<PAGE>
MAS
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MAS FUNDS
Institutional Class Prospectus
JANUARY 31, 1999
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
MAS FUNDS (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 22 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Institutional Class Shares of the following portfolios (each a"Portfolio"
and collectively the "Portfolios"):
EQUITY PORTFOLIOS
-----------------
EQUITY SMALL CAP GROWTH
MID CAP GROWTH SMALL CAP VALUE
MID CAP VALUE VALUE
FIXED INCOME PORTFOLIOS
-----------------------
CASH RESERVES INTERNATIONAL FIXED INCOME
DOMESTIC FIXED INCOME LIMITED DURATION
FIXED INCOME MORTGAGE-BACKED SECURITIES
FIXED INCOME II MULTI-MARKET FIXED INCOME
GLOBAL FIXED INCOME MUNICIPAL
HIGH YIELD SPECIAL PURPOSE FIXED INCOME
INTERMEDIATE DURATION TARGETED DURATION
BALANCED PORTFOLIOS
-------------------
BALANCED
MULTI-ASSET-CLASS
INVESTMENT ADVISER:
MILLER ANDERSON & SHERRERD, LLP
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 o WEST CONSHOHOCKEN, PA 19428
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TABLE OF CONTENTS
INVESTMENT SUMMARY
INVESTOR SUITABILITY, INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES, RISKS AND PERFORMANCE ................................... 1
EQUITY PORTFOLIOS
EQUITY ............................................................... 2
MID CAP GROWTH ....................................................... 3
MID CAP VALUE ........................................................ 4
SMALL CAP GROWTH ..................................................... 5
SMALL CAP VALUE ...................................................... 6
VALUE ................................................................ 7
FIXED INCOME PORTFOLIOS
CASH RESERVES ........................................................ 8
DOMESTIC FIXED INCOME ................................................ 9
FIXED INCOME ......................................................... 10
FIXED INCOME II ...................................................... 11
GLOBAL FIXED INCOME .................................................. 12
HIGH YIELD ........................................................... 13
INTERMEDIATE DURATION ................................................ 14
INTERNATIONAL FIXED INCOME ........................................... 15
LIMITED DURATION ..................................................... 16
MORTGAGE-BACKED SECURITIES ........................................... 17
MULTI-MARKET FIXED INCOME ............................................ 18
MUNICIPAL ............................................................ 20
SPECIAL PURPOSE FIXED INCOME ......................................... 21
TARGETED DURATION .................................................... 22
BALANCED PORTFOLIOS
BALANCED ............................................................. 23
MULTI-ASSET-CLASS .................................................... 25
IMPORTANT INVESTMENT INFORMATION
DESCRIPTION OF PRINCIPAL INVESTMENTS ................................. 27
FEES AND EXPENSES OF THE PORTFOLIOS
SHAREHOLDER FEES AND ANNUAL PORTFOLIO OPERATING EXPENSES ............. 31
PURCHASING SHARES ....................................................... 35
REDEEMING SHARES ........................................................ 36
VALUATION OF SHARES ..................................................... 37
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE, TAXES, DIVIDENDS AND DISTRIBUTIONS ............... 37
FUND MANAGEMENT
INFORMATION ABOUT THE ADVISER, THE PORTFOLIO MANAGERS AND THE
DISTRIBUTOR ....................................................... 39
YEAR 2000 DISCLOSURE STATEMENT .......................................... 42
FINANCIAL HIGHLIGHTS .................................................... 44
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
[ ] Investment Objective
[ ] Principal Investment Strategy
[ ] Principal Risks
The discussions on the following pages 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. In fact,
some of the Portfolios strive to meet their investment objectives over an
extended period. These Portfolios focus on a market cycle of three to five
years. This means that the Portfolios will strive to meet their respective
investment objectives within that period without regard to interim market
fluctuations.
[ ] 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 transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy. The Municipal
Portfolio may be a suitable investment for persons who would benefit from
tax-exempt income.
1
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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.
In determining whether securities should be sold, the Adviser considers factors
such as high price/earnings ratios and relative valuations.
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.
GENERALLY AT LEAST 65% INVESTED
IN EQUITY SECURITIES
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EQUITY CAPITALIZATION
GENERALLY GREATER THAN $1 BILLION
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BENCHMARK: S&P 500 INDEX
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TICKER SYMBOL: MPEQX
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CUSIP NO.: 552-913-105
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG, JAMES J. JOLINGER,
NICHOLAS J. KOVICH, BRIAN KRAMP,
ROBERT J. MARCIN AND
GARY G. SCHLARBAUM
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EQUITY PORTFOLIO
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Commenced operations on November 14, 1984
28.28% -0.09% 39.96% 7.78% 6.66% 0.05% 33.02% 20.59% 25.84% 19.67%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/90
21.34% -15.00%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- ------------------------------------------------------------------------------
EQUITY PORTFOLIO S&P 500 INDEX
- ------------------------------------------------------------------------------
ONE YEAR 19.67 28.57
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FIVE YEARS 19.41 24.06
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TEN YEARS 17.48 19.21
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SINCE INCEPTION
11/14/84 17.26 18.70
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<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
2
<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.
