Portfolio's Adviser
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Adviser Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Fixed Income Portfolio
- --------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
17
<PAGE>
HIGH YIELD PORTFOLIO
Objective: The High Yield Portfolio seeks above average total return over a
market cycle of three to five years.
Approach: The Portfolio invests primarily in HIGH YIELD SECURITIES (commonly
referred to as "junk bonds"). The Portfolio also may invest in other FIXED
INCOME SECURITIES, including U.S. Government securities, MORTGAGE SECURITIES,
and investment grade corporate bonds. The Portfolio may invest to a limited
extent in FOREIGN FIXED INCOME SECURITIES, including emerging market securities.
The Adviser will use FUTURES, SWAPS and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser uses equity and fixed income valuation techniques, together
with analyses of economic and industry trends, to determine the Portfolio's
overall structure, sector allocation and desired maturity. The Adviser
emphasizes securities of companies that have strong industry positions and
favorable outlooks for cash flow and asset values. The Adviser conducts a credit
analysis for each security considered for investment to evaluate its
attractiveness relative to the level of risk it presents. The Portfolio
maintains a high level of diversification to minimize its exposure to the risks
associated with any particular issuer.
- --------------------------------------------------------------------------------
o Average weighted maturity generally o Benchmark: Salomon High Yield
greater than 5 years Market Index
o Generally at least 65% invested in o CUSIP No. ____________
high yield securities o Ticker Symbol ____________
- --------------------------------------------------------------------------------
Principal Risks: Market prices of the Portfolio's fixed income securities
holdings respond to economic developments, especially changes in interest rates,
as well as to perceptions of the creditworthiness of individual issuers. The
Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
The Portfolio also is subject to the risks associated with using derivatives.
Foreign fixed income securities may be denominated in foreign currencies, which
will fluctuate in value relative to the U.S. dollar. The Portfolio may use
derivatives to hedge some or all of the risks associated with foreign
currencies. Hedging the Portfolio's currency risks involves certain risks,
including the possibility of mismatching the Portfolio's obligations under a
forward or futures contract with the value of securities denominated in a
particular currency. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: Robert E. Angevine, Thomas L. Bennett and Stephen F. Esser.
18
<PAGE>
The bar chart and table below show the performance of the Portfolio's Adviser
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Adviser Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark index. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
High Yield Portfolio
- --------------------------------------------------------------------------------
Salomon High Yield Market Index
- --------------------------------------------------------------------------------
19
<PAGE>
BALANCED PORTFOLIOS
BALANCED PORTFOLIO
Objective: The Balanced Portfolio seeks above average total return over a market
cycle of three to five years.
Approach: The Portfolio invests in a mix of EQUITY and FIXED INCOME SECURITIES.
The Portfolio normally invests 45-75% of its assets in equity securities and
25-55% of its assets in fixed income securities. The Portfolio may invest up to
25% of its assets in FOREIGN EQUITY and FOREIGN FIXED INCOME SECURITIES,
including EMERGING MARKETS SECURITIES. Equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, corporate bonds, MORTGAGE SECURITIES, HIGH YIELD
SECURITIES (commonly called "junk bonds") and foreign fixed income securities.
The Adviser will use futures, swaps and other DERIVATIVES in managing the
Portfolio.
Process: The Adviser determines the Portfolio's equity and fixed income
investment strategies separately and then determines the mix of those strategies
that will maximize the return available from both the stock and bond markets,
based on proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities.
- --------------------------------------------------------------------------------
o Generally 45-75% invested in o Equity capitalization generally
equities, 25-55% in fixed income greater than $1 billion
securities o Average weighted maturity of fixed
o At least 25% invested in senior fixed income securities generally
income securities greater than 5 years
o Up to 25% invested in foreign equity o Benchmark: weighted blend of
and foreign fixed income securities quarterly returns of
o Up to 10% invested in Brady Bonds (a 60% S&P 500 Index
type of emerging market fixed income 40% Salomon Broad Investment
security) Grade Index
o Ticker Symbol ___________ o CUSIP No. ___________
- ----------------------------------------------------------- --------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
20
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally considered
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A. Valeiras
and Richard B. Worley.
21
<PAGE>
The bar chart and table below show the performance of the Portfolio's Adviser
Class Shares year-by year and the Portfolio's best and worst performance for a
quarter. The variability of performance over time provides an indication of the
risks of investing in the Portfolio.
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Adviser Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark indices. How the Portfolio has performed
in the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------
60/40 Blended Index **
- --------------------------------------------------------------------------------
** The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
22
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO
Objective: The Multi-Asset-Class Portfolio seeks above average total return over
a market cycle of three to five years.
Approach: The Portfolio seeks to invest in a combination of asset classes that
do not move in tandem with each other in order to improve potential return and
control the Portfolio's overall risk. The Portfolio invests in EQUITY SECURITIES
and FIXED INCOME SECURITIES of U.S. and foreign issuers, including EMERGING
MARKET SECURITIES, in accordance with the Adviser's target allocation among
certain asset classes. The Portfolio's equity securities generally will be
issued by larger corporations. Fixed income securities will include U.S.
Government securities, foreign government securities, corporate bonds, MORTGAGE
SECURITIES and HIGH YIELD SECURITIES (commonly called "junk bonds"). The
Portfolio's neutral position is generally 50% domestic equity securities, 24%
domestic fixed income securities, 14% foreign equity securities, 6% foreign
fixed income securities and 6% high yield securities. The Adviser will use
futures, swaps and other DERIVATIVES in managing the Portfolio.
Process: The Adviser makes strategic judgments based on proprietary measures
used to compare the relative risks and returns of stock and bond markets around
the world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Benchmark: a weighted blend of
issuers located in at least 3 countries, quarterly returns of
including the U.S. 50% S&P 500 Index
o Equity capitalization generally greater 14% MSCI EAFE-GDP Weighted Index
than $1 billion 24% Salomon Broad Investment
o Average weighted maturity of fixed Grade Index
income securities generally greater 6% Salomon World Government
than 5 years Ex U.S. Bond Index
o Ticker Symbol __________ 6% Salomon High Yield Market
Index
o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The prices of common stocks and other equity securities will
rise and fall in response to events that affect entire financial markets or
industries, and to events that affect a particular issuer.
Market prices of the Portfolio's fixed income securities respond to economic
developments, especially changes in interest rates, as well as to perceptions of
the creditworthiness of individual issuers. The prices of mortgage securities
may be particularly sensitive to changes in interest rates because of the risk
that borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities.
23
<PAGE>
The Portfolio is subject to the risks of investing in foreign securities. News
and events unique to a country or region will affect those markets and their
issuers, yet may have little or no effect on the U.S. economy or similar issuers
located in the United States. Emerging market countries are generally considered
to be less economically mature than developed nations. Emerging market countries
may be more likely to experience political turmoil or rapid changes in economic
conditions, and issuers in those countries may be in a more precarious financial
condition. These characteristics can cause securities in emerging market
countries to experience significant price volatility.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Changes in the values of those currencies compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from and in response to events that do not otherwise affect the value
of the security in the issuer's home country. The Adviser may use derivatives
and other techniques to manage these risks. However, the Adviser cannot
guarantee that it will succeed in doing so. Hedging the Portfolio's currency
risks involves certain risks, including the possibility of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity, and sudden and substantial decreases in price,
during certain market conditions.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect performance.
The Portfolio also is subject to the risks of using derivatives. Please read the
section entitled "Important Investment Information" for more information about
these risks.
Portfolio Managers: Thomas L. Bennett, J. David Germany, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley.
The bar chart and table below show the performance of the Portfolio's
Institutional Class Shares year-by year and the Portfolio's best and worst
performance for a quarter. The Adviser Class Shares would have had similar
annual returns, but returns would have differed due to different expenses
charged to each class. The variability of performance over time provides an
indication of the risks of investing in the Portfolio.
24
<PAGE>
[Bar Chart]
* Total Return for the period October 1 - December 31, 1998 was __%.
------------------------------------------------
High Quarter Low Quarter
------------------------------------------------
__/__ - __/__ __/__ - __/__
___% ___%
------------------------------------------------
The following table shows the average annual total return of the Portfolio's
Institutional Class Shares for the past 1, 5, and 10 year periods and the
corresponding returns of its benchmark indices. How the Portfolio has performed
in the past does not necessarily indicate how the Portfolio will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
---------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- --------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------
MSCI EAFE-GDP Weighted Index
- --------------------------------------------------------------------------------
50/24/14/6/6 Blended Index **
- --------------------------------------------------------------------------------
** The 50/24/14/6/6 Blended Index is an unmanaged index comprised of 50% S&P 500
Index, 24% Salomon Broad Investment Grade Index, 14% MSCI EAFE-GDP Weighted
Index, 6% Salomon High Yield Index and 6% Salomon World Government Bond Ex-U.S.
Index.
IMPORTANT INVESTMENT INFORMATION
This section describes the principal types of investments that various
Portfolios may make and some of the risks associated with those investments.
More information about these investments and risks is contained in the Statement
of Additional Information.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
ADRs, rights, warrants and shares of investment companies. Equity securities in
which the Portfolios may invest may be publicly traded on securities exchanges
or over-the-counter. The Portfolios also may invest in securities that are not
publicly traded. These securities may be more difficult to sell than other
equity securities and their value may fluctuate more dramatically than other
securities. Each Portfolio may purchase shares of other investment companies
subject to limits imposed by the Investment Company Act of 1940 ("1940 Act") and
any other applicable law.
25
<PAGE>
Equity securities are subject to the risk that prices will fluctuate in response
to events affecting particular issuers, or entire industries or markets. Smaller
companies are subject to additional risks because they may have more limited
markets and financial resources, narrower product lines or lack of depth of
management. Smaller companies' securities also may be less liquid, and subject
to more abrupt or erratic price movements. ADRs are U.S. dollar-denominated
securities that represent claims to shares of foreign stocks. The Fund treats
ADRs as U.S. securities.
Growth stocks generally are 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 Index. Value stocks are those stocks that 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 ad price/book ratios. Value stocks are generally dividend paying common
stocks. However, non-dividend paying stocks may also be selected for their value
characteristics.
FIXED INCOME SECURITIES
Fixed income securities include a wide variety of investments, such as U.S.
Government securities; securities issued by federal or federally sponsored
agencies ("agencies"); corporate bonds; asset-backed securities; mortgage
securities; high yield securities; municipal bonds; loan participations and
assignments; zero coupon bonds; convertible securities; Yankee bonds; repurchase
agreements; commercial paper; and cash equivalents.
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers. The
value of a fixed income security typically moves in the opposite direction of
prevailing interest rates: if rates rise, the value of a fixed income security
falls; if rates fall, the value increases. The maturity and duration of a fixed
income instrument also affects the extent to which the price of the security
will change in response to these and other factors. Longer term securities tend
to experience larger changes than shorter term securities because they are more
sensitive to changes in interest rates or in the credit ratings of the issuers.
Certain types of fixed income securities, such as inverse floaters, are designed
to respond differently to changes in interest rates.
Certain fixed income securities pay a floating or variable rate of interest. The
interest rates on these securities will vary with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. The
variation in the interest rate may enable an investor to trade a floating or
variable rate security at par on a daily or periodic basis. Some obligations
carry a demand feature permitting the holder to tender them back to the issuer
or to a third party at par value before maturity. If the demand feature is an
obligation of a foreign entity, it will be subject to certain risks described
under FOREIGN SECURITIES, below.
Some fixed income securities may be called (redeemed by the issuer) prior to
final maturity. The risk of holding a callable security is that if it is called,
a Portfolio may have to reinvest the proceeds at a lower rate of interest.
26
<PAGE>
Duration: The average duration of a fixed income portfolio measures its exposure
to the risk of changing interest rates. A Portfolio with a lower average
duration generally will experience less price volatility in response to changes
in interest rates as compared with a Portfolio with a higher average duration.
Mortgage Securities: Mortgage securities are subject to the risk that as
interest rates fall, borrowers will refinance their mortgages, resulting in
prepayment of principal. A Portfolio holding mortgage securities that are
experiencing prepayments will have to reinvest these principal payments at lower
prevailing interest rates. On the other hand, when interest rates rise,
borrowers are less likely to refinance, resulting in lower prepayments. This can
effectively extend the maturity of a Portfolio's mortgage securities, resulting
in greater price volatility.
High Yield Securities: Fixed income securities that are not investment grade are
commonly referred to as junk bonds or high yield, high risk securities. These
securities offer a higher yield than other, higher rated securities, but they
carry a greater degree of risk and are considered speculative by the major
credit rating agencies. High yield securities may be issued by companies that
are restructuring, are smaller and less credit worthy, or are more highly
indebted than other companies. This means that they may have more difficulty
making scheduled payments of principal and interest. Changes in the value of
high yield securities are influenced more by changes in the financial and
business position of the issuing company than by changes in interest rates when
compared to investment grade securities.
Yankee Bonds: Yankee bonds are U.S.-dollar denominated fixed income instruments
issued by foreign governments and corporations and sold in the U.S. They are
considered U.S. securities for purposes of the Portfolios' investment policies
(except for the Domestic Fixed Income Portfolio).
FOREIGN SECURITIES
While many of the characteristics and risks of foreign equity and fixed income
securities are similar to those of domestic securities, investing in foreign
securities involves certain additional risks. Foreign issuers generally are
subject to different accounting, auditing and financial reporting standards than
U.S. companies. There may be less information available to the public about
foreign issuers. Securities of foreign issuers can be less liquid and experience
greater price movements. Foreign stock exchanges, broker-dealers, and listed
issuers may be subject to less government regulation and oversight. The cost of
investing in foreign securities, including brokerage commissions and custodial
expenses, can be higher than in the U.S. In some foreign countries, there is
also the risk of government expropriation, excessive taxation, political or
social instability, the imposition of currency controls, or diplomatic
developments that could affect the Portfolios' investments in those countries.
There also can be difficulty obtaining and enforcing judgments in foreign
countries.
27
<PAGE>
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since the
Portfolios must convert the value of foreign securities into dollars, changes in
currency exchange rates can increase or decrease the U.S. dollar value of the
Portfolios' assets. The Adviser may use certain derivatives to offset this risk.
The risks of hedging currency risk are described below under forwards and
futures. The Adviser may in its discretion choose not to hedge against currency
risks. In addition, certain market conditions may make it impractical or
uneconomical to do so.
Emerging Markets Securities: Investing in emerging markets securities enhances
the risks of foreign investing. The risk of political or social upheaval,
expropriation, and restrictive controls on foreign investors' ability to
repatriate capital is greater in emerging markets. Emerging market securities
generally are less liquid and subject to wider price and currency fluctuations
than securities issued in more developed countries. In certain countries, there
may be few publicly traded securities, and the market may be dominated by a few
issuers or sectors. Fixed income securities issued by emerging markets issuers
are more likely to be considered equivalent to risky high yield securities.
Investment funds and structured investments are mechanisms for U.S. and other
investors to invest in certain emerging markets that have laws precluding or
limiting direct investments in their securities by foreign investors. Brady
Bonds are debt obligations created as part of the restructuring of commercial
bank loans to entities in emerging market countries. BRADY BONDS may be
collateralized or not, and may be issued in various currencies (most are
U.S.-dollar denominated).
DERIVATIVES AND OTHER INVESTMENTS
The Portfolios may use derivatives to pursue portfolio strategies and
objectives. Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include futures, options, forward contracts, swaps,
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), and structured notes.
Derivatives sometimes offer the most economic way of pursuing a particular
investment strategy, limiting certain risks, or enhancing potential returns.
Forward contracts are used to protect against uncertainty in the level of future
foreign currency exchange rates. The Portfolios may use futures to gain exposure
to an entire market (e.g., stock index futures) or to control their exposure to
changing foreign currency exchange rates. Portfolios investing in fixed income
securities will use futures to control their exposure to changes in interest
rates and to manage the overall maturity and duration of their securities
holdings. If a Portfolio buys an option, it buys a legal contract giving it the
right to buy or sell a specific amount of a security or futures contract at an
agreed-upon price. If a Portfolio "writes" an option, it sells to another person
the right to buy from or sell to the Portfolio a specific amount of a security
or futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices and commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
28
<PAGE>
Certain derivative instruments are publicly traded on exchanges or
over-the-counter, while others are privately negotiated. The Portfolios may
enter into public or private over-the-counter derivatives transactions with
counterparties that meet the Fund's requirements for credit quality and
collateral. A Portfolio will not use derivatives to increase a Portfolio's level
of risk above the level that could be achieved using only traditional investment
securities. A Portfolio will not use derivatives as an indirect way of investing
in assets that it cannot, as a matter of policy, invest in directly.
Risks of Derivatives: The primary risks of derivatives are: (i) changes in the
market value of securities held by a Portfolio, and of derivatives relating to
those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. See the Statement of Additional Information for more about the
risks of different types of derivatives.
- --------------------------------------------------------------------------------
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio (except the Cash Reserves Portfolio) may enter into
futures contracts and options on futures contracts for bona fide hedging
purposes to an unlimited extent. It also can enter into futures contracts and
options thereon for other purposes, provided that no more than 5% of the
Portfolio's total assets at the time of the transaction are required as margin
and option premiums to secure the Portfolio's obligations under such contracts.
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as margin and option premiums to secure the Portfolio's obligations under
futures contracts and options thereon entered into for purposes other than bona
fide hedging.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Each Portfolio, except the Cash Reserves Portfolio, may invest in certain
derivatives, such as forwards, futures, options and mortgage derivatives as well
as when-issued securities which require the Portfolio to segregate some or all
of its cash or liquid securities to cover its obligations under those
instruments. At certain levels, this can cause a Portfolio to lose flexibility
in managing its investments properly, responding to shareholder redemption
requests, or meeting other obligations. A Portfolio in that position could be
forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
- --------------------------------------------------------------------------------
29
<PAGE>
Mortgage Derivatives: CMOs and SMBS are derivatives based on mortgage
securities. CMOs are issued in a number of series (known as "tranches"), each of
which has a stated maturity. Cash flow from the underlying mortgages is
allocated to the tranches in a predetermined, specified order. SMBS are
multi-class mortgage securities issued by U.S. government agencies and
instrumentalities and financial institutions. They usually have two classes, one
receiving most of the principal payments from the mortgages, and one receiving
most of the interest. In some cases, classes may receive interest only (called
"IOs") or principal only (called "POs"). Both CMOs and SMBS are subject to the
risks of price movements in response to changing interest rates and the level of
prepayments made by borrowers. Depending on the class of CMO or SMBS that a
Portfolio holds, these price movements may be significantly greater than that
experienced by mortgage securities generally, depending on whether the payments
are predominantly based on principal or interest paid on the underlying
mortgages. In addition, the yield to maturity of IOs and POs is extremely
sensitive to prepayment levels. As a result, a high rate of prepayments can have
a material effect on a Portfolio's yield to maturity and could cause a Portfolio
to lose money on the investment.
- --------------------------------------------------------------------------------
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in certain fixed
income securities for temporary defensive purposes. See the Statement of
Additional Information for more information about the types of fixed income
securities in which the Portfolios may invest. If the Adviser incorrectly
predicts the effects of these changes, such defensive investments may adversely
affect the Portfolios' performance. Consistent with their investment policies,
the Portfolios also will purchase and sell securities without regard to the
effect on portfolio turnover. Higher portfolio turnover (e.g., over 100% per
year) will cause the Portfolio to incur additional transaction costs and may
result in taxable gains being passed through to shareholders.
- --------------------------------------------------------------------------------
30
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table below the fees and expenses that you may pay if you buy
and hold shares of the Portfolios. The Portfolios do not charge any sales loads
or similar fees when you purchase or redeem shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Management Distribution Shareholder Other Total Annual Fund After MAS Waiver/
Portfolio Fees* (12b-1) Fees Servicing Fees Expenses Operating Expenses* Reimbursement
- --------- ---------- ------------ -------------- -------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Equity Portfolio % 0.25% None % % %
International Equity % 0.25% None % % %
Portfolio
Mid Cap Growth Portfolio % 0.25% None % % %
Mid Cap Value Portfolio % 0.25% None % % %
Value Portfolio % 0.25% None % % %
Domestic Fixed Income % 0.25% None % % %
Portfolio
Fixed Income Portfolio % 0.25% None % % %
High Yield Portfolio % 0.25% None % % %
Balanced Portfolio % 0.25% None % % %
Multi-Asset-Class % 0.25% None % % %
Portfolio
</TABLE>
- ----------------------
* The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown. Fee waivers and/or expense reimbursements are voluntary and the Adviser
reserves the right to terminate any waiver and/or reimbursement at any time
and without notice.
31
<PAGE>
Example
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
EQUITY 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
International Equity Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Mid Cap Growth Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Mid Cap Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Value Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
FIXED INCOME
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Domestic Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
High Yield Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
BALANCED
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Balanced Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
Multi-Asset-Class Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- --------------------------------------------------- ---------------- ---------------- -------------- ---------------
</TABLE>
32
<PAGE>
GENERAL SHAREHOLDER INFORMATION
PURCHASING SHARES
Adviser Class Shares are available to clients of the Adviser with combined
investments of $500,000 and corporations or other institutions, such as trusts,
foundations or broker-dealers, who have a contractual arrangement with the Fund
or its Distributor and who purchase shares for the accounts of others
(Shareholder Organizations).
Adviser Class Shares of each portfolio may be purchased at the net asset value
per share (NAV) next determined after we receive your purchase order.
INITIAL PURCHASE BY MAIL: You may open an account by completing and signing an
Account Registration Form provided by MAS Funds' Client Services Group ("Client
Services") and mailing it to MAS Funds c/o Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868 together with a check payable to
MAS Funds.
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. You can avoid this delay by purchasing
shares by wire.
INITIAL PURCHASE BY WIRE: You may purchase Adviser Class Shares of each
portfolio by wiring Federal Funds to Chase. You should forward a completed
Account Registration Form to Client Services in advance of the wire. For all
portfolios, except the Cash Reserves Portfolio, notification must be given to
Client Services at 1-800-354-8185 prior to the determination of NAV. (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 Chase
using the following wire 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: You may make additional investments in Adviser Class
Shares at the NAV (minimum additional investment $1,000) by mailing a check
(payable to MAS Funds) to Client Services at the address noted under Initial
Purchase by Mail or by wiring Federal Funds to Chase as outlined above.
OTHER PURCHASE INFORMATION: We may suspend the offering of shares, or any class
of shares, of any Portfolio or reject any purchase orders when we think it is in
the best interest of the Fund. We may waive the minimum initial and additional
investment amounts in certain cases.
33
<PAGE>
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each Portfolio by mail, or, if authorized, by telephone
at no charge. The value of shares redeemed may be more or less than the purchase
price, depending on the NAV at the time of redemption.
BY MAIL: Each Portfolio will redeem shares at the NAV 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. 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;
and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE: If you have authorized the Telephone Redemption Option on the
Account Registration Form, you may request a redemption of shares by calling MAS
Funds' Client Services Group at 1-800-354-8185 and requesting that the
redemption proceeds be mailed or wired to you. You cannot redeem shares by
telephone if you hold share certificates for those shares.
BY FACSIMILE: Written requests in good order for redemptions, exchanges, and
transfers may be forwarded to the Fund via facsimile at (610) 940-5284. If you
make a request via facsimile, you must call Client Services to ensure that the
Fund properly received your instructions. The original request must be promptly
mailed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0686.
34
<PAGE>
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We 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 or under any emergency circumstances.
In certain cases, we may determine that it is in the best interest of other
shareholders not to pay redemption proceeds in cash. We may pay you partly or
entirely by distributing to you readily marketable securities held by the
portfolio from which you are redeeming. You may incur brokerage charges when you
sell those securities.
VALUATION OF SHARES
We determine the NAV of the following portfolios at the following times on each
day the portfolio(s) is open for business:
o Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
o Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
o Balanced and Multi-Asset-Class Portfolios as of the later of the close of the
NYSE or one hour after the close of the bond markets.
When no quotations are readily available for securities or when the value of
securities has been materially affected by events occurring after the close of
the market, we will determine the value for those securities in good faith at
fair value using methods approved by the Board of Trustees.
The NAV of Adviser Class Shares may differ from that of other classes because of
class-specific expenses that each class may pay, the distribution fees charged
to Adviser Class Shares and the shareholder servicing fees charged to Investment
Class Shares.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. A
portfolio's NAV may change on a day when you can't purchase or redeem shares
because some portfolios invest in foreign securities that trade on days when the
Fund is closed. A fixed-income portfolio may be open on a day when U.S. bond
markets are closed, such as Columbus Day. On such a day, the NAV of the
fixed-income portfolios will still be determined at 4:00 p.m. Eastern Time that
day, but purchase orders via wire will not be effective until the following day.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE: You may exchange each Portfolio's Adviser Class Shares for
Adviser Class Shares of the Fund's other Portfolios based on their respective
NAVs. The exchange privilege is only available with respect to Portfolios
offering Adviser Class Shares that are qualified for sale in your state of
residence. We charge no fee for exchanges. You should send exchange requests to
MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868.
35
<PAGE>
We may not accept any request for an exchange when we think the exchange
privilege is being used as a tool for market timing. We reserve the right to
change the terms or conditions of the exchange privilege upon sixty days'
notice.
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
-------------------------------------- ---------------- ------------------- -------------------
Portfolio Monthly Quarterly Annually
-------------------------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Balanced X
-------------------------------------- ---------------- ------------------- -------------------
Domestic Fixed Income X
-------------------------------------- ---------------- ------------------- -------------------
Equity X
-------------------------------------- ---------------- ------------------- -------------------
Fixed Income X
-------------------------------------- ---------------- ------------------- -------------------
High Yield X
-------------------------------------- ---------------- ------------------- -------------------
International Equity X
-------------------------------------- ---------------- ------------------- -------------------
Mid Cap Growth X
-------------------------------------- ---------------- ------------------- -------------------
Mid Cap Value X
-------------------------------------- ---------------- ------------------- -------------------
Multi-Asset-Class X
-------------------------------------- ---------------- ------------------- -------------------
Value X
-------------------------------------- ---------------- ------------------- -------------------
</TABLE>
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the portfolio unless you elect otherwise in writing. If you
want to change how your dividends are paid you must notify MAS in writing.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. 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 may be taxable at different rates
depending on the length of time the Fund holds its assets.
36
<PAGE>
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign income
taxes that it paid.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP (the
"Adviser"), is a Pennsylvania limited liability partnership founded in 1969. The
Adviser is a subsidiary of Morgan Stanley Dean Witter Investment Management,
Inc. The Adviser is located at One Tower Bridge, West Conshohocken, PA 19428.
The Adviser provides investment advisory services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
________ had in excess of $___ billion in assets under management.
The Adviser makes investment decisions for the Fund's portfolios and places each
portfolio's purchase and sales orders. Each portfolio, in turn, pays the Adviser
an annual advisory fee calculated by applying a quarterly rate. The following
table shows the Adviser's contractual and actual rates of compensation for the
Fund's 1998 fiscal year.
Contractual FY 1998
Compensation Actual
Rate Compensation Rate
------------ -----------------
Equity Portfolio
International Equity Portfolio
Mid Cap Growth Portfolio
Mid Cap Value Portfolio
Value Portfolio
Domestic Fixed Income Portfolio
Fixed Income Portfolio
High Yield Portfolio
Balanced Portfolio
Multi-Asset-Class Portfolio*
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Multi-Asset-Class Portfolio to keep Total Operating
Expenses from exceeding 0.78%
37
<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:
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He joined the management team for the High Yield Portfolio
in 1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986. She
joined the management team 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 joined
the management team for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
joined the management team for the Fixed Income Portfolio in 1984, the Domestic
Fixed Income Portfolio in 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.
David P. Chu, Vice President, Morgan Stanley, joined MAS in 1998. He served as
Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997 for
NationsBank and its subsidiary, TradeStreet Investment Associates. He joined the
management team for the Mid Cap Growth Portfolio in 1998.
Bradley S. Daniels, Vice President, Morgan Stanley, joined MAS in 1985. He
joined the management team 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
joined the management team 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
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 joined the management team for
the International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team for the High Yield Portfolio in 1989 and the
Multi-Market Fixed Income Portfolio in 1997.
38
<PAGE>
William B. Gerlach, Principal, Morgan Stanley, joined MAS in 1991. He joined the
management team for the Small Cap Value and Mid Cap Value Portfolios in 1996.
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
joined the management team 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.
James J. Jolinger, Principal, Morgan Stanley, joined MAS in 1994. He served as
Equity Analyst for Oppenheimer Capital from 1987-1994. He joined the management
team for the Equity Portfolio in 1997.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team 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 joined the management team 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 Premier Trust
Company from 1994 to 1995; and as a Research Analyst for Leavy Investment
Management from 1993-1994. He joined the management team for the Mid Cap Value
and Small Cap Value Portfolio in 1998.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
joined the management team 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 joined the management team 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, Managing Director, Morgan Stanley, joined MAS in 1992. He
joined the management team 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
joined the management team 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.
39
<PAGE>
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
DISTRIBUTION PLAN
The Fund has adopted a Plan of Distribution for each Portfolio's Adviser Class
Shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
each Portfolio pays the Distributor a monthly distribution fee at an annual rate
of 0.25% of the Portfolio's average daily net assets attributable to Adviser
Class Shares. The Distributor may keep any or all of this fee as compensation
for its services in connection with distributing Adviser Class Shares or
providing shareholder or account maintenance services. The Distributor also may
use this fee to pay financial intermediaries, plan fiduciaries, and investment
professionals, including the Adviser, for providing distribution support
services, and/or account maintenance services to shareholders (including, when
applicable, any underlying beneficial owners) of Adviser Class Shares.
YEAR 2000 DISCLOSURE STATEMENT
The management and distribution services that the Adviser and Distributor
provide to the Fund depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser and Distributor
have been actively working on necessary changes to their own computer systems to
deal with the year 2000 problem and expect that their systems will be adapted
before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Adviser and Distributor are monitoring their remedial
efforts, however, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the portfolios' investments may be
adversely affected.
40
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. Certain information
reflects financial results for a single Portfolio share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by _______________, whose
report, along with the Fund's financial statements, are incorporated by
reference into the Fund's Statement of Additional Information and are included
in the Fund's September 30, 1998 Annual Report to Shareholders.
As of September 30, 1998, the Adviser Class Shares of the __ Portfolios had not
commenced operation. We have provided historical financial information for
International Class Shares of these Portfolios for your information.
[Insert Financial Highlights here]
41
<PAGE>
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428
1-800-354-8185
ADVISER CLASS PROSPECTUS
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January __, 1999, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the Fund's
annual report, you will find a discussion of the market conditions and the
investment strategies that significantly affected each Portfolio's performance
during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number above. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without charge, by contacting
your Financial Intermediary.
You may obtain more information about the Fund through the Internet at
www.______.com.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
"http://www.sec.gov"; or (3) By mail: you may request documents, upon payment of
a duplicating fee, by writing to Securities Exchange Commission, Public
Reference Section, Washington, D.C. 20549-6009. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-03980.
42
<PAGE>
MAS
- ---
MAS FUNDS
JANUARY 31, 1999
MAS FUNDS (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 2 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a subsidiary of Morgan Stanley Dean
Witter Investment Management, Inc., is the Fund's investment adviser. This
prospectus offers shares of the following portfolios (each a "Portfolio" and
collectively the "Portfolios"):
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
ADVISORY MORTGAGE PORTFOLIO
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Morgan Stanley Dean Witter Investment Management
One Tower Bridge, West Conshohocken, PA 19428.
For information, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
o Investment Objectives, Principal Investment Strategies, Risks and
Performance
o Advisory Foreign Fixed Income Portfolio
o Advisory Mortgage Portfolio
FEES AND EXPENSES
o Shareholder Fees and Annual Portfolio Operating Expenses
SHAREHOLDER INFORMATION
o How to Purchase and Redeem Shares
o Dividends, Distributions and Taxes
MANAGEMENT
o Information About the Adviser and the Portfolio Managers
FINANCIAL HIGHLIGHTS
2
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
o Investment Objective
o Principal Investment Strategy
o Principal Risks
The following discussions use a number of important investment terms. These
terms, printed in bold, are explained in the section entitled "Important
Investment Information," which follows the individual Portfolio summaries.
There is more information about the Portfolios in the Statement of Additional
Information ("SAI"), which legally is a part of this prospectus. For details
about how to obtain the SAI, and other reports and information, see the back
cover of this prospectus.
INVESTOR SUITABILITY
The Portfolios may be suitable for you if you are a long-term investor who can
accept the risks of investing in the stock and bond markets. The Portfolios are
designed principally for investment by fiduciary investors who are entrusted
with the responsibility of investing assets held for the benefit of others.
While the Portfolios consider whether their securities transactional will
generate distributions taxable at capital gains or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
3
<PAGE>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
Objective: The Advisory Foreign Fixed Income Portfolio seeks above average total
return over a market cycle of three to five years.
Approach: This Portfolio is available only to the Adviser's private advisory
clients. It invests primarily in high grade FOREIGN FIXED INCOME SECURITIES. The
Portfolio may invest to a limited degree in EMERGING MARKET FIXED INCOME
SECURITIES that meet the Portfolio's rating requirements. The Adviser will use
FUTURES, SWAPS and other DERIVATIVES in managing the Portfolio. The Portfolio
may at times invest all or a portion of its assets in U.S. securities as a
defensive strategy.
Process: The portfolio management team determines the desired country, currency
and duration exposures for the Portfolio. The Adviser manages the Portfolio's
duration and exposure to particular countries and currencies by conducting
fundamental research on relative values and analyzing economic, interest rate
and exchange rate trends. The portfolio managers select particular securities
for the Portfolio in various sectors within the overall guidelines set by the
team.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Average weighted maturity
fixed income securities of issuers in generally greater than 5 years
at least 3 countries other than the U.S. o Benchmark: Salomon Broad
o 100% of securities rated A or higher Investment Grade Index
o Ticker Symbol ___________ o CUSIP No. _________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is subject to the risks of investing in foreign
fixed income securities. News and events unique to a country or region will
affect those markets and their issuers, yet may have little or no effect on the
U.S. economy or similar issuers located in the United States. Many of the
Portfolio's investments will be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These changes may happen separately from, and in
response to, events that do not otherwise affect the value of the security in
the issuer's home country. The Adviser may use derivatives and other techniques
to manage these risks. However, the Adviser cannot guarantee that it will
succeed in doing so. Hedging the Portfolio's currency risks involves certain
risks, including the possibility of mismatching the Portfolio's obligations
under a forward or futures contract with the value of securities denominated in
a particular currency.
Market prices of fixed income securities respond to economic developments,
especially changes in interest rates, and perceptions of the creditworthiness of
individual issuers. Generally, fixed income securities decrease in value as
interest rates rise and vice versa. Prices of fixed income securities also
generally will fall if an issuer's credit rating declines, and rise if it
improves.
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. As a result, the Portfolio's performance may be
affected by the rise and fall in the price of fixed income securities of a
relatively small number of companies. The Portfolio also is
4
<PAGE>
subject to the risks associated with investing in derivatives and emerging
market securities. Please read the section entitled "Important Investment
Information" for more information about these risks.
Portfolio Managers: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley.
PORTFOLIO PERFORMANCE
The bar chart and table below show the Portfolio's performance year-by year and
its highest and lowest quarterly performance. The variability of performance
over time provides an indication of the risks of investing in the Portfolio.
Insert Bar Chart
* Total Return for the period October 1 - December 31, 1998 was __%.
---------------------------------------------------------
Highest Quarter Lowest Quarter
---------------------------------------------------------
--/--/-- --/--/--
---------------------------------------------------------
--% --%
---------------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
--------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------- ----------- ----------- ------------
Advisory Foreign Fixed Income Portfolio
- ---------------------------------------- ----------- ----------- ------------
Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------
5
<PAGE>
ADVISORY MORTGAGE PORTFOLIO
Objective: The Advisory Mortgage Portfolio seeks returns consistent with returns
generated by the market for mortgage securities.
Approach: This Portfolio is available only to the Adviser's private advisory
clients. It invests primarily in investment grade MORTGAGE SECURITIES of U.S.