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.
GENERALLY 65% INVESTED IN EQUITY
SECURITIES OF MID-CAP COMPANIES
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EQUITY CAPITALIZATION GENERALLY
MATCHING THE BENCHMARK (CURRENTLY
$500 MILLION TO $6 BILLION)
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FOCUS ON GROWTH SECURITIES
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BENCHMARK: S&P MIDCAP 400 INDEX
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TICKER SYMBOL: MPEGX
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CUSIP NO.: 552-913-782
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG AND DAVID P. CHU
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MID CAP GROWTH PORTFOLIO
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Commenced operations on March 30, 1990
59.39% 2.91% 18.23% -5.39% 36.25% 18.79% 33.13% 37.36%
1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended Quarter Ended
12/31/98 9/30/98
36.03% -19.18%
- ---------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
MID CAP S&P MIDCAP
GROWTH PORTFOLIO 400 INDEX
- --------------------------------------------------------------------------------
ONE YEAR 37.36 19.12
- --------------------------------------------------------------------------------
FIVE YEARS 22.87 18.84
- --------------------------------------------------------------------------------
SINCE INCEPTION
3/30/90 22.61 18.57
<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
3
<PAGE>
MID CAP VALUE PORTFOLIO
OBJECTIVE
The Mid Cap 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 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. In determining whether securities should be sold, the Adviser considers
factors such as high valuations relative to other investment opportunities, and
deteriorating short or long-term earnings growth projections. Sector weightings
normally are kept within 5% of those of the S&P MidCap 400 Index.
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.
GENERALLY AT LEAST 65% INVESTED IN
EQUITY SECURITIES OF MID-CAP
COMPANIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY
MATCHING THE BENCHMARK (CURRENTLY
$500 MILLION TO $6 BILLION)
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: S&P MIDCAP 400 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPMVX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-618
PORTFOLIO MANAGERS
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
CHRIS LEAVY AND GARY G. SCHLARBAUM
- ----------------------------------------------
MID CAP VALUE PORTFOLIO
- ----------------------------------------------
Commenced operations on December 30, 1994
32.71% 40.77% 39.58% 16.05%
1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended Quarter Ended
12/31/98 9/30/98
22.46% -13.80%
- ----------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
MID CAP S&P MIDCAP
GROWTH PORTFOLIO 400 INDEX
- --------------------------------------------------------------------------------
ONE YEAR 16.05 19.12
- --------------------------------------------------------------------------------
SINCE INCEPTION
12/30/94 31.87 25.20
<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
4
<PAGE>
SMALL CAP GROWTH PORTFOLIO
OBJECTIVE
The Small Cap Growth Portfolio seeks 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.
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.
No performance information is provided because the Small Cap Growth Portfolio
had been in operation for less than a year as of 12/31/98.
GENERALLY AT LEAST 65% INVESTED IN
EQUITIES OF SMALL-CAP COMPANIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION RANGE:
$250 MILLION TO $2.5 BILLION
- --------------------------------------------------------------------------------
FOCUS ON GROWTH SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: RUSSELL 2000 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP No.: 552-913-253
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG AND
DAVID P. CHU
5
<PAGE>
SMALL CAP VALUE PORTFOLIO (NOT CURRENTLY BEING OFFERED TO NEW INVESTORS)
OBJECTIVE
The Small Cap 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 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 have lower price/earnings
and price/book ratios than the stocks in the Russell 2000 Index. In determing
whether securities should be sold, the Adviser considers factors such as high
valuations relative to other investment opportunities, and deteriorating short
or long-term earnings growth projections. The Portfolio will normally keep its
sector weightings within 5% of the index.
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.
GENERALLY AT LEAST 65% INVESTED IN
EQUITIES OF SMALL-CAP COMPANIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY
MATCHING THE BENCHMARK (CURRENTLY
$100 MILLION TO $2 BILLION)
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: RUSSELL 2000 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPSCX
- --------------------------------------------------------------------------------
CUSIP No.: 552-913-501
PORTFOLIO MANAGERS
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
CHRIS LEAVY AND GARY G. SCHLARBAUM
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on July 1, 1986
17.61% -16.55% 63.78% 22.77% 21.16% 2.18% 21.04% 35.15% 30.63% -1.42%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended Quarter Ended
3/31/91 9/30/90
31.89% -27.20%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
SMALL CAP RUSSELL 2000
VALUE PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR -1.42 -2.55
- --------------------------------------------------------------------------------
FIVE YEARS 16.57 11.87
- --------------------------------------------------------------------------------
TEN YEARS 17.80 12.92
- --------------------------------------------------------------------------------
SINCE INCEPTION
7/1/86 13.25 10.23
<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
6
<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.
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.