Government and private issuers, and in MORTGAGE DERIVATIVES. The Portfolio also
may invest in other U.S. Government securities and investment grade FIXED INCOME
SECURITIES. The Adviser will use FUTURES, SWAPS and other DERIVATIVES in
managing the Portfolio.
Process: The Adviser sets targets for how the Portfolio should respond to
changes in interest rates, the yield curve, and prepayment rates on underlying
mortgages. The Adviser may make the Portfolio more sensitive to changes in
interest rates when bonds offer greater value based on interest rates adjusted
for inflation. Similarly, the Adviser may increase the Portfolio's sensitivity
to changes in the yield curve when long maturity interest rates offer
exceptional value relative to short maturity interest rates. The Adviser also
may increase the Portfolio's exposure to prepayments on underlying mortgages
when mortgage yields, adjusted for the expected level of prepayments, indicate
unusual value in mortgage securities.
- --------------------------------------------------------------------------------
o Generally at least 65% invested in o Average weighted maturity generally
mortgage securities greater than 7 years
o 100% investment grade securities o Average duration generally 2-7 years
o Ticker Symbol _________ o Benchmark: Lehman Mortgage Index
o CUSIP No. __________
- --------------------------------------------------------------------------------
Principal Risks: The Portfolio is primarily exposed to the risks associated with
investing in mortgage securities. Market prices of the Portfolio's holdings
respond to economic developments, especially changes in interest rates, as well
as to perceptions of the creditworthiness of individual issuers. Generally,
fixed income securities decrease in value as interest rates rise and vice versa.
Prices of fixed income securities also generally will fall if an issuer's credit
rating declines, and rise if it improves. The prices of mortgage securities may
be particularly sensitive to changes in interest rates because of the risk that
borrowers will become more or less likely to refinance their mortgages. For
example, an increase in interest rates generally will reduce prepayments,
effectively lengthening the maturity of some mortgage securities, and making
them subject to more drastic price movements. Because of prepayment issues, it
is not possible to predict the ultimate maturity of mortgage securities. The
Portfolio also is subject to the risks associated with using derivatives. Please
read the section entitled "Important Investment Information" for more
information about these risks.
Portfolio Managers: Kenneth B. Dunn and Scott F. Richard.
6
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart and table below show the Portfolio's performance year-by year and
its highest and lowest quarterly performance. The variability of performance
over time provides an indication of the risks of investing in the Portfolio.
Insert Bar Chart
* Total Return for the period October 1 - December 31, 1998 was __%.
---------------------------------------------------------
Highest Quarter Lowest Quarter
------------------------------ --------------------------
--/--/-- --/--/--
------------------------------ --------------------------
--% --%
---------------------------------------------------------
The following table shows the Portfolio's average annual total return for the
past 1, 5, and 10 year periods and the corresponding returns of its benchmark
index. How the Portfolio has performed in the past does not necessarily indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31/98
-----------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------ ------------- ----------- ---------------
Advisory Mortgage Portfolio
- ------------------------------------ ------------- ----------- ---------------
Lehman Mortgage Index
- --------------------------------------------------------------------------------
7
<PAGE>
IMPORTANT INVESTMENT INFORMATION
This section describes the principal types of investments that various
Portfolios may make and some of the risks associated with those investments.
More information about these investments and risks is contained in the Statement
of Additional Information.
FIXED INCOME SECURITIES
Fixed income securities include a wide variety of investments, such as U.S.
Government securities; securities issued by federal or federally sponsored
agencies ("agencies"); corporate bonds; asset-backed securities; mortgage
securities; high yield securities; municipal bonds; loan participations and
assignments; zero coupon bonds; convertible securities; Yankee bonds; repurchase
agreements; commercial paper; and cash equivalents.
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers. The
value of a fixed income security typically moves in the opposite direction of
prevailing interest rates: if rates rise, the value of a fixed income security
falls; if rates fall, the value increases. The maturity and duration of a fixed
income instrument also affects the extent to which the price of the security
will change in response to these and other factors. Longer term securities tend
to experience larger changes than shorter term securities because they are more
sensitive to changes in interest rates or in the credit ratings of the issuers.
Certain types of fixed income securities, such as inverse floaters, are designed
to respond differently to changes in interest rates.
Certain fixed income securities pay a floating or variable rate of interest. The
interest rates on these securities will vary with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. The
variation in the interest rate may enable an investor to trade a floating or
variable rate security at par on a daily or periodic basis. Some obligations
carry a demand feature permitting the holder to tender them back to the issuer
or to a third party at par value before maturity. If the demand feature is an
obligation of a foreign entity, it will be subject to certain risks described
under FOREIGN SECURITIES, below.
Some fixed income securities may be called (redeemed by the issuer) prior to
final maturity. The risk of holding a callable security is that if it is called,
a Portfolio may have to reinvest the proceeds at a lower rate of interest.
Duration: The average duration of a fixed income portfolio measures its exposure
to the risk of changing interest rates. A Portfolio with a lower average
duration generally will experience less price volatility in response to changes
in interest rates as compared with a Portfolio with a higher average duration.
Mortgage Securities: Mortgage securities are subject to the risk that as
interest rates fall, borrowers will refinance their mortgages, resulting in
prepayment of principal. A Portfolio holding mortgage securities that are
experiencing prepayments will have to reinvest these principal payments at lower
prevailing interest rates. On the other hand, when interest rates rise,
8
<PAGE>
borrowers are less likely to refinance, resulting in lower prepayments. This can
effectively extend the maturity of a Portfolio's mortgage securities, resulting
in greater price volatility.
High Yield Securities: Fixed income securities that are not investment grade are
commonly referred to as junk bonds or high yield, high risk securities. These
securities offer a higher yield than other, higher rated securities, but they
carry a greater degree of risk and are considered speculative by the major
credit rating agencies. High yield securities may be issued by companies that
are restructuring, are smaller and less credit worthy, or are more highly
indebted than other companies. This means that they may have more difficulty
making scheduled payments of principal and interest. Changes in the value of
high yield securities are influenced more by changes in the financial and
business position of the issuing company than by changes in interest rates when
compared to investment grade securities.
Yankee Bonds: Yankee bonds are U.S.-dollar denominated fixed income instruments
issued by foreign governments and corporations and sold in the U.S. They are
considered U.S. securities for purposes of the Portfolios' investment policies.
FOREIGN SECURITIES
While many of the characteristics and risks of foreign fixed income securities
are similar to those of domestic securities, investing in foreign securities
involves certain additional risks. Foreign issuers generally are subject to
different accounting, auditing and financial reporting standards than U.S.
companies. There may be less information available to the public about foreign
issuers. Securities of foreign issuers can be less liquid and experience greater
price movements. Foreign stock exchanges, broker-dealers, and listed issuers may
be subject to less government regulation and oversight. The cost of investing in
foreign securities, including brokerage commissions and custodial expenses, can
be higher than in the U.S. In some foreign countries, there is also the risk of
government expropriation, excessive taxation, political or social instability,
the imposition of currency controls, or diplomatic developments that could
affect the Portfolios' investments in those countries. There also can be
difficulty obtaining and enforcing judgments in foreign countries.
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since the
Portfolios must convert the value of foreign securities into dollars, changes in
currency exchange rates can increase or decrease the U.S. dollar value of the
Portfolios' assets. The Adviser may use certain derivatives to offset this risk.
The risks of hedging currency risk are described below under FORWARDS and
FUTURES. The Adviser may in its discretion choose not to hedge against currency
risks. In addition, certain market conditions may make it impractical or
uneconomical to do so.
Emerging Markets Securities: Investing in emerging markets securities enhances
the risks of foreign investing. The risk of political or social upheaval,
expropriation, and restrictive controls on foreign investors' ability to
repatriate capital is greater in emerging markets. Emerging market securities
generally are less liquid and subject to wider price and currency fluctuations
than securities issued in more developed countries. In certain countries, there
may be few
9
<PAGE>
publicly traded securities, and the market may be dominated by a few issuers or
sectors. Fixed income securities issued by emerging markets issuers are more
likely to be considered equivalent to risky high yield securities. Investment
funds and structured investments are mechanisms for U.S. and other investors to
invest in certain emerging markets that have laws precluding or limiting direct
investments in their securities by foreign investors. Brady Bonds are debt
obligations created as part of the restructuring of commercial bank loans to
entities in emerging market countries. Brady Bonds may be collateralized or not,
and may be issued in various currencies (most are U.S.-dollar denominated).
DERIVATIVES AND OTHER INVESTMENTS
The Portfolios may use derivatives to pursue portfolio strategies and
objectives. Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include futures, options, forward contracts, swaps,
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), and structured notes.
Derivatives sometimes offer the most economic way of pursuing a particular
investment strategy, limiting certain risks, or enhancing potential returns.
Forward contracts are used to protect against uncertainty in the level of future
foreign currency exchange rates. The Portfolios may use futures to gain exposure
to an entire market (e.g., stock index futures) or to control their exposure to
changing foreign currency exchange rates. Portfolios investing in fixed income
securities will use futures to control their exposure to changes in interest
rates and to manage the overall maturity and duration of their securities
holdings. If a Portfolio buys an option, it buys a legal contract giving it the
right to buy or sell a specific amount of a security or futures contract at an
agreed-upon price. If a Portfolio "writes" an option, it sells to another person
the right to buy from or sell to the Portfolio a specific amount of a security
or futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices and commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
Certain derivative instruments are publicly traded on exchanges or
over-the-counter, while others are privately negotiated. The Portfolios may
enter into public or private over-the-counter derivatives transactions with
counterparties that meet the Fund's requirements for credit quality and
collateral. A Portfolio will not use derivatives to increase a Portfolio's level
of risk above the level that could be achieved using only traditional investment
securities. A Portfolio will not use derivatives as an indirect way of investing
in assets that it cannot, as a matter of policy, invest in directly.
10
<PAGE>
Risks of Derivatives: The primary risks of derivatives are: (i) changes in the
market value of securities held by a Portfolio, and of derivatives relating to
those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. See the Statement of Additional Information for more about the
risks of different types of derivatives.
- --------------------------------------------------------------------------------
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Each Portfolio may enter into futures contracts and options on futures contracts
for bona fide hedging purposes to an unlimited extent. It also can enter into
futures contracts and options thereon for other purposes, provided that no more
than 5% of the Portfolio's total assets at the time of the transaction are
required as margin and option premiums to secure the Portfolio's obligations
under such contracts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Each Portfolio may invest in certain derivatives, such as forwards, futures,
options and mortgage derivatives as well as when-issued securities which require
the Portfolio to segregate some or all of its cash or liquid securities to cover
its obligations under those instruments. At certain levels, this can cause a
Portfolio to lose flexibility in managing its investments properly, responding
to shareholder redemption requests, or meeting other obligations. A Portfolio in
that position could be forced to sell other securities that it wanted to retain
or to realize unintended gains or losses.
- --------------------------------------------------------------------------------
Mortgage Derivatives: CMOs and SMBS are derivatives based on mortgage
securities. CMOs are issued in a number of series (known as "tranches"), each of
which has a stated maturity. Cash flow from the underlying mortgages is
allocated to the tranches in a predetermined, specified order. SMBS are
multi-class mortgage securities issued by U.S. government agencies and
instrumentalities and financial institutions. They usually have two classes, one
receiving most of the principal payments from the mortgages, and one receiving
most of the interest. In some cases, classes may receive interest only (called
"IOs") or principal only (called "POs"). Both CMOs and SMBS are subject to the
risks of price movements in response to changing interest rates and the level of
prepayments made by borrowers. Depending on the class of CMO or SMBS that a
Portfolio holds, these price movements may be significantly greater than that
experienced by mortgage securities generally, depending on whether the payments
are predominantly based on principal or interest paid on the underlying
mortgages. In addition, the yield to maturity of IOs and POs is extremely
sensitive to prepayment levels. As a result, a high rate of prepayments can have
a material effect on a Portfolio's yield to maturity and could cause a Portfolio
to lose money on the investment.
11
<PAGE>
- --------------------------------------------------------------------------------
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in certain fixed
income securities for temporary defensive purposes. See the Statement of
Additional Information for more information about the types of fixed income
securities in which the Portfolios may invest. If the Adviser incorrectly
predicts the effects of these changes, such defensive investments may adversely
affect the Portfolios' performance. Consistent with their investment policies,
the Portfolios also will purchase and sell securities without regard to the
effect on portfolio turnover. Higher portfolio turnover (e.g., over 100% per
year) will cause the Portfolio to incur additional transaction costs and may
result in taxable gains being passed through to shareholders.
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table below the fees and expenses that you may pay if you buy
and hold shares of the Portfolios. The Portfolios do not charge any sales loads
or similar fees when you purchase or redeem shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Portfolio Management Distribution Other Total Annual Fund After MAS Waiver/
Fees* (12b-1) Fees Expenses Operating Expenses* Reimbursement
<S> <C> <C> <C> <C> <C>
Advisory Foreign Fixed % None % % %
Income Portfolio
Advisory Mortgage % None % % %
</TABLE>
- --------------
* The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown. Fee waivers and/or expense reimbursements are voluntary and the
Adviser reserves the right to terminate any waiver and/or reimbursement
at any time and without notice.
12
<PAGE>
Example
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory Foreign Fixed Income Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio $ $ $ $
After MAS Waiver/Reimbursement $ $ $ $
- ------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL SHAREHOLDER INFORMATION
PURCHASING 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 the Fund.
Shares of each portfolio may be purchased at the net asset value per share (NAV)
next determined after we receive your purchase order.
Other Purchase Information: We may suspend the offering of shares of any
portfolio or reject any purchase orders when we think it is in the best interest
of the Fund. We may waive the minimum initial and additional investment amounts
in certain cases.
Purchases of a portfolio's shares will be made in full and fractional shares of
the portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each portfolio by mail, or, if authorized, by telephone
at no charge. The value of shares redeemed may be more or less than the purchase
price, depending on the NAV at the time of redemption.
BY MAIL: Each portfolio will redeem shares at the NAV 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.
13
<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. 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;
and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE: If you have authorized the Telephone Redemption Option on the
Account Registration Form, you may request a redemption of shares by calling MAS
Funds' Client Services Group at 1-800-354-8185 and requesting that the
redemption proceeds be mailed or wired to you. You cannot redeem shares by
telephone if you hold share certificates for those shares.
BY FACSIMILE: Written requests in good order for redemptions, exchanges, and
transfers may be forwarded to the Fund via facsimile at 1-610-940-5284. If you
make a request via facsimile, you must call Client Services to ensure that the
Fund properly received your instructions. The original request must be promptly
mailed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0686.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We 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 or under any emergency circumstances.
In certain cases, we may determine that it is in the best interest of other
shareholders not to pay redemption proceeds in cash. We may pay you partly or
entirely by distributing to you readily marketable securities held by the
portfolio from which you are redeeming. You may incur brokerage charges when you
sell those securities.
14
<PAGE>
VALUATION OF SHARES
We determine the NAV of the portfolios as of one hour after the close of the
bond markets (normally 4:00 p.m. Eastern Time). When no quotations are readily
available for securities or when the value of securities has been materially
affected by events occurring after the close of the market, we will determine
the value for those securities in good faith at fair value using methods
approved by the Board of Trustees.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. A
portfolio's NAV may change on a day when you can't purchase or redeem shares
because some portfolios invest in foreign securities that trade on days when the
Fund is closed. A may be open on a day when U.S. bond markets are closed, such
as Columbus Day. On such a day, the NAV of the portfolios will still be
determined at 4:00 p.m. Eastern Time that day, but purchase orders via wire will
not be effective until the following day.
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
---------------------------------------------------------------------------
Portfolio Monthly Quarterly
---------------------------------------------------------------------------
Advisory Foreign Fixed Income X
---------------------------------------------------------------------------
Advisory Mortgage X
---------------------------------------------------------------------------
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the portfolio unless you elect otherwise in writing. If you
want to change how your dividends are paid you must notify MAS in writing.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. 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 may be taxable at different rates
depending on the length of time the Fund holds its assets.
15
<PAGE>
Investment income received by the Advisory Foreign Fixed Income Portfolio from
sources within foreign countries may be subject to foreign income taxes. The
Portfolio may be able to pass through to you for foreign tax credit purposes the
amount of foreign income taxes that it paid.
Distributions paid in January but declared by a portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a portfolio are taxable events.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP (the
"Adviser"), is a Pennsylvania limited liability partnership founded in 1969. The
Adviser is a subsidiary of Morgan Stanley Dean Witter Investment Management,
Inc. The Adviser is located at One Tower Bridge, West Conshohocken, PA 19428.
The Adviser provides investment advisory services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of
________ had in excess of $___ billion in assets under management.
The Adviser makes investment decisions for the Fund's portfolios and places each
portfolio's purchase and sales orders. Each portfolio, in turn, pays the Adviser
an annual advisory fee calculated by applying a quarterly rate. The following
table shows the Adviser's contractual and actual rates of compensation for the
Fund's 1998 fiscal year.
Contractual FY 1998
Compensation Actual
Rate Compensation Rate
------------ -----------------
Advisory Foreign Fixed Income Portfolio*
Advisory Mortgage Portfolio*
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios to keep Total Operating Expenses from exceeding ___% and ___%,
respectively.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
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:
16
<PAGE>
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
joined the management team 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
Multi-Market Fixed Income Portfolio in 1997.
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
joined the management team 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.
Michael Kushma, Principal, Morgan Stanley, joined Morgan Stanley in 1988. He
joined the management team for the Global Fixed Income and International Fixed
Income Portfolios in 1996.
Paul F. O'Brien, Principal, Morgan Stanley, joined MAS in 1996. He served as
Head of European Economics from 1993 through 1995 for J.P. Morgan. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1996.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS in 1992. He
joined the management team for the Mortgage-Backed Securities Portfolio in 1992,
the Limited Duration, Intermediate Duration, and the Advisory Mortgage Portfolio
in 1995.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
joined the management team 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.
YEAR 2000 DISCLOSURE STATEMENT
The management and distribution services that the Adviser and Distributor
provide to the Fund depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser and Distributor
have been actively working on necessary changes to their own computer systems to
deal with the year 2000 problem and expect that their systems will be adapted
before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Adviser and Distributor are monitoring their remedial
efforts, however, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning
17
<PAGE>
January 1, 2000. Improperly functioning trading systems may result in settlement
problems and liquidity issues. In addition, corporate and governmental data
processing errors may result in production problems for individual companies and
overall economic uncertainties. Earnings of individual issuers will be affected
by remediation costs, which may be substantial and may be reported
inconsistently in U.S. and foreign financial statements. Accordingly, the
portfolios' investments may be adversely affected.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio. Certain information reflects
financial results for a single Portfolio share. The total returns in the tables
represent the rate that an investor would have earned (or lost) on an investment
in each Portfolio (assuming reinvestment of all dividends and distributions).
This information has been audited by _______________, whose report, along with
the Fund's financial statements, are incorporated by reference into the Fund's
Statement of Additional Information and are included in the Fund's September 30,
1998 Annual Report to Shareholders.
[Insert Financial Highlights here]
18
<PAGE>
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428
1-800-354-8185
Advisory Foreign Fixed Income Portfolio
Advisory Mortgage Portfolio
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January __, 1999, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the Fund's
annual report, you will find a discussion of the market conditions and the
investment strategies that significantly affected each Portfolio's performance
during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number above. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without charge, by contacting
your Financial Intermediary.
You may obtain more information about the Fund through the Internet at
www.______.com.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
"http://www.sec.gov"; or (3) By mail: you may request documents, upon payment of
a duplicating fee, by writing to Securities Exchange Commission, Public
Reference Section, Washington, D.C. 20549-6009. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-03980.
19
<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1999
MAS Funds (the "Fund") is a no load mutual fund consisting of thirty portfolios
(each, a "Portfolio") offering a variety of investment alternatives. This
Statement of Additional Information sets forth information about the Fund
applicable to all thirty Portfolios.
This Statement is not a prospectus but should be read in conjunction with the
Fund's prospectuses dated January 31, 1999, 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
<TABLE>
<CAPTION>
<S> <C>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES....................................2
INVESTMENT STRATEGIES.........................................................6
INVESTMENTS...................................................................9
INVESTMENT LIMITATIONS.......................................................34
PURCHASE OF SHARES...........................................................36
REDEMPTION OF SHARES.........................................................36
TRANSACTIONS WITH BROKER/DEALERS.............................................36
SHAREHOLDER SERVICES.........................................................37
VALUATION OF SHARES..........................................................37
MANAGEMENT OF THE FUND.......................................................39
INVESTMENT ADVISER...........................................................41
PRINCIPAL UNDERWRITER........................................................44
DISTRIBUTION OF SHARES.......................................................44
FUND ADMINISTRATION..........................................................45
OTHER SERVICE PROVIDERS......................................................46
BROKERAGE TRANSACTIONS.......................................................46
GENERAL INFORMATION..........................................................51
TAX CONSIDERATIONS...........................................................54
PRINCIPAL HOLDERS OF SECURITIES..............................................57
PERFORMANCE INFORMATION......................................................57
COMPARATIVE INDICES..........................................................67
FINANCIAL STATEMENTS.........................................................72
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS...............................72
</TABLE>
<PAGE>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES
The prospectus describes the investment objectives, principal investment
strategies and principal risks associated with each Portfolio. The Portfolios
may engage in a variety of investment strategies and invest in a variety of
securities and other instruments. The following tables summarize the permissible
strategies and investments for each Portfolio (abbreviations are explained
following each table). The table excludes investments that Portfolios may make
solely for temporary defensive purposes. More details about each strategy and
investment are provided in the discussion that follows the table.
- --------------------------------------------------------------------------------
EQUITY AND BALANCED PORTFOLIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Emerging
Balanced Markets International Mid Cap
Balanced Plus Value Equity Growth Equity Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Strategies
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Management x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Core Equity Investing x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing x/
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Stock Investing x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield Investing x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
International Equity Investing x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Value Investing x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Value Stock Investing x/
- ----------------------------------------------------------------------------------------------------------------------------------
Investments
- ----------------------------------------------------------------------------------------------------------------------------------
ADRs x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Agencies x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Asset-Backeds x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Mid Cap Multi-Asset Small Cap Small Cap
Value Class Growth Value Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Strategies
- ---------------------------------------------------------------------------------------------------------------------
Asset Allocation Management x/
- ---------------------------------------------------------------------------------------------------------------------
Core Equity Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation x/
- ---------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Foreign Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Growth Stock Investing x/
- ---------------------------------------------------------------------------------------------------------------------
High Yield Investing x/
- ---------------------------------------------------------------------------------------------------------------------
International Equity Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management x/
- ---------------------------------------------------------------------------------------------------------------------
Mortgage Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Value Investing x/
- ---------------------------------------------------------------------------------------------------------------------
Value Stock Investing x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Investments
- ---------------------------------------------------------------------------------------------------------------------
ADRs x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Agencies x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Asset-Backeds x/
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Emerging
Balanced Markets International Mid Cap
Balanced Plus Value Equity Growth Equity Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brady Bonds x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
CMOs x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Convertibles x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Corporates x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Depositary Receipt x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Floaters x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Currency x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Securities x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Forwards x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Futures x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield Securities x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Inverse Floaters x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Companies x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Funds x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Loan Participations and Assignments x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Municipals x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Options x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Rights x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
SMBS x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Lending x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Short Sales x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Investments x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Notes x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Swaps x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Mid Cap Multi-Asset Small Cap Small Cap
Value Class Growth Value Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brady Bonds x/
- ---------------------------------------------------------------------------------------------------------------------
Cash Equivalents x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
CMOs x/
- ---------------------------------------------------------------------------------------------------------------------
Commercial Paper x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Common Stock x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Convertibles x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Corporates x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Depositary Receipt x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities x/
- ---------------------------------------------------------------------------------------------------------------------
Floaters x/
- ---------------------------------------------------------------------------------------------------------------------
Foreign Currency x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Foreign Equity x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Securities x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Forwards x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Futures x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
High Yield Securities x/
- ---------------------------------------------------------------------------------------------------------------------
Inverse Floaters x/
- ---------------------------------------------------------------------------------------------------------------------
Investment Companies x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Investment Funds x/
- ---------------------------------------------------------------------------------------------------------------------
Loan Participations and Assignments x/
- ---------------------------------------------------------------------------------------------------------------------
Mortgage Securities x/
- ---------------------------------------------------------------------------------------------------------------------
Municipals x/
- ---------------------------------------------------------------------------------------------------------------------
Options x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Repurchase Agreements x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Rights x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
SMBS x/
- ---------------------------------------------------------------------------------------------------------------------
Securities Lending x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Short Sales x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Structured Investments x/
- ---------------------------------------------------------------------------------------------------------------------
Structured Notes x/
- ---------------------------------------------------------------------------------------------------------------------
Swaps x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Emerging
Balanced Markets International Mid Cap
Balanced Plus Value Equity Growth Equity Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Warrants x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
When-Issued Securities x/ x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Yankees x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons x/ x/ x/ x/ x/ x/
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Mid Cap Multi-Asset Small Cap Small Cap
Value Class Growth Value Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Governments x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Warrants x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
When-Issued Securities x/ x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
Yankees x/
- ---------------------------------------------------------------------------------------------------------------------
Zero Coupons x/ x/ x/ x/ x/
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Domestic Global
Cash Fixed Fixed Fixed Fixed High Intermediate
Reserves Income Income Income Income Yield Duration
Portfolio Portfolio Portfolio Portfolio II Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C> <C>
Strategies
- -----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Investing x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Investing x/
- -----------------------------------------------------------------------------------------------------------------------------------
Municipals Management
- -----------------------------------------------------------------------------------------------------------------------------------
Value Investing x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Investments
- -----------------------------------------------------------------------------------------------------------------------------------
Agencies x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Asset-Backeds x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
International Mortgage-
Fixed Limited Backed Multi-Market
Income duration Securities Fised Income Municipal NY Municipal
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Strategies
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Investing x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
High Yield Investing x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage Investing x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Money Market Investing
- -----------------------------------------------------------------------------------------------------------------------------
Municipals Management x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Value Investing x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Investments
- -----------------------------------------------------------------------------------------------------------------------------
Agencies x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Asset-Backeds x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Brady Bonds x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Advisory
Special Foreign
Purpose Targeted Fied Advisory
Fixed Income Duration Income Mortgage
Fortfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Strategies
- -----------------------------------------------------------------------------------------
Emerging Markets Investing
- -----------------------------------------------------------------------------------------
Fixed Income and Asset Allocation x/
- -----------------------------------------------------------------------------------------
Foreign Fixed Income Investing x/ x/ x/
- -----------------------------------------------------------------------------------------
Foreign Investing x/ x/ x/
- -----------------------------------------------------------------------------------------
High Yield Investing x/ x/
- -----------------------------------------------------------------------------------------
Maturity and Duration Management x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Mortgage Investing x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Money Market Investing
- -----------------------------------------------------------------------------------------
Municipals Management
- -----------------------------------------------------------------------------------------
Value Investing x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Investments
- -----------------------------------------------------------------------------------------
Agencies x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Asset-Backeds x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Brady Bonds x/ x/ x/
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Domestic Global
Cash Fixed Fixed Fixed Fixed High Intermediate
Reserves Income Income income Income Yield Duration
Portfolio Portfolio Portfolio Portfolio II Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
CMOs x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Convertibles x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Corporates x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Floaters x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Currency x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity x/
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Securities x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Forwards x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Securities x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Inverse Floaters x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Companies x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Loan Participations and Assignments x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Municipals x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
NY Municipals
- -----------------------------------------------------------------------------------------------------------------------------------
Options x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
SMBS x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Short Sales x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Structured Investments
- -----------------------------------------------------------------------------------------------------------------------------------
Structured Notes x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Swaps x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------------------------------------------------------------
When-Issued Securities x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Yankees x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
International Mortgage-
Fixed Limited Backed Multi-Market
Income duration Securities Fised Income Municipal NY Municipal
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Strategies
- -----------------------------------------------------------------------------------------------------------------------------
Cash Equivalents x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
CMOs x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Commercial Paper x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Convertibles x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Corporates x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Floaters x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Currency x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Equity
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Securities x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Forwards x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Futures x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
High Yield Securities x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Inverse Floaters x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Investment Companies x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Loan Participations and Assignments x/
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage Securities x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Municipals x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
NY Municipals x/
- -----------------------------------------------------------------------------------------------------------------------------
Options x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Preferred Stock x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
SMBS x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Securities Lending x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Short Sales x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Structured Investments x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Structured Notes x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Swaps x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Governments x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Warrants x/
- -----------------------------------------------------------------------------------------------------------------------------
When-Issued Securities x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Yankees x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
Zero Coupons x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Advisory
Special Foreign
Purpose Targeted Fied Advisory
Fixed Income Duration Income Mortgage
Fortfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Cash Equivalents x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
CMOs x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Commercial Paper x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Convertibles x/ x/ x/
- -----------------------------------------------------------------------------------------
Corporates x/ x/ x/
- -----------------------------------------------------------------------------------------
Emerging Markets Securities x/
- -----------------------------------------------------------------------------------------
Floaters x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Foreign Currency x/ x/ x/
- -----------------------------------------------------------------------------------------
Foreign Equity
- -----------------------------------------------------------------------------------------
Foreign Fixed Income Securities x/ x/ x/
- -----------------------------------------------------------------------------------------
Forwards x/ x/ x/
- -----------------------------------------------------------------------------------------
Futures x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
High Yield Securities x/ x/
- -----------------------------------------------------------------------------------------
Inverse Floaters x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Investment Companies x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Loan Participations and Assignments x/ x/
- -----------------------------------------------------------------------------------------
Mortgage Securities x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Municipals x/ x/ x/
- -----------------------------------------------------------------------------------------
NY Municipals
- -----------------------------------------------------------------------------------------
Options x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Preferred Stock x/ x/ x/
- -----------------------------------------------------------------------------------------
Repurchase Agreements x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Reverse Repurchase Agreements x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
SMBS x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Securities Lending x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Short Sales x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Structured Investments
- -----------------------------------------------------------------------------------------
Structured Notes x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Swaps x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
U.S. Governments x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------------------
When-Issued Securities x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Yankees x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
Zero Coupons x/ x/ x/ x/
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTMENT 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.
FIXED INCOME MANAGEMENT AND ASSET ALLOCATION: In selecting fixed-income
securities for certain Portfolios, the Adviser considers the value offered by
various segments of the fixed income securities market relative to cash
equivalents and equity securities. 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.
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
6
<PAGE>
of custodial and/or market risk, especially where the securities purchased are
not traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).
FOREIGN FIXED INCOME INVESTING: The Adviser invests in foreign bonds and other
fixed-income securities denominated in foreign currencies, where, in the opinion
of the Adviser, the combination of current yield and currency value offer
attractive expected returns. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency futures &
options, forwards and swaps may be used to hedge the currency risk.
FOREIGN INVESTING: Investors should recognize that investing in Foreign bonds
and foreign equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign bonds and Foreign
equities may be less liquid and more volatile than securities of comparable U.S.
companies. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the U.S. With respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Since foreign bonds and foreign equities may be denominated in foreign
currencies, and since a Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, a Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Although a Portfolio will endeavor to achieve the most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's 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: The Adviser focuses on common stocks that generally have
higher growth rates, betas, and price/earnings ratios, and lower yields than the
stock market in general as measured by an appropriate market index.
HIGH YIELD INVESTING: This strategy involves investments 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. See "High Yield Securities," below, for further
discussion of these securities, including risks.
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
7
<PAGE>
appropriate, a Portfolio may also invest in regulated investment companies or
Investment funds which invest in such countries to the extent allowed by
applicable law.
MATURITY AND DURATION MANAGEMENT: One of two primary components of the Adviser's
fixed-income investment strategy is maturity and duration management. The
maturity and duration structure of a Portfolio investing in fixed-income
securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-day
movements in the market, but instead are implemented in anticipation of longer
term shifts in the levels of interest rates. Adjustments made to shorten
portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators. See value investing for a description of the second primary
component of the Adviser's fixed-income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations also
have call provisions. Depending on the relative magnitude of these payments and
the nature of the call provisions, the market values of debt obligations may
respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed-income securities. Duration is a
measure of the expected life of a fixed-income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
Fixed-income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MONEY MARKET INVESTING: 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. The Portfolio is
designed to provide maximum stability of principal. However, because the
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.
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
8
<PAGE>
trend with allowance made for unusual circumstances; (5) typically, the issuer's
industry is well established and the issuer has a strong position within the
industry; and (6) the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is A-1, A-2, or A-3. The rating Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: (1) evaluation of the management
of the issuer; (2) economic evaluation of the issuer's industry or industries
and the appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations.
MORTGAGE INVESTING: As described in the prospectus, certain Portfolios may
invest greater than 50% of their assets, and other Portfolios also may invest,
in mortgage-related securities. These include mortgage securities representing
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 quality.
MUNICIPALS MANAGEMENT: Municipals management emphasizes a diversified portfolio
of high grade municipal debt securities. These securities generally provide
interest income that is exempt from federal regular income tax. However, the
interest on certain types of municipal securities may be subject to the
alternative minimum tax.
The Adviser manages the Fund's municipal Portfolios with the goal of maximizing
their total return. This means that they may invest in taxable investments when
the prospective after-tax total return on such investments is attractive,
regardless of the taxable nature of income on the security. Municipal Portfolios
also may invest in taxable investments such as U.S. Governments, agencies,
corporates, cash equivalents, preferred stocks, mortgage securities,
asset-backeds, floaters, and inverse floaters.
VALUE INVESTING: One of two primary components of the Adviser's fixed-income
strategy is value investing. 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.
VALUE STOCK INVESTING: The Adviser emphasizes common stocks that it believes are
undervalued relative to the stock market in general as measured by an
appropriate market index. The Adviser determines value using a variety of
measures, including price/earnings ratios and price/book ratios. Value stocks
generally pay dividends, but the Adviser may select non-dividend paying stocks
for their value characteristics.
INVESTMENTS
ADRs: American Depository Receipts ("ADRs") are dollar-denominated securities
which are listed and traded in the United States, but which represent claims to
shares of foreign stocks. They are treated as U.S. Equity Securities for
purposes of the Portfolios' investment policies. ADRs may be either sponsored or
unsponsored. Unsponsored ADR facilities typically provide less information to
ADR holders. ADRs also include American Depository Shares.
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AGENCIES: Agencies are Fixed Income Securities issued or guaranteed by federal
agencies and U.S. Government sponsored instrumentalities. They may or may not be
backed by the full faith and credit of the U.S. Government. If they are 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 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 them in meeting their
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.
ASSET-BACKEDS: Asset-Backeds are Fixed Income 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. The short-term
nature of the loans reduces, but does not eliminate, the impact of any change in
prepayment level. Due to amortization, the average life for these securities is
used to measure their 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: Brady Bonds are both Emerging Market Securities and Foreign Fixed
Income Securities. They are created by exchanging existing commercial bank loans
to foreign entities for new obligations for the purpose of restructuring the
issuers' debts 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). They are actively traded in the over-the-counter
secondary market. Portfolios will only invest in Brady Bonds consistent with
quality specifications.
Dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds or
floating rate discount bonds. These Brady Bonds are generally collateralized in
full as to principal due at maturity by U.S. Treasury Zero Coupon Obligations
having 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
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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 due on the Brady Bonds in the normal course. 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 generally are viewed
as speculative.
CASH EQUIVALENTS: Cash equivalents are short-term Fixed Income Securities
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 the Portfolio may purchase.
(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;
(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
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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) The Cash Reserves Portfolio's investments in Cash Equivalents are limited by
the quality, maturity and diversification requirements adopted under Rule 2a-7
of the Investment Company Act of 1940 ("1940 Act").
Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They 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
rated by Moody's or Standard & Poor's.
CMOS: Collateralized mortgage obligations ("CMOs") are Derivatives structured as
debt obligations or multiclass pass-through certificates. CMOs are issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated for federal income tax purposes as a Real
Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after
1991 must elect to be treated as a REMIC or it will be taxable as a corporation
under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash flows
on Mortgage Assets to the various classes of a CMO is to create certain tranches
on which the expected cash flows have a higher degree of predictability than do
the underlying Mortgage Assets. As a general matter, the more predictable the
cash flow is on a particular CMO tranche, the lower the anticipated yield on
that tranche at the time of issue will be relative to prevailing market yields
on Mortgage Assets. As part of the process of creating more predictable cash
flows on certain tranches of a CMO, one or more tranches generally must be
created that absorb most of the changes in the cash flows on the underlying
Mortgage Assets. The yields on these tranches are generally higher than
prevailing market yields on other mortgage related securities with similar
average lives. Principal prepayments on the underlying Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final scheduled distribution dates. Because of the uncertainty of the cash flows
on these tranches, the market prices and yields of these tranches are more
volatile. In addition, some inverse floating rate obligation CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of these CMOs is sensitive not only to changes in interest rates, but
also to changes in prepayment rates on the related underlying Mortgage Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
The magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
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greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risk of prepayment than are other types of
mortgage related securities.
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
that a Portfolio holds 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 STOCK: Common stocks are EQUITY SECURITIES representing an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
Convertibles: Convertibles may be considered either EQUITY SECURITIES or FIXED
INCOME SECURITIES. They are commonly corporates or preferred stocks which may be
exchanged for a fixed number of shares of common stock at the purchaser's
option. Convertibles may be viewed as an investment in the convertible security
or the security into which it may be exchanged. Therefore, the Fund's equity,
fixed income and balanced Portfolios may all purchase convertibles.
CORPORATES: Corporate bonds ("Corporates") are FIXED INCOME SECURITIES 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 Portfolio holds a
security that 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: Depositary receipts are FOREIGN EQUITY SECURITIES,
including Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs"), and other similar types of depositary shares. Depositary receipts 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.
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. 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.
DERIVATIVES: Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include the following instruments, each of which is
described in this Statement of Additional Information: CMOs, FORWARDS, FUTURES,
OPTIONS, SMBS, STRUCTURED INVESTMENTS, STRUCTURED NOTES, and SWAPS.
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Each Portfolio (except the Cash Reserves Portfolio) may use derivatives for
various purposes. A Portfolio will use derivatives only in circumstances where
they offer the most economic means of improving its risk/reward profile. A
Portfolio will not use derivatives to increase its risk above the level that it
could achieve using only traditional investment securities. A Portfolio also
will not use derivatives to acquire exposure to changes in the value of assets
or indexes of assets that it could not acquire and hold directly. 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 ("Board"). 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, options, SMBS, structured investments, structured
notes and swaps.
When a Portfolio engaged in certain types of derivatives transactions, including
certain forwards, futures, options and mortgage derivatives, it will have to
segregate cash and/or liquid securities to cover its obligations. At certain
levels, this can cause a Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. A Portfolio in that position could be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
EMERGING MARKETS SECURITIES: Emerging market securities are FOREIGN EQUITY
SECURITIES or FOREIGN FIXED INCOME SECURITIES 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 market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud. With
respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value of
a Portfolio's investments in those countries. It may be difficult to obtain and
enforce a judgment in a court outside the United States. Portfolios that invest
in emerging markets may also be exposed to an extra degree of custodial and/or
market risk, especially where the securities purchased are not traded on an
official exchange or where ownership records regarding the securities are
maintained by an unregulated entity (or even the issuer itself).
EQUITY SECURITIES: Equity securities generally represent an ownership interest
in an issuer, or may be convertible into or represent a right to acquire an
ownership interest in an issuer. While there are many types of equity
securities, prices of all equity securities will fluctuate. Economic, political
and other events may affect the prices of broad equity markets. For example,
changes in inflation or consumer demand may affect the prices of equity
securities generally in the United States. Similar events also may affect the
prices of particular equity securities. For example, news about the success or
failure of a new product may affect the price of a particular issuer's equity
securities. Equity securities include the following types of instruments, each
of which is described in this Statement of Additional Information: ADRs, COMMON
STOCK, CONVERTIBLES, INVESTMENT COMPANIES, PREFERRED STOCK, RIGHTS and WARRANTS.
FIXED INCOME SECURITIES: Fixed income securities generally represent an issuer's
obligation to repay money that it has borrowed together with interest on the
amount borrowed. Fixed income securities come in many varieties and may differ
in the way that interest is calculated, the amount and frequency of payments,
and the type of collateral, if any. Some fixed income securities may have other
novel features such as conversion rights. Fixed income securities include the
following types of instruments, each of which is described in this Statement of
Additional Information: AGENCIES, ASSET-BACKEDS, CASH EQUIVALENTS, CONVERTIBLES,
CORPORATES, FLOATERS, HIGH YIELD SECURITIES, INVERSE FLOATERS, LOAN
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PARTICIPATIONS and ASSIGNMENTS, MORTGAGE SECURITIES, MUNICIPALS, NY MUNICIPALS,
PREFERRED STOCK, REPURCHASE AGREEMENTS, U.S. GOVERNMENTS, WHEN-ISSUED
SECURITIES, YANKEE AND EURODOLLAR OBLIGATIONS and ZERO COUPONS.
Prices of fixed income securities fluctuate and, in particular, are subject to
credit risk and market risk. Credit risk is the possibility that an issuer may
be unable to meet scheduled interest and principal payments. Market risk is the
possibility that a change in interest rates or the market's perception of the
issuer's prospects may adversely affect the value of a fixed income security.
Economic, political and other events also may affect the prices of broad fixed
income markets. The duration and maturity of a fixed income security also affect
its price volatility. These concepts are described below in Maturity and
Duration Management. Generally, securities with longer maturities or durations
will experience greater price volatility.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. Prepayments and
call provisions also will affect the maturity and value of some fixed income
securities. The occurrence of prepayments and calls generally increases in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, a Portfolio may
be forced to reinvest in lower yielding fixed income securities.
FLOATERS: Floaters are FIXED INCOME SECURITIES with a floating or variable rate
of interest, i.e., the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
floating or variable rate obligations may carry a demand feature that permits
the holder to tender them back to the issuer of the underlying instrument, or to
a third party, at par value prior to maturity. When the demand feature of
certain floating or variable rate obligations represents an obligation of a
foreign entity, the demand feature will be subject to certain risks discussed
under foreign investing.
FOREIGN CURRENCY: Portfolios investing in FOREIGN SECURITIES will regularly
transact security purchases and sales in foreign currencies. These Portfolios
may hold foreign currency or purchase or sell currencies on a forward basis (see
FORWARDS, below).
Foreign currency warrants. Portfolios may invest in foreign currency warrants,
which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the U.S., in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may attempt to reduce the
foreign exchange risk assumed by purchasers of a security by, for example,
providing for a supplemental payment in the event that the U.S. dollar
depreciates against the value of a major foreign currency such as the Japanese
Yen or German Deutschmark. The formula used to determine the amount payable upon
exercise of a foreign currency warrant may make the warrant worthless unless the
applicable foreign currency exchange rate moves in a particular direction (e.g.,
unless the U.S. dollar appreciates or depreciates against the particular foreign
currency to which the warrant is linked or indexed). Foreign currency warrants
are severable from the debt obligations with which they may be offered, and may
be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to
purchase additional warrants, thereby incurring additional transaction costs. In
the case of any exercise of warrants, there may be a 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
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accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants.
Foreign currency warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the OCC. Unlike
foreign currency options issued by the OCC, the terms of foreign exchange
warrants generally will not be amended in the event of governmental or
regulatory actions affecting exchange rates or in the event of the imposition of
other regulatory controls affecting the international currency markets. The
initial public offering price of foreign currency warrants is generally
considerably in excess of the price that a commercial user of foreign currencies
might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies.
Foreign currency warrants are subject to complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate linked
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based of the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper. Performance indexed paper is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
FOREIGN EQUITY SECURITIES: Foreign equity securities are EQUITY SECURITIES of
foreign issuers denominated in foreign currency and traded primarily in non-U.S.
markets, including depositary receipts. See also Foreign Securities, below.
FOREIGN FIXED INCOME SECURITIES: Foreign fixed income securities 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. See also Foreign Securities, below.
FOREIGN SECURITIES: Foreign Securities include BRADY BONDS, DEPOSITARY RECEIPTS,
EMERGING MARKET SECURITIES, FOREIGN CURRENCY, FOREIGN EQUITY SECURITIES, FOREIGN
FIXED INCOME SECURITIES, and INVESTMENT FUNDS. Investing in foreign securities
involves certain special risks 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
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between various currencies. Certain Portfolios may enter into forward foreign
currency exchange contracts 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.
European Currency Transition. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan will mean that financial
transactions and market information, including share quotations and company
accounts, in participating countries will be denominated in Euros. Monetary
policy for participating countries will be uniformly managed by a new central
bank, the European Central Bank.
The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the Euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets worldwide.
FORWARDS: Forward Foreign Currency Exchange Contracts ("Forwards") 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
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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.
Risks. Forward contracts are not traded on contract markets regulated by the SEC
or CFTC. They are traded through financial institutions acting as market-makers.
Portfolios that trade forward contracts could lose amounts substantially in
excess of their initial investments, due to the margin and collateral
requirements associated with them.
Forward contracts may be traded on foreign exchanges. These 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.
Currency hedging strategies involve certain other risks as well. 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: Futures contracts and options on futures contracts ("Futures") are
DERIVATIVES. Each Portfolio, except the Cash Reserves Portfolio, may invest in
Futures. 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
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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
Board.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Risks. Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue to
be required to make daily cash payments to maintain its required margin. In such
situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Portfolio may be required to make
delivery of the instruments underlying interest rate futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to effectively hedge. A Portfolio will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. A Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
A Portfolio's use of futures involves 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 that a Portfolio could
lose 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
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several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures traders to
substantial losses.
HIGH YIELD SECURITIES: High yield securities are Fixed Income Securities,
generally corporates, preferred stocks, and convertibles, rated Ba through C by
Moody's or BB through D by Standard & Poor's, and unrated fixed income
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. See the Appendix for more
information about fixed income security ratings. Investment grade securities
that Portfolios hold may be downgraded to below investment grade by the rating
agencies. If a Portfolio holds a security that is downgraded, the Portfolio may
choose to retain the security.
While fixed income securities rated below investment grade 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. High yield
securities issued under these circumstances pose substantial risks. The price
movement of high yield 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. Compared with investment grade
securities, the values of high yield securities tend to be more volatile and may
react with greater sensitivity to changes in interest rates.
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.
A lower level of 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.
INVERSE FLOATERS: Inverse floating rate obligations ("inverse floaters") are
Fixed Income Securities which have coupon rates that vary inversely to another
specified floating rate, such as LIBOR (London Inter-Bank Offered Rate). If the
specified reference rate rises, the coupon rate of the inverse floater falls,
while a decrease in the reference rate causes an increase in the inverse
floater's coupon rate. Inverse floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality, redemption
provisions and maturity. Inverse floater CMOs exhibit greater price volatility
than the majority of mortgage pass-through securities or CMOs. Some inverse
floater CMOs are extremely sensitive 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: Investment companies are EQUITY SECURITIES and include
open-end or closed-end investment companies. The 1940 Act generally prohibits
the Portfolios from acquiring more than 3% of the outstanding voting shares
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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
Securities and Exchange Commission ("SEC") rule or order.
INVESTMENT FUNDS: Investment funds are EMERGING MARKET SECURITIES. 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: Investment grade securities are FIXED INCOME
SECURITIES that are (a) rated by one or more NRSROs 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. Securities rated A or
higher are considered to be "high grade." Any Portfolio permitted to hold
Investment Grade Securities or "high 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
or "high grade" securities, respectively. 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.
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.
LOAN PARTICIPATIONS AND ASSIGNMENTS: Loan participations and assignments are
FIXED INCOME SECURITIES. A Portfolio may invest in fixed rate and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders"). A
Portfolio's investments in Loans are expected in most instances to be in the
form of participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In the case of a
Participation, a Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. If a Lender selling a Participation becomes insolvent, a Portfolio may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation. Even
under such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. A Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
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assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make it
more difficult for the Portfolio to assign a value to those securities for
purposes of valuing the Portfolio's holdings and calculating its net asset
value.
Participations and Assignments involve a risk of loss in case of default or
insolvency of the borrower. In addition, they may offer less legal protection to
a Portfolio in the event of fraud or misrepresentation and may involve a risk of
insolvency of the Lender. Certain Participations and Assignments may also
include standby financing commitments that obligate the investing Portfolio to
supply additional cash to the borrower on demand. Participations involving
emerging market country issuers may relate to Loans as to which there has been
or currently exists an event of default or other failure to make payment when
due, and may represent amounts owed to Lenders that are themselves subject to
political and economic risks, including the risk of currency devaluation,
expropriation, or failure. Those Participations and Assignments present
additional risk of default or loss.
MORTGAGE SECURITIES: Mortgage-backed securities ("Mortgage Securities") are
FIXED INCOME SECURITIES representing 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 GNMA, 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 a Portfolio purchases a
mortgage security that does not have an issuer-provided guarantee, the security
will be rated investment grade at the time of purchase by one or more NRSROs,
or, if unrated, of the same quality.
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.
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.
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Average Life. The average life of pass-through pools varies with the maturities,
coupon rates, and type of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
Returns of Mortgage Securities. Yields on mortgage 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 Securities. Interests in pools of mortgage 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 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 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 GNMA. GNMA
is a wholly-owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by approved institutions and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
Government and Government-related pools because there are no direct or indirect
Government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance purchased by the issuer. The insurance and guarantees are issued by
Governmental entities, private insurers and the mortgage poolers. There can be
no assurance that the private insurers can meet their obligations under the
policies. The Portfolios will purchase mortgage securities that are rated
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
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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.
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.
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. Prepayments at a time
when interest rates are falling generally means that a Portfolio may have to
invest the principal payments it receives at lower interest rates. In selecting
mortgage 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 FIXED INCOME SECURITIES 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.
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.
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.
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
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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.
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.
Note obligations with demand or put options may have a stated maturity in excess
of one year, but permit any holder to demand payment of principal plus accrued
interest upon a specified number of days' notice. Frequently, such obligations
are secured by letters of credit or other credit support arrangements provided
by banks. The issuer of such notes normally has a corresponding right, after a
given period, to repay at its discretion the outstanding principal of the note
plus accrued interest upon a specific number of days' notice to the bondholders.
The interest rate on a demand note may be based upon a known lending rate, such
as the prime lending rate, and be adjusted when such rate changes, or the
interest rate on a demand note may be a market rate that is adjusted at
specified intervals. Each note purchased by the Portfolios will meet the quality
criteria set out in the prospectus for the Portfolios.
The yields of municipal bonds depend on, among other things, general money
market conditions, conditions in the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and Standard & Poor's represent their opinions of
the quality of the municipal bonds rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields, while municipal bonds of the same maturity and coupon, but
with different ratings may have the same yield. It will be the responsibility of
the investment management staff to appraise independently the fundamental
quality of the bonds held by the Portfolios.
Municipal bonds are sometimes purchased on a "when-issued" basis, meaning the
Portfolio has committed to purchase certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the federal income tax exemption for interest on municipal bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Portfolios to achieve
their investment objectives. In that event, the Fund's Trustees and officers
would reevaluate 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.
The Portfolios eligible to purchase municipal bonds may also purchase bonds the
income on which is subject to the alternative minimum tax ("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.
NY MUNICIPALS: NY Municipals are FIXED INCOME SECURITIES issued by the New York
State government, state agencies and various local governments, including
counties, cities, municipalities, townships, special districts and authorities.
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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 protects 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 the 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
securities of that state.
Certain state-created agencies have statutory authority 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
State. Some of these agencies, however, are indirectly dependent on State funds
through various state-assisted programs.
The Portfolio will make significant investments in NY Municipal Bonds. The
Portfolio's performance will depend in part upon the ability of the issuers of
these Bonds to meet their obligations for the payment of principal and interest.
The Portfolio may acquire Bonds whose issuers are affected by the financial
circumstances facing New York generally. While the overall wealth of New York,
as reflected by its per capita income, is among the highest in the nation, New
York has a large accumulated deficit and the per capita debt is among the
highest in the country. Additionally, New York City, which represents a
significant part of the state's economy, has struggled at times to maintain
fiscal stability. Financial difficulties affecting New York's economy generally
may also affect municipal securities issuers, by jeopardizing their credit
standing, impairing their borrowing abilities, and affording fewer markets for
their outstanding debt obligations. In recent years, Standard & Poor's and
Moody's have downgraded several different issues of municipal securities of New
York City and New York State and their agencies and instrumentalities.
Historically, there has been a strong demand for New York Municipal Bonds, and
as a consequence, New York Municipal Bonds are often issued with relatively
lower yields, and traded in the marketplace at relatively higher prices, than
comparably rated municipal bonds issued in other jurisdictions.
Options: Options are Derivatives. 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.
Portfolios may purchase over-the-counter options ("OTC Options") from, or sell
them 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
>
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the currency in which the security is denominated. In such circumstances, the
Portfolios will follow the coverage requirements as described in the preceding
paragraph.
Risks of Options. Investments in options involve some of the same risks 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. Those
price changes also can result in a Portfolio holding an option that will expire
worthless. For example, if a Portfolio purchases a call option and the price of
the underlying security falls to rise above the option's strike price, the
Portfolio would not exercise the option. As a result, the option will expire
worthless and the Portfolio will lose the price it paid for the option. By
contrast, if a Portfolio writes a call option on a security and the price of the
underlying security rises above the strike price, the purchaser of the option
may exercise the option, so that the Portfolio will not benefit from the
increase in value of the underlying security.
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. The market prices of options generally
can be more volatile than the market prices on the underlying futures contract
or securities. Another risk is that the Counterparty to an over-the-counter
option will be unable to fulfill its obligation to the Portfolio due to
bankruptcy or other circumstances.
Options on 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 they would use futures contracts on foreign currencies,
or forward contracts. 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. 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 falls, a Portfolio will have the right to sell the
currency for a fixed amount in dollars and thereby offset, in whole or in part,
the adverse effect that the foreign currency's fall would have had on the
Portfolio's holdings.
Conversely, a Portfolio may buy call options on a foreign currency when the
Adviser wants to purchase securities denominated in that currency and believes
that the dollar value of that foreign currency will increase, thereby increasing
the cost of acquiring those securities. Purchasing such options may 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
lose money on transactions in foreign currency options, which could reduce the
gain the Portfolio might have achieved from advantageous changes in the exchange
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.
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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 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 and on foreign currencies. Options on
foreign currencies are traded over-the-counter through financial institutions
acting as market-makers, although they are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. 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 purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, a Portfolio that writes options could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements.
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, 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.
PREFERRED STOCK: Preferred stocks are non-voting ownership shares in a
corporation which pay a fixed or variable stream of dividends. Preferred stocks
have a preference over common stocks in the event of the liquidation of an
issuer. Preferred stocks have many of the characteristics of both Equity
Securities and Fixed Income Securities. Therefore, the Fund's equity, fixed
income and balanced Portfolios may all purchase preferred stocks.
REPURCHASE AGREEMENTS: Repurchase agreements are Fixed Income Securities in the
form of an agreement backed by collateral. 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.
Pursuant to an SEC order, 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.
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.
REVERSE REPURCHASE AGREEMENTS: Under a Reverse Repurchase Agreement, a Portfolio
sells a security and promises to repurchase that security at an agreed upon
future date and price. The price paid to repurchase the security reflects
interest accrued during the term of the agreement. The Portfolio will establish
a separate custodial account holding cash and other liquid assets in an amount
not less than the purchase obligations of the agreement. Reverse Repurchase
Agreements may be viewed as a speculative form of borrowing called leveraging. A
Portfolio may invest in reverse repurchase agreements if (i) interest earned
from leveraging exceeds the interest expense of the original reverse repurchase
transaction and (ii) proceeds from the transaction are not invested for longer
than the term of the Reverse Repurchase Agreement.
RIGHTS: Rights are EQUITY SECURITIES representing 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. A stockholder who
purchases rights may be able to retain the same ownership percentage after the
new stock offering. A right usually enables the stockholder to purchase common
stock at a price below the initial offering price. A Portfolio that purchases a
right takes the risk that the right might expire worthless because the market
value of the common stock falls below the price fixed by the right.
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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 1940 Act or the rules and regulations
or interpretations of 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
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.
SHORT SELLING: A short sale is a transaction in which a Portfolio sells
securities that it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. To deliver the securities to the buyer,
the Portfolio arranges through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement. When selling short, the Portfolio
intends to replace the securities at a lower price and therefore, profit from
the difference between the cost to replace the securities and the proceeds
received from the sale of the securities. When the Portfolio makes a short sale,
the proceeds it receives from the sale will be held on behalf of a broker until
the Portfolio replaces the borrowed securities. The Portfolio may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Portfolio secures its obligation to replace the borrowed securities by
depositing collateral with the broker, consisting of cash or other liquid
securities. The Portfolio also must place in a segregated account with its
custodian cash or other liquid securities equal in value to the difference, if
any, between (i) the current market value of the securities sold short, and (ii)
any cash or other liquid securities deposited as collateral with the broker in
connection with the short sale. This amount will be adjusted daily to reflect
changes in the value of the securities sold short. A Portfolio also can cover
its obligations by owning another security (such as a call option) giving it the
right to obtain the same kind and amount of the security it sold short.
Risks: Short sales by a Portfolio involve certain risks and special
considerations. If the Adviser incorrectly predicts that the price of a borrowed
security will decline, the Portfolio will have to replace the securities by
purchasing them at a higher price than it received from the sale. Therefore,
losses from short sales may be unlimited. By contrast, when a Portfolio
purchases a security and holds it, the Portfolio cannot lose more than the
amount it paid for the security.
SMBS: Stripped mortgage-backed securities ("SMBS") are DERIVATIVES in the form
of 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
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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.
STRUCTURED INVESTMENTS: 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.
STRUCTURED NOTES: 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: All Portfolios, except the Cash Reserves and Mid Cap Growth Portfolios,
may enter into Swap Contracts ("Swaps"). A swap is a DERIVATIVE in the form of
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 notional 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.
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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, 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. 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.
Risks: Interest rate and total rate of return Swaps do not involve the delivery
of securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency swaps may involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap may be subject to the risk that
the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than Swaps.
The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
U.S. GOVERNMENTS: The term "U.S. Government securities" ("U.S. Governments")
refers to a variety of FIXED INCOME SECURITIES issued or guaranteed by the U.S.
Government and various instrumentalities which have been established or
sponsored by the U.S. Government, on which the payment of principal and interest
is backed by the full faith and credit of the U.S. Government. For example, U.S.
Treasury securities are backed by the "full faith and credit" of the U.S.
WARRANTS: Warrants are EQUITY SECURITIES in the form of options issued by a
corporation which give the holder the right to purchase stock, usually at a
price that is higher than the market price at the time the warrant is issued. A
purchaser takes the risk that the warrant may expire worthless because the
market price of the common stock fails to rise above the price set by the
warrant.
WHEN-ISSUED SECURITIES: Certain FIXED INCOME SECURITIES are purchased on a
"when-issued" basis. This means that the securities are purchased at a certain
price, but may not be delivered for up to 90 days. No payment or delivery is
made 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.
Yankee and Eurodollar Obligations: Each Portfolio, except the Domestic Fixed
Income Portfolio, can invest in Eurodollar and Yankee obligations, which are
Fixed Income Securities. 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.
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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. However,
Eurodollar (and to a limited extent, Yankee) obligations also are subject to
certain sovereign risks. One such risk is the possibility that a sovereign
country might prevent capital, in the form of dollars, from flowing across their
borders. Other risks include: adverse political and economic developments; the
extent and quality of government regulation of financial markets and
institutions; the imposition of foreign withholding taxes, and the expropriation
or nationalization of foreign issuers. The Cash Reserves Portfolio will perform
the same credit analysis on Eurodollar and Yankee obligations that it purchases
as it does on domestic issues, and will seek to invest in obligations of issuers
that have at least the same financial strength as the domestic issuers whose
securities it purchases.
ZERO COUPONS: Zero coupon bonds 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.
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 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. 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").
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INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. Each Portfolio of the Fund is subject to the following
restrictions which are fundamental policies and may not be changed without the
approval of the lesser of: (1) at least 67% of the voting securities of the
Portfolio present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the
Portfolio.
As a matter of fundamental policy, each Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subject to the limitations 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 ("1933 Act") 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.
NON-FUNDAMENTAL LIMITATIONS. Each Portfolio is also subject to the following
restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, no Portfolio will:
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(1) in the case of any equity or balanced Portfolio
(a) 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; or
(b) write put or call options except to the extent described above in (a);
and
(2) in the case of any fixed income Portfolio, enter into futures contracts or
options on futures contracts for purposes other than bona fide hedging if more
than 5% of the Portfolio's total assets at the time of the transaction would be
required as margin and option premiums to secure the Portfolio's obligations
under such contracts;
(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;
(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.
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PURCHASE OF SHARES
The Portfolios requested should be designated on the Account Registration Form.
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.
The Cash Reserves Portfolio declares dividends daily and, therefore, at the time
of a purchase must have funds immediately available for investment. As a result,
you must pay for shares of the Cash Reserves Portfolio with Federal Funds
(monies credited to the Portfolio's Custodian by a Federal Reserve Bank).
Payment for shares of the other Portfolios need not be converted into Federal
Funds before acceptance by the Fund.
Investors purchasing and redeeming shares of the Portfolios through a
Shareholder Organization may be charged a transaction-based fee or other fee for
the Shareholder Organization's services. Each Shareholder Organization is
responsible for sending you a schedule of 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.
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.
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 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.
Because an exchange of shares amounts to a redemption from one Portfolio and
purchase of shares of another Portfolio, the information regarding purchase and
redemption of shares applies to exchanges. 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. If
shares are being transferred to a new account, requests for transfer must be
accompanied by a completed Account Registration Form for the receiving party. If
shares are being transferred to an existing account, 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.
VALUATION OF SHARES
Net asset value per share ("NAV") is determined by dividing the total market
value of each Portfolio's investments and other assets, less any liabilities
(this includes accrued expenses and dividends payable for the Cash Reserves
Portfolio), by the total outstanding shares of that Portfolio. NAV 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.
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 of valuation. 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 NAV, all assets and liabilities
initially expressed in foreign currencies are converted into U.S. dollars at the
bid price of the foreign 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.
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. NAV includes interest on bonds and other fixed income securities which
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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 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.
CASH RESERVES PORTFOLIO: For the purpose of calculating the Cash Reserves
Portfolio's NAV, securities are valued by the amortized cost method of
valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value based on amortized cost is higher or lower than the price the Portfolio
would receive if it sold the instrument.
The use of amortized cost and the maintenance of the Portfolio's per share NAV
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 has established 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.
In the event of a deviation of over 1/2 of 1% between a Portfolio's NAV 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 will also take any action 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. This 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
losses or to shorten average maturity, withholding dividends, paying
distributions from capital or capital gains, or utilizing a NAV not equal to
$1.00 based upon available market quotations.
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MANAGEMENT OF THE FUND
TRUSTEES' RESPONSIBILITIES
The Trustees supervise the Trust's affairs under the laws governing business
trusts in the Commonwealth of Pennsylvania. The Trustees have approved contracts
under which certain companies provide essential management, administrative and
shareholder services to the Trust.
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 Corporation; Director, Sun Company, Inc.; Director,
Fannie Mae; Director, Reliance Group Holdings; Director, CVS Corporation;
Director, Union Carbide Corporation.
JOSEPH P. HEALEY, Trustee; Headmaster, Ethical Culture Fieldston School; Trustee
Springside School; formerly Headmaster, Haverford School; 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.
JAMES A. GALLO, Treasurer, MAS Funds; Head of Fund Administration, Miller
Anderson & Sherrerd, LLP; formerly, Manager, Internal Accounting and then Vice
President and Director of Investment Accounting, PFPC, Inc.
JOHN H. GRADY, JR., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius LLP.
39
<PAGE>
RICHARD J. SHOCH, Assistant Secretary, MAS Funds; Fund Compliance Officer,
Miller Anderson & Sherrerd, LLP; formerly, Fund Legal Administrator and then
Counsel, Vice President and Assistant Secretary, SEI Corporation.
COMPENSATION OF TRUSTEES AND OFFICERS
The Fund pays each Trustee, who is not also an officer or interested person, a
fee for each Board 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 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 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. 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, 1998.
As of the fiscal year ended September 30, 1998, 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, 1998 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
Joseph P. Healey
Joseph J. Kearns
C. Oscar Morong, Jr.
Vincent R. McLean
</TABLE>
*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.
40
<PAGE>
INVESTMENT ADVISER
The Adviser provides investment services to employee benefit plans, endowment
funds, foundations and other institutional investors and as of December 31, 1998
had in excess of $____ billion in assets under management.
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board 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:
- -------------------------------------------------------------------------------
Portfolio 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 Growth Portfolio 1.000
- -------------------------------------------------------------------------------
Small Cap Value Portfolio 0.750
- -------------------------------------------------------------------------------
Value Portfolio 0.500
- -------------------------------------------------------------------------------
Value II 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
41
<PAGE>
- -------------------------------------------------------------------------------
Limited Duration Portfolio 0.300
- -------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 0.375
- -------------------------------------------------------------------------------
Municipal Portfolio 0.375
- -------------------------------------------------------------------------------
NY Municipal Portfolio 0.375
- -------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 0.375
- -------------------------------------------------------------------------------
Targeted Duration Portfolio 0.375
- -------------------------------------------------------------------------------
Balanced Portfolio 0.450
- -------------------------------------------------------------------------------
Balanced Plus Portfolio 0.550
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 0.650
- -------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 0.375
- -------------------------------------------------------------------------------
Advisory Mortgage Portfolio 0.375
- -------------------------------------------------------------------------------
In cases where a shareholder of any of the Portfolios has an investment
counseling relationship with the Adviser, the Adviser may, at its discretion,
reduce the shareholder's investment counseling fees by an amount equal to the
pro-rata advisory fees paid by the Fund. This procedure will be utilized with
clients having contractual relationships based on total assets managed by Miller
Anderson & Sherrerd, LLP to avoid situations where excess advisory fees might be
paid to the Adviser. In no event will a client pay higher total advisory fees as
a result of the client's investment in the Fund. In addition, the Adviser has
voluntarily agreed to waive its advisory fees 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___________________ Portfolios from exceeding ___________% of its average
daily net assets, respectively. The Adviser also 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 Investment Class and the Adviser Class of the___________________
Portfolios from exceeding ___________% of its average daily net assets,
respectively.
For the fiscal years ended September 30, 1996, 1997 and 1998 the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Advisory Fees Paid Advisory Fees Waived
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio 1996 1997 1998 1996 1997 1998
(000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Growth Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Value Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Value II Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
The Agreement continues for successive one year periods, only if each renewal is
specifically approved by a vote of the Fund's Board, 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
43
<PAGE>
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 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.
PRINCIPAL UNDERWRITER
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, 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.
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, 1998, the Fund paid
$________ to compensate the Distributor under this Shareholder Service
Agreement.
DISTRIBUTION OF SHARES
The Fund's Distribution Plan provides that the Adviser Class Shares will pay 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, 1998, the _________________
Portfolios paid $_____, respectively, in distribution fees pursuant to the
44
<PAGE>
Distribution Plan. Other than $_______ 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.
FUND ADMINISTRATION
MAS also 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 (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, 1996, 1997 and 1998, the Fund paid the
following administrative fees:
<TABLE>
<CAPTION>
--------------------------------------------
Administrative Fees Paid
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio 1996 1997 1998
(000) (000) (000)
- -----------------------------------------------------------------------------------------
Emerging Markets Value Portfolio
- -----------------------------------------------------------------------------------------
Equity Portfolio
- -----------------------------------------------------------------------------------------
Growth Portfolio
- -----------------------------------------------------------------------------------------
International Equity Portfolio
- -----------------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- -----------------------------------------------------------------------------------------
Mid Cap Value Portfolio
- -----------------------------------------------------------------------------------------
Small Cap Growth Portfolio
- -----------------------------------------------------------------------------------------
Small Cap Value Portfolio
- -----------------------------------------------------------------------------------------
Value Portfolio
- -----------------------------------------------------------------------------------------
Value II Portfolio
- -----------------------------------------------------------------------------------------
Cash Reserves Portfolio
- -----------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
Fixed Income II Portfolio
- -----------------------------------------------------------------------------------------
Global Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
High Yield Portfolio
- -----------------------------------------------------------------------------------------
Intermediate Duration Portfolio
- -----------------------------------------------------------------------------------------
International Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------
Administrative Fees Paid
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio 1996 1997 1998
(000) (000) (000)
- -----------------------------------------------------------------------------------------
Limited Duration Portfolio
- -----------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- -----------------------------------------------------------------------------------------
Municipal Portfolio
- -----------------------------------------------------------------------------------------
NY Municipal Portfolio
- -----------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
Targeted Duration Portfolio
- -----------------------------------------------------------------------------------------
Balanced Portfolio
- -----------------------------------------------------------------------------------------
Balanced Plus Portfolio
- -----------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- -----------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- -----------------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- -----------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
OTHER SERVICE PROVIDERS
CUSTODIAN. The Chase Manhattan Bank, New York, NY serves as custodians for the
Fund. The Custodian holds cash, securities, and other assets of the Fund 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.
INDEPENDENT ACCOUNTANTS. ____________________, located at ____________________,
serves as independent accountants for the Fund and audits the annual financial
statements of each Portfolio.
FUND COUNSEL. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
LITIGATION: The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
Portfolio Transactions
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs the Adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
Portfolios. In so doing, the Adviser will consider all matters it deems
relevant, including the following: the Adviser's knowledge of negotiated
commission rates and spreads currently available; the nature of the security or
instrument being traded; the size and type of the transaction; the nature and
character of the markets for the security or instrument to be purchased or sold;
the desired timing of the transaction; the activity existing and expected in the
market for the particular security or
46
<PAGE>
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, 1996, 1997 and 1998, the Fund paid brokerage commissions of
$18,252,335, $19,134,219 and $__________, 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 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.
As an indirect subsidiary of Morgan Stanley Dean Witter & 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 $_________ in brokerage commissions to
affiliates for $____________ of brokered transactions for the fiscal year ended
September 30, 1998.
47
<PAGE>
ANNUAL TURNOVER
The annual turnover rate for each Portfolio for the past two fiscal years ended
September 30 was as follows:
- -------------------------------------------------------------------------
Portfolio 1997 1998
========= ==== ====
- -------------------------------------------------------------------------
Emerging Markets Value Portfolio
- -------------------------------------------------------------------------
Equity Portfolio
- -------------------------------------------------------------------------
Growth Portfolio
- -------------------------------------------------------------------------
International Equity Portfolio
- -------------------------------------------------------------------------
Mid Cap Growth Portfolio
- -------------------------------------------------------------------------
Mid Cap Value Portfolio
- -------------------------------------------------------------------------
Small Cap Growth Portfolio
- -------------------------------------------------------------------------
Small Cap Value Portfolio
- -------------------------------------------------------------------------
Value Portfolio
- -------------------------------------------------------------------------
Value II Portfolio
- -------------------------------------------------------------------------
Cash Reserves Portfolio
- -------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- -------------------------------------------------------------------------
Fixed Income Portfolio
- -------------------------------------------------------------------------
Fixed Income II Portfolio
- -------------------------------------------------------------------------
Global Fixed Income Portfolio
- -------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- -------------------------------------------------------------------------
High Yield Portfolio
- -------------------------------------------------------------------------
Intermediate Duration Portfolio
- -------------------------------------------------------------------------
International Fixed Income Portfolio
- -------------------------------------------------------------------------
Limited Duration Portfolio
- -------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- -------------------------------------------------------------------------
Municipal Portfolio
- -------------------------------------------------------------------------
NY Municipal Portfolio
- -------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- -------------------------------------------------------------------------
Targeted Duration Portfolio
- -------------------------------------------------------------------------
Balanced Portfolio
- -------------------------------------------------------------------------
Balanced Plus Portfolio
- -------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- -------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- -------------------------------------------------------------------------
Advisory Mortgage Portfolio
- -------------------------------------------------------------------------
N/A -- Portfolio had not commenced operations as of September 30, 1998.
48
<PAGE>
COMMISSIONS PAID
For the fiscal years ended September 30, 1996, 1997, and 1998,
the Fund paid brokerage commissions of approximately $__, $__ and $__,
respectively. For the fiscal years ended September 30, 1996, 1997 and 1998, the
Fund paid in the aggregate $__, $__ and $__ , respectively, as brokerage
commissions to Morgan Stanley, an affiliated broker-dealer, which represented
__%,__% and __% of the total amount of brokerage commissions paid in each
respective period. For the fiscal year ended September 30, 1998, the Fund paid
in the aggregate $_____ as brokerage commissions to Dean Witter Reynolds, Inc.,
an affiliated broker-dealer which represented __% of the total amount of
brokerage commissions paid in the period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Brokerage Commissions Paid during Fiscal Year Ended September 30, 1998
------------------------------------------------------------------------------------------------------------
Commissions Paid to Morgan Stanley Commissions Paid to DWR
----------------------------------------------------------------------------------------------
Percent of Total Percent of Total
Total Percent of Total Brokered Percent of Total Brokered
Commissions Total Commissions Transactions Total Commissions Transactions
Portfolio Paid Commissions Commissions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Value
- ------------------------------------------------------------------------------------------------------------------------------------
Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Growth
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth
- ------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value
- ------------------------------------------------------------------------------------------------------------------------------------
Value
- ------------------------------------------------------------------------------------------------------------------------------------
Value II
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserves
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Income II
- ------------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration
- ------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Duration
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------------
Municipal
- ------------------------------------------------------------------------------------------------------------------------------------
NY Municipal
- ------------------------------------------------------------------------------------------------------------------------------------
PA Municipal
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Brokerage Commissions Paid during Fiscal Year Ended September 30, 1998
------------------------------------------------------------------------------------------------------------
Commissions Paid to Morgan Stanley Commissions Paid to DWR
----------------------------------------------------------------------------------------------
Percent of Total Percent of Total
Total Percent of Total Brokered Percent of Total Brokered
Commissions Total Commissions Transactions Total Commissions Transactions
Portfolio Paid Commissions Commissions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed
Income
- ------------------------------------------------------------------------------------------------------------------------------------
Targeted Duration
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Plus
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class
- ------------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed
Income
- ------------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Brokerage Commission Paid during Fiscal Years Ended September 30, 1996 and 1997
--------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 Fiscal Year Ended September 30, 1997
--------------------------------------------------------------------------------------------------
Portfolio Total Morgan Stanley DWR Total Morgan Stanley DWR
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value
- ---------------------------------------------------------------------------------------------------------------------------
Equity
- ---------------------------------------------------------------------------------------------------------------------------
Growth
- ---------------------------------------------------------------------------------------------------------------------------
International Equity
- ---------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth
- ---------------------------------------------------------------------------------------------------------------------------
Mid Cap Value
- ---------------------------------------------------------------------------------------------------------------------------
Small Cap Growth
- ---------------------------------------------------------------------------------------------------------------------------
Small Cap Value
- ---------------------------------------------------------------------------------------------------------------------------
Value
- ---------------------------------------------------------------------------------------------------------------------------
Value II
- ---------------------------------------------------------------------------------------------------------------------------
Cash Reserves
- ---------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income II
- ---------------------------------------------------------------------------------------------------------------------------
Global Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
High Yield
- ---------------------------------------------------------------------------------------------------------------------------
Intermediate Duration
- ---------------------------------------------------------------------------------------------------------------------------
International Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
Limited Duration
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
- ---------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
Municipal
- ---------------------------------------------------------------------------------------------------------------------------
NY Municipal
- ---------------------------------------------------------------------------------------------------------------------------
PA Municipal
- ---------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed
Income
- ---------------------------------------------------------------------------------------------------------------------------
Targeted Duration
- ---------------------------------------------------------------------------------------------------------------------------
Balanced
- ---------------------------------------------------------------------------------------------------------------------------
Balanced Plus
- ---------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class
- ---------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed
Income
- ---------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage
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</TABLE>
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GENERAL INFORMATION
FUND 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.
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 thirty
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
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.
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.
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.
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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.
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 NAV. Therefore, on the ex-dividend date, the NAV 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 your behalf by the Portfolio.
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.
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
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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.
YEAR 2000
The management and distribution services that the Adviser and Distributor
provide to the Fund depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser and Distributor
have been actively working on necessary changes to their own computer systems to
deal with the year 2000 problem and expect that their systems will be adapted
before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Adviser and Distributor are monitoring their remedial
efforts, however, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
Portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Portfolios' investments may be
adversely affected.
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
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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
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
54
<PAGE>
notional principal contract, a futures or forward contract, or a similar
transaction with respect to such stock or substantially identical property.
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 you annually
as to the tax classification of all distributions.
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.
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, you must certify
on your Account Registration Form that your Social Security Number or Taxpayer
Identification Number is correct, and that you are not subject to backup
withholding.
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.
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
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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.
STATE AND LOCAL INCOME TAXES: The Fund 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 NY MUNICIPAL PORTFOLIOS: Each
of the Municipal and NY Municipal Portfolios 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.
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 paid to shareholders of either Portfolio that are derived from
taxable interest or capital gains will be subject to federal income tax.
Additionally, such distributions are not eligible for the dividends received
deduction for corporations.
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.
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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.
PRINCIPAL HOLDERS OF SECURITIES
As of January __, 1999 the following persons owned of record or beneficially 5%
or more of the shares of a Portfolio:
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.
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
57
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less than the average for the entire period. Average annual total return is
calculated according to the following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the stated period
The average annual total return of the Institutional Class Shares of each
Portfolio for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Growth, Balanced Plus and Multi-Market Fixed Income Portfolios had not
commenced operations as of September 30, 1998.
The average annual total return of the Investment Class shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The _______ Portfolio had not commenced operations as of September 30, 1998.
The average annual total return of the Adviser Class Shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years 10 Years Inception to
9/30/98 ended ended 9/30/98 Inception
9/30/98 9/30/98 Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Value II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
</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
61
<PAGE>
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
Portfolio 9/30/98 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Value Portfolio
- --------------------------------------------------------------------------------
Equity Portfolio
- --------------------------------------------------------------------------------
Growth Portfolio
- --------------------------------------------------------------------------------
International Equity Portfolio
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------
Mid Cap Value Portfolio
- --------------------------------------------------------------------------------
Small Cap Growth Portfolio
- --------------------------------------------------------------------------------
Small Cap Value Portfolio
- --------------------------------------------------------------------------------
Value Portfolio
- --------------------------------------------------------------------------------
Value II Portfolio
- --------------------------------------------------------------------------------
Cash Reserves Portfolio
- --------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- --------------------------------------------------------------------------------
Fixed Income Portfolio
- --------------------------------------------------------------------------------
Fixed Income II Portfolio
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
- --------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- --------------------------------------------------------------------------------
High Yield Portfolio
- --------------------------------------------------------------------------------
Intermediate Duration Portfolio
- --------------------------------------------------------------------------------
International Fixed Income Portfolio
- --------------------------------------------------------------------------------
Limited Duration Portfolio
- --------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- --------------------------------------------------------------------------------
Municipal Portfolio
- --------------------------------------------------------------------------------
NY Municipal Portfolio
- --------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
5 Years Ended Inception to
Portfolio 9/30/98 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
Targeted Duration Portfolio
- --------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------
Balanced Plus Portfolio
- --------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- --------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- --------------------------------------------------------------------------------
</TABLE>
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively. ** The_____________ Portfolios had not
commenced operations as of September 30, 1998.
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 Portfolios are set
forth below:
- --------------------------------------------------------------------------------
Portfolio Total Return (%)
- --------------------------------------------------------------------------------
Emerging Markets Value Portfolio
- --------------------------------------------------------------------------------
Equity Portfolio
- --------------------------------------------------------------------------------
Growth Portfolio
- --------------------------------------------------------------------------------
International Equity Portfolio
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------
Mid Cap Value Portfolio
- --------------------------------------------------------------------------------
Small Cap Growth Portfolio
- --------------------------------------------------------------------------------
Small Cap Value Portfolio
- --------------------------------------------------------------------------------
Value Portfolio
- --------------------------------------------------------------------------------
Value II Portfolio
- --------------------------------------------------------------------------------
Cash Reserves Portfolio
- --------------------------------------------------------------------------------
Domestic Fixed Income Portfolio
- --------------------------------------------------------------------------------
Fixed Income Portfolio
63
<PAGE>
- --------------------------------------------------------------------------------
Fixed Income II Portfolio
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
- --------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- --------------------------------------------------------------------------------
High Yield Portfolio
- --------------------------------------------------------------------------------
Intermediate Duration Portfolio
- --------------------------------------------------------------------------------
International Fixed Income Portfolio
- --------------------------------------------------------------------------------
Limited Duration Portfolio
- --------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- --------------------------------------------------------------------------------
Municipal Portfolio
- --------------------------------------------------------------------------------
NY Municipal Portfolio
- --------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- --------------------------------------------------------------------------------
Targeted Duration Portfolio
- --------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------
Balanced Plus Portfolio
- --------------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- --------------------------------------------------------------------------------
Advisory Mortgage Portfolio
- --------------------------------------------------------------------------------
As of September 30, 1998, the ________________ Portfolios had not commenced
operations.
The Municipal and NY Municipal Portfolio may also calculate a total return which
reflects the cumulative percentage change in value over the measuring period
after the deduction of income taxes. The formula for calculating the total after
tax return can be expressed as follows:
Total After Tax Return = (((((ERV-M)/P) x T) + (M/P)) -1)
M = Portion of ending redeemable value which was derived from tax exempt income.
T = Applicable tax rate.
The after tax returns are as follows for the Municipal Portfolio for the period
10/1/92 (inception) through 9/30/98:
Pre-tax return Post-tax return
Municipal Portfolio 7.95*/46.59** 7.86*/45.98**
*Annualized
**Cumulative
The federal tax rate used was 31%. All municipal interest was considered exempt
from federal taxes.
64
<PAGE>
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:
- -----------------------------------------------------------------------------
Period Ending
9/30/98
- -----------------------------------------------------------------------------
Emerging Markets Value Portfolio
- -----------------------------------------------------------------------------
Equity Portfolio
- -----------------------------------------------------------------------------
Growth Portfolio
- -----------------------------------------------------------------------------
International Equity Portfolio
- -----------------------------------------------------------------------------
Mid Cap Growth Portfolio
- -----------------------------------------------------------------------------
Mid Cap Value Portfolio
- -----------------------------------------------------------------------------
Small Cap Growth Portfolio
- -----------------------------------------------------------------------------
Small Cap Value Portfolio
- -----------------------------------------------------------------------------
Value Portfolio
- -----------------------------------------------------------------------------
Value II Portfolio
- -----------------------------------------------------------------------------
Cash Reserves Portfolio
- -----------------------------------------------------------------------------
Domestic Fixed Income Portfolio
65
<PAGE>
- -----------------------------------------------------------------------------
Period Ending
9/30/98
- -----------------------------------------------------------------------------
Fixed Income Portfolio
- -----------------------------------------------------------------------------
Fixed Income II Portfolio
- -----------------------------------------------------------------------------
Global Fixed Income Portfolio
- -----------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio
- -----------------------------------------------------------------------------
High Yield Portfolio
- -----------------------------------------------------------------------------
Intermediate Duration Portfolio
- -----------------------------------------------------------------------------
International Fixed Income Portfolio
- -----------------------------------------------------------------------------
Limited Duration Portfolio
- -----------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio
- -----------------------------------------------------------------------------
Municipal Portfolio
- -----------------------------------------------------------------------------
NY Municipal Portfolio
- -----------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio
- -----------------------------------------------------------------------------
Targeted Duration Portfolio
- -----------------------------------------------------------------------------
Balanced Portfolio
- -----------------------------------------------------------------------------
Balanced Plus Portfolio
- -----------------------------------------------------------------------------
Multi-Asset-Class Portfolio
- -----------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio
- -----------------------------------------------------------------------------
Advisory Mortgage Portfolio
- -----------------------------------------------------------------------------
As of September 30, 1998, the _____________ 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.
66
<PAGE>
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, 1998.
Period ending
9/30/98
Value at beginning of period $1.00
Value at end of period $1.00
Current yield %
Effective yield %
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.
67
<PAGE>
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.
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.
68
<PAGE>
Lehman Brothers Long Municipal Bond Index
The Lehman Brothers Long Municipal Bond Index is a total return for the
long-term, investment-grade tax-exempt bond market for bonds. The index includes
municipal bonds with maturities of 22 years or more.
Lehman Brothers Mortgage-Backed Securities Index
The Lehman Brothers Mortgage-Backed Securities Index includes fixed rate
mortgage securities backed by GNMA, FHLMC, and FNMA. Graduated Payment Mortgages
(GPM's) are included. All issues are AAA, with maturities of at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
Lipper Growth & Income Fund Index
The Lipper Growth & Income Fund Index is a net asset value weighted index of the
30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
Lipper High Current Yield Fund Average
The Lipper High Current Yield Fund Average reports the average return of all the
Funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of Funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
Salomon World Government Bond Index ex US
The Salomon World Government Bond Index ex US is designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the 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.
69
<PAGE>
Morgan Stanley Capital International World ex USA Index
The Morgan Stanley Capital International World ex USA Index is a
capitalization-weighted price index expressed in dollars. The index reflects the
performance of over 1,100 companies in 19 foreign equity markets. The index
includes dividends, net of foreign withholding taxes.
Morgan Stanley Capital International EAFE Index
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morgan Stanley Capital International EAFE-GDP Weighted Index
The EAFE-GDP index is an arithmetic average of the performance of over 900
securities listed on the stock exchanges of countries in Europe, Australia and
the Far East. The index is weighted by the Grow Domestic Product of the various
countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
The MSCI Emerging Markets Free Index is a capitalization weighted index of over
800 stocks from 17 different emerging market countries.
Nasdaq Industrials Index
The Nasdaq Industrials Index is a measure of all Nasdaq National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive of
warrants, and all domestic common stocks traded in the regular Nasdaq market
which are not part of the Nasdaq National Market System. The Nasdaq Industrials
Index is market value weighted.
Russell 1000
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
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.
70
<PAGE>
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.
71
<PAGE>
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.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1998,
including notes thereto and the report of _______________ thereon are
incorporated herein by reference. A copy of the 1998 Annual Report will
accompany the delivery of this Statement of Additional Information.
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings Excerpts from Moody's Investors Service, Inc.'s
Corporate Bond Ratings:
Aaa: judged to be the best quality; carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; Ba: B: protection of interest and
principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
72
<PAGE>
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection as to
principal and interest; AA: also qualify as high grade obligations, and in the
majority of instances differs from AAA issues only in small degree; A: regarded
as upper medium grade; have considerable investment strength but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe; BBB: regarded as borderline between
definitely sound obligations and those where the speculative element begins to
predominate; this group is the lowest which qualifies for commercial bank
investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
73
<PAGE>
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
74
<PAGE>
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as 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.
75
<PAGE>
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
D: Issuer is in default on its debt obligations and has filed for reorganization
or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
<PAGE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
C-2
<PAGE>
MAS FUNDS
PART C: OTHER INFORMATION
Post-Effective Amendment No. 51
Item 23. Exhibits:
(a) (1) Amended and Restated Declaration of Trust as filed as
Exhibit 1 of the Initial Registration Statement, as filed on
March 1, 1984.
(2) Amendment No. 1 to Amended and Restated Declaration of Trust,
dated May 20, 1992 as filed as Exhibit 2 of Post-Effective
Amendment No. 25, as filed on January 28, 1993.
(3) Amended and Restated Declaration of Trust, dated November 18,
1993 as filed as Exhibit 1 of Post-Effective Amendment No.
29, as filed on December 27, 1993.
(4) Amended and Restated Agreement and Declaration of Trust dated
November 18, 1993, is incorporated by reference to Exhibit 1
of Post-Effective Amendment No. 42, as filed on July 15,
1996.
(b) (1) By-Laws as filed as Exhibit 2 of the initial Registration
Statement, as filed on March 1, 1984.
(2) By-Laws as filed as to Exhibit 2 of Post-Effective Amendment
No. 29, as filed on December 27, 1993.
(3) Amended and Restated By-Laws dated November 21, 1996 are
incorporated by reference to Exhibit (2)(b) of Post-Effective
Amendment No. 43, as filed on January 29, 1997.
(c) Not Applicable.
(d) (1) Investment Advisory Agreement with Miller Anderson &
Sherrerd, LLP dated July 1, 1988 as filed as Exhibit 5 of
Post-Effective Amendment No. 8, as filed on
February 18, 1987.
(2) Investment Advisory Agreement with Miller Anderson &
Sherrerd, LLP dated January 3, 1996 is incorporated by
reference to Exhibit (5)(a) of Post-Effective Amendment No.
43, as filed January 29, 1997.
(3) Investment Advisory Agreement with Miller Anderson &
Sherrerd, LLP dated May 31, 1997 is incorporated by reference
to Exhibit 5(b) of Post-Effective Amendment No. 44, as filed
on June 13, 1997.
(4) Amended Schedule A, dated August 4, 1998, to Investment
Advisory Agreement with Miller Anderson & Sherrerd, LLP dated
May 31, 1997 is filed herewith.
(e) (1) Distribution Agreement with MAS Fund Distribution, Inc. dated
April 13, 1993 as filed as Exhibit (6) of Post-Effective
Amendment No. 26, as filed on June 28, 1993.
(2) Distribution Agreement with MAS Fund Distribution, Inc. dated
January 3, 1996 is incorporated by reference to Exhibit
(6)(a) of Post-Effective Amendment No. 43, as filed January
29, 1997.
(3) Distribution Agreement with MAS Fund Distribution, Inc. dated
May 31, 1997, is incorporated by reference to Exhibit 6(b) of
post-Effective Amendment No. 50, as filed on july 10, 1998.
(f) Not Applicable.
(g) (1) Custodian Agreement with State Street Bank & Trust Company as
filed as Exhibit (8) of the initial Registration Statement,
as filed on March 1, 1984.
(2) Custodian Agreement with Morgan Stanley Trust Company dated
September 1, 1993 is incorporated by reference to Exhibit
8(a) of Post-Effective Amendment No. 41 filed on January 30,
1996.
(3) Custodian Agreement with United States Trust Company of New
York dated July 22, 1994 is incorporated by reference to
Exhibit 8(b) of Post-Effective Amendment No. 41, as filed on
January 30, 1996.
(4) Amendment dated January 3, 1996 between Morgan Stanley Trust
Company and MAS Funds is incorporated by reference to Exhibit
8(c) of Post-Effective Amendment No. 41, as filed on January
30, 1996.
C-3
<PAGE>
(5) Deferred Compensation Plan for MAS Funds Board of Trustees,
as amended, is incorporated by reference to Exhibit (8)(c) of
Post-Effective Amendment No. 44, as filed on June 13, 1997.
(6) Amendment dated July 22, 1994 to the Custody Agreement
between MAS Funds and United States Trust Company of New York
is incorporated by reference to Exhibit (8)(e) of
Post-Effective Amendment No. 46, as filed on January 29,
1998.
(h) (1) Administration Agreement with The Vanguard Group dated
September, 1984 as filed as Exhibit 9 of Pre-Effective
Amendment No. 3, as filed on August 27, 1984.
(2) Administration Agreement with Miller Anderson & Sherrerd, LLP
dated November 18, 1993 as filed as Exhibit 9 of
Post-Effective Amendment No. 29, as filed on December 27,
1993.
(3) Sub-Administration Agreement with United States Trust Company
of New York dated November 18, 1993 is incorporated by
reference to Exhibit (9)(b) of Post-Effective Amendment No.
46, as filed on January 29, 1998.
(4) Transfer Agency Agreement with United States Trust Company of
New York dated November 18, 1993, as amended February 9, 1995
and November 18, 1996, is incorporated by reference to
Exhibit (9)(c) of Post-Effective Amendment No. 46, as filed
on January 29, 1998.
(5) Administration Agreement with Miller Anderson & Sherrerd, LLP
dated January 3, 1996 is incorporated by reference to
Post-Effective Amendment No. 43, as filed on January 29,
1997.
(6) Investment Class Shareholder Service Agreement is
incorporated by reference to Exhibit 15(a) of Post-Effective
Amendment No. 41, as filed on January 30, 1996.
(7) Investment Class Service Provider Agreement is incorporated
by reference to Exhibit 15(b) of Post-Effective Amendment No.
40, as filed on December 1, 1995.
(8) Amendment dated August, 1995 to the Transfer Agency and Fund
Sub-Administration Agreement between MAS Funds and United
States Trust Company, is incorporated by reference to Exhibit
(9)(g) of Post-Effective Amendment No. 46, as filed on
January 29, 1998.
(i) Opinion and Consent of Counsel dated August 23, 1984 is incorporated
by reference to Exhibit (10) of Post- Effective Amendment No. 46, as
filed on January 29, 1998.
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Distribution Plan relating to Adviser Class Shares is incorporated by
reference to Exhibit 15 of Post- Effective Amendment No. 41, as filed
on January 30, 1996.
(n) Not Applicable.
(o) Rule 18f-3 Multiple Class Plan is incorporated by reference to Exhibit
18 of Post-Effective Amendment No. 41, as filed on January 30, 1996.
(p) Powers of Attorney for Joseph P. Healey, Joseph J. Kearns, John H.
Grady, Jr., Lorraine Truten, C. Oscar Morong, Jr., Thomas L. Bennett,
James D. Schmid, Vincent R. McLean, Thomas P. Gerrity, and James A.
Gallo are filed herewith.
Item 24. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification.
Reference is made to Article V of Registrant's By-Laws dated November
18, 1993, which is incorporated by reference. Registrant hereby also
makes the undertaking consistent with rule 484 under the Securities
Act of 1933, as amended.
C-4
<PAGE>
The Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgements, in
compromise or as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, or whether by or in the right of the Trust, before any court
or administrative or legislative body, in which such Covered Person
may be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or
thereafter, by reason of any alleged act or omission as a Trustee or
officer, except with respect to any matter as to which such Covered
Person shall have been finally adjudicated in any such action, suit or
other proceeding not to have acted in good faith in the reasonable
belief that such Covered Person's action was in the best interest of
the Trust and except that no Covered Person shall be indemnified
against any liability to the Trust or its Shareholders to which such
Covered Person would otherwise be subject by reason of self-dealing,
willful misconduct or recklessness. Expenses, including counsel fees
so incurred by any such Covered Person, may be paid from time to time
by the Trust in advance of the final disposition of any such action,
suit or proceeding on the condition that the amounts so paid shall be
repaid to the Trust if it is ultimately determined that
indemnification of such expenses is not authorized under this Article.
Item 26. Business and Other Connections of Investment Adviser:
Miller Anderson & Sherrerd, LLP (the "Adviser") is a Pennsylvania
limited liability partnership founded in 1969. The Adviser provides
investment services to employee benefit plans, endowment funds,
foundations and other institutional investors.
<TABLE>
<CAPTION>
Name and Position with Connection with Other
Investment Adviser Name of Other Company Company
- ---------------------- --------------------- ---------------------
<S> <C> <C>
Richard Brown Worley Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Management, Inc. Portfolio Manager
Executive Committee Member MAS Fund Distribution, Inc. Registered Representative
Thomas Leonard Bennett Morgan Stanley Universal Funds Director
Portfolio Manager Morgan Stanley & Co. Incorporated Managing Director
Executive Committee Member Morgan Stanley Dean Witter Investment Management, Inc Portfolio Manager
MAS Funds Chairman
MAS Fund Distribution, Inc. Director
Gilbert Schlarbaum Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Management, Inc. Portfolio Manager
Executive Committee Member MAS Fund Distribution, Inc. Director
Robert J. Marcin Morgan Stanley Asset Management, Inc. Portfolio Manager
Portfolio Manager Morgan Stanley & Co. Incorporated Managing Director
Executive Committee Member MAS Fund Distribution, Inc. Registered Representative
Marna C. Whittington Morgan Stanley & Co. Incorporated Managing Director
Executive Committee Member MAS Fund Distribution, Inc. CEO
Rohm Haas Director
</TABLE>
C-5
<PAGE>
Item 27. Principal Underwriter:
(a) MAS Fund Distribution, Inc. acts as sole distributor of the
Registrant's shares.
(b) The principal address for MAS Fund Distribution, Inc. and each
partner and officer listed below is One Tower Bridge, West
Conshohocken, PA 19428.
<TABLE>
<CAPTION>
Name and Principal Positions and Positions and
Business Address Offices with Underwriter Offices with Registrant
---------------- ------------------------ -----------------------
<S> <C> <C>
Marna Whittington Chief Executive Officer N/A
Lorraine Truten President Vice President
Ronald R. Reese Secretary & Treasurer N/A
Paul A. Frick Compliance Officer N/A
Gary G. Schlarbaum Director N/A
Thomas L. Bennett Director Trustee
James D. Schmid Director President
Marion Mitchell Client Account Manager Assistant Secretary
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records:
Books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940, and the rules promulgated
thereunder, are maintained as follows:
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, N.Y. 10081
and
1 Pierrepont Plaza
Brooklyn, New York 11201
(records relating to its function as custodian)
Chase Global Funds Services
73 Tremont Street
Boston, MA 02108-3913
(records relating to its functions as sub-administrator,
transfer agent and dividend disbursing agent)
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
(records relating to its function as investment adviser)
C-6
<PAGE>
Item 29. Management Services
Not Applicable
Item 30. Undertakings:
(a) Not applicable
C-7
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Post-Effective Amendment to Registration Statement No. 2- 89729 to be
signed on its behalf by the undersigned, thereunto duly authorized in the
District of Columbia on the 25th day of November 1998.
MAS FUNDS
By: *
-----------------------------------
James D. Schmid, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity on the dates
indicated.
* Trustee November 25, 1998
- -------------------------------
Thomas L. Bennett
* Trustee November 25, 1998
- -------------------------------
Thomas P. Gerrity
* Trustee November 25, 1998
- -------------------------------
Joseph P. Healey
* Trustee November 25, 1998
- -------------------------------
Joseph J. Kearns
* Trustee November 25, 1998
- -------------------------------
Vincent R. McLean
* Trustee November 25, 1998
- -------------------------------
C. Oscar Morong, Jr.
* President November 25, 1998
- -------------------------------
James D. Schmid
* Assistant November 25, 1998
- ------------------------------- Treasurer
James A. Gallo
*By: /s/ John H. Grady, Jr.
------------------------------------
John H. Grady, Jr.
Attorney-in-Fact
C-8
<PAGE>
EXHIBIT INDEX
Name Exhibit
<TABLE>
<CAPTION>
<S> <C>
Amended and Restated Declaration of Trust as filed as Exhibit 1 of the initial a(1)
Registration Statement, as filed on March 1, 1984.
Amendment No. 1 to Amended and Restated Declaration of Trust, dated a(2)
May 20, 1992 as filed as Exhibit 2 of Post-Effective Amendment No. 25,
as filed on January 28, 1993.
Amended and Restated Declaration of Trust, dated November 18, 1993 as filed a(3)
as Exhibit 1 of Post-Effective Amendment No. 29, as filed on December 27, 1993.
Amended and Restated Agreement and Declaration of Trust dated November 18, 1993, a(4)
as corrected by the Trustees on February 29, 1996, is incorporated by reference
to Exhibit 1 of Post-Effective Amendment No. 42, as filed on July 15, 1996.
By-Laws as filed as Exhibit 2 of the initial Registration Statement, as filed on b(1)
March 1, 1984.
By-Laws as filed as Exhibit 2 of Post-Effective Amendment No. 29, as filed on b(2)
December 27, 1993.
Amended and Restated By-Laws dated November 21, 1996, are incorporated by b(3)
reference to Exhibit (2)(b) of Post-Effective Amendment No. 43, as filed on
January 29, 1997.
Not Applicable. c
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(1)
July 1, 1988 as filed as Exhibit 5 of Post-Effective Amendment No. 8, on
February 18, 1987.
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(2)
January 3, 1996 is incorporated by reference to Exhibit (5)(a) of Post-Effective
Amendment No. 43, as filed on January 29, 1997.
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(3)
May 31, 1997 is incorporated by reference to Exhibit 5(b) of Post-Effective
Amendment No. 44, as filed on June 13, 1997.
Amended Schedule A, dated August 4, 1998, to Investment Advisory Agreement d(4)
with Miller Anderson & Sherrerd, LLP dated May 31, 1997 is filed herewith.
Distribution Agreement with MAS Fund Distribution, Inc. dated April 13, 1993 as e(1)
filed as Exhibit 6 of Post-Effective Amendment No. 26, as filed on June 28, 1993.
Distribution Agreement with MAS Fund Distribution, Inc. dated January 3, 1996 is e(2)
incorporated by reference to Exhibit (6)(a) of Post-Effective Amendment No. 43,
as filed on January 29, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Distribution Agreement with MAS Fund Distribution, Inc. dated May 31,1997, is e(3)
incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 50, as
filed on July 10, 1998.
Not Applicable. f
Custodian Agreement with State Street Bank & Trust Company as filed as Exhibit 8 g(1)
of the initial Registration Statement, as filed on March 1, 1984.
Custodian Agreement with Morgan Stanley Trust Company dated September 1, 1993 g(2)
is incorporated by reference to Exhibit 8(a) of Post-Effective Amendment
No. 41 filed on January 30, 1996.
Custodian Agreement with United States Trust Company of New York dated g(3)
July 22, 1994 is incorporated by reference to Exhibit 8(b) of Post-Effective
Amendment No. 41, as filed on January 30, 1996.
Amendment dated January 3, 1996 between Morgan Stanley Trust Company and g(4)
MAS Funds is incorporated by reference to Exhibit 8(c) of Post-Effective
Amendment No. 41, as filed on January 30, 1996.
Deferred Compensation Plan for MAS Funds Board of Trustees, as amended, is g(5)
incorporated by reference to Exhibit 8(c) of Post-Effective Amendment No. 44, as
filed on June 13, 1997.
Amendment dated July 22, 1994 to the Custody Agreement between MAS Funds g(6)
and United States Trust Company of New York is incorporated by reference to
Exhibit (8)(e) of Post-Effective Amendment No. 46, as filed on January 29, 1998.
Administration Agreement with The Vanguard Group dated September, 1984 as h(1)
filed as Exhibit 9 of Pre-Effective Amendment No. 3, as filed on August 27, 1984.
Administration Agreement with Miller Anderson & Sherrerd, LLP dated h(2)
November 18, 1993 as filed as Exhibit 9 of Post-Effective Amendment No. 29, as
filed on December 27, 1993.
Sub-Administration Agreement with United States Trust Company of New York h(3)
dated November 18, 1993 is incorporated by reference to Exhibit (9)(b) of
Post-Effective Amendment No. 46, as filed on January 29, 1998.
Transfer Agency Agreement with United States Trust Company of New York h(4)
dated November 18, 1993 and amended February 9, 1995 and November 18, 1996 is
incorporated by reference to Exhibit (9)(c) of Post-Effective Amendment No. 46,
as filed on January 29, 1998.
Administration Agreement with Miller Anderson & Sherrerd, LLP is dated h(5)
January 3, 1996 is incorporated by reference to Post-Effective Amendment No. 43,
as filed on January 29, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Investment Class Shareholder Service Agreement is incorporated by reference to h(6)
Exhibit 15(a) of Post-Effective Amendment No. 41, as filed on January 30, 1996.
Investment Class Service Provider Agreement is incorporated by reference to h(7)
Exhibit 15(b) of Post-Effective Amendment No. 40, as filed on December 1, 1995.
Amendment dated August, 1995 to the Transfer Agency and Fund Sub- h(8)
Administration Agreements between MAS Funds and United States Trust Company is
incorporated by reference to Exhibit (9)(g) of Post-Effective Amendment No. 46,
as filed on January 29, 1998.
Opinion and Consent of Counsel dated August 23, 1984 is incorporated by i
reference to Exhibit 10 of Post-Effective Amendment No. 46, as filed on
January 29, 1998.
Not Applicable. j
Not Applicable. k
Not Applicable. l
Distribution Plan relating to Adviser Class Shares is incorporated by reference m
to Exhibit 15 of Post-Effective Amendment No. 41, as filed on January 30, 1996.
Not Applicable. n
Rule 18f-3 Multiple Class Plan is incorporated by reference to Exhibit 18 of o
Post-Effective Amendment No. 41, as filed on January 30, 1996.
Powers of Attorney for Joseph P. Healey, Joseph J. Kearns, John H. Grady, Jr., p
Lorraine Truten, C. Oscar Morong, Jr., Thomas L. Bennett, James D. Schmid,
Vincent R. McLean, Thomas P. Gerrity, and James A. Gallo are filed herewith
</TABLE>
<PAGE>
Schedule A
to the Investment Advisory Agreement
dated May 31, 1997, as amended August 4, 1998
Portfolio Rate
Advisory Foreign Fixed Income .375%
Advisory Mortgage .375%
Balanced .450%
Balanced Plus .550%
Cash Reserves .250%
Domestic Fixed Income .375%
Emerging Markets Value .750%
Equity .500%
Fixed Income .375%
Fixed Income II .375%
Global Fixed Income .375%
Growth .500%
High Yield .375%
Intermediate Duration .375%
International Fixed Income .375%
International Equity .500%
Limited Duration .300%
Mid Cap Growth .500%
Mid Cap Value .750%
Mortgage-Backed Securities .375%
Multi-Asset-Class .650%
Multi-Market Fixed Income .450%
Municipal .375%
NY Municipal .375%
PA Municipal .375%
Small Cap Growth 1.000%
Small Cap Value .750%
Special Purpose Fixed Income .375%
Targeted Duration .375%
Value .500%
Value II .500%
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Thomas L. Bennett Date: October 26, 1998
- --------------------- ----------------
Thomas L. Bennett
Chairman of the Board of Trustees
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Joseph P. Healey Date: November 18, 1998
- --------------------------- --------------------
Joseph P. Healey
Trustee
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Joseph J. Kearns Date: October 29, 1998
- -------------------- ----------------
Joseph J. Kearns
Trustee
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ C. Oscar Morong Date: October 26, 1998
- ------------------- ----------------
C. Oscar Morong
Trustee
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ James D. Schmid Date: October 27, 1998
- ------------------- ----------------
James D. Schmid
President
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Vincent R. McLean Date: October 26, 1998
- --------------------- ----------------
Vincent R. McLean
Trustee
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten, James A. Gallo and John H. Grady, Jr., and each of them singly, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Fund's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Thomas P. Gerrity Date: October 28, 1998
- --------------------- ----------------
Thomas P. Gerrity
Trustee
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints James A. Gallo
and John H. Grady, Jr., and each of them singly, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to sign for him and in his name, place and stead, and in the capacity indicated
below, to sign any and all Registration Statements and all amendments thereto
relating to the offering of the Fund's shares under the provisions of the
Investment Company Act of 1940 and/or the Securities Act of 1933, each such Act
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, acting alone, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Lorraine Truten Date: October 26, 1998
- ------------------- ----------------
Lorraine Truten
Vice President
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten and James A. Gallo, and each of them singly, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to sign for him and in his name, place and stead, and in the capacity indicated
below, to sign any and all Registration Statements and all amendments thereto
relating to the offering of the Fund's shares under the provisions of the
Investment Company Act of 1940 and/or the Securities Act of 1933, each such Act
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, acting alone, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ John H. Grady, Jr. Date: November 18, 1998
- ---------------------- -----------------
John H. Grady, Jr.
Secretary
<PAGE>
MAS FUNDS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee and/or
officer of MAS Funds (the "Fund"), a business trust organized under the laws of
the Commonwealth of Pennsylvania, hereby constitutes and appoints Lorraine
Truten and John H. Grady, Jr., and each of them singly, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to sign for him and in his name, place and stead, and in the capacity indicated
below, to sign any and all Registration Statements and all amendments thereto
relating to the offering of the Fund's shares under the provisions of the
Investment Company Act of 1940 and/or the Securities Act of 1933, each such Act
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, acting alone, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ James A. Gallo Date: October 27, 1998
- ------------------ ----------------
James A. Gallo
Treasurer