GENERALLY AT LEAST 65% INVESTED IN
EQUITIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY
GREATER THAN $1.5 BILLION
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: S&P 500 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPVLX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-204
PORTFOLIO MANAGERS
RICHARD M. BEHLER, NICHOLAS J. KOVICH AND ROBERT J. MARCIN
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on November 5, 1984
20.73% -6.16% 37.65% 14.61% 14.34% 3.48% 38.75% 27.63% 23.38% -2.88%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/91 Quarter Ended 9/30/98
17.05% -19.02%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
VALUE S&P 500
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR -2.88 28.57
- --------------------------------------------------------------------------------
FIVE YEARS 17.03 24.06
- --------------------------------------------------------------------------------
TEN YEARS 16.20 19.21
- --------------------------------------------------------------------------------
SINCE INCEPTION
11/5/84 16.39 18.55
<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
7
<PAGE>
CASH RESERVES PORTFOLIO
OBJECTIVE
The Cash Reserves Portfolio seeks to realize maximum current income,
consistent with the preservation of capital and liquidity.
APPROACH
The Portfolio tries to maintain a stable net asset value of $1.00 per
share by investing exclusively in liquid, high quality money market instruments.
Money market instruments consist of certain types of FIXED INCOME SECURITIES
including 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
will 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. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities, or when a security is downgraded.
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. The Portfolio invests in the money market obligations of
private financial and non-financial corporations, as well as obligations of the
U.S. Government and its agencies and instrumentalities. If an issuer's credit
rating is downgraded, the market value of its money market obligations may fall.
Repurchase agreements are subject to additional risks associated with the
possibility of default by the seller at a time when the collateral has declined
in value, or insolvency of the seller, which may affect the Portfolio's right to
control the collateral. Please read the section entitled "Important Investment
Information" for more information about these risks. An investment in the
Portfolio is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. 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.
DOLLAR WEIGHTED AVERAGE MATURITY
LESS THAN 90 DAYS
- --------------------------------------------------------------------------------
100% OF NON-U.S. GOVERNMENT
SECURITIES RATED A-1/P-1 OR BETTER BY
MOODY'S OR STANDARD & POOR'S
- --------------------------------------------------------------------------------
INDIVIDUAL MATURITIES 397 DAYS OR LESS
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON 1-MONTH
TREASURY BILL INDEX
LIPPER MONEY
MARKET AVERAGE
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPCXX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-758
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
ABIGAIL JONES FEDER AND
DANIEL M. NILAND
- ------------------------------------------------------------------------
CASH RESERVES PORTFOLIO
- ------------------------------------------------------------------------
Commenced operations on August 29, 1990
5.81% 3.46% 2.80% 3.93% 5.75% 5.24% 5.39% 5.36%
1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/91 Quarter Ended 3/31/93
1.64% 0.66%
- ------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
CASH SALOMON LIPPER MONEY
RESERVES 1-MONTH TREASURY MARKET
PORTFOLIO BILL INDEX AVERAGE
- --------------------------------------------------------------------------------
ONE YEAR 5.36 4.56 5.26
- --------------------------------------------------------------------------------
FIVE YEARS 5.13 4.70 4.86
- --------------------------------------------------------------------------------
SINCE INCEPTION
8/29/90 4.85 4.43 4.58
<PAGE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The Lipper Money
Market Average is an index that shows the performance of other money market
funds. The variability of performance over time provides an indication of the
risks of investing in the Portfolio. 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.
8
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO
OBJECTIVE
The Domestic Fixed Income Portfolio seeks 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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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 make 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.
100% U.S. ISSUERS
- --------------------------------------------------------------------------------
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
80% OF FIXED INCOME SECURITIES RATED
A OR HIGHER (OR EQUIVALENT)
- --------------------------------------------------------------------------------
UP TO 20% OF FIXED INCOME
SECURITIES RATED BBB (OR EQUIVALENT)
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE
SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON BROAD INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPSFX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-881
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN
AND RICHARD B. WORLEY
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on September 29, 1987
11.22% 7.19% 21.54% 9.12% 13.75% -3.89% 18.85% 3.89% 9.62% 7.23%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.48% -2.28%
- --------------------------------------------------------------------------------
<PAGE>
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
DOMESTIC SALOMON BROAD
FIXED INCOME INVESTMENT GRADE
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR 7.23 8.72
- --------------------------------------------------------------------------------
FIVE YEARS 6.88 7.30
- --------------------------------------------------------------------------------
TEN YEARS 9.63 9.31
- --------------------------------------------------------------------------------
SINCE INCEPTION
9/29/87 9.80 9.48
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
9
<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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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 make 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 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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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.
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
80% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
UP TO 20% HIGH YIELD SECURITIES
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITES
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON BROAD INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPFIX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-303
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN
AND RICHARD B. WORLEY
<PAGE>
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on November 14, 1984
11.19% 7.16% 21.50% 8.46% 13.90% -5.51% 19.03% 7.36% 9.61% 6.91%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 9/30/91 Quarter Ended 3/31/94
7.56% -3.13%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
FIXED SALOMON BROAD
INCOME INVESTMENT
PORTFOLIO GRADE INDEX
- --------------------------------------------------------------------------------
ONE YEAR 6.91 8.72
- --------------------------------------------------------------------------------
FIVE YEARS 7.19 7.30
- --------------------------------------------------------------------------------
TEN YEARS 9.73 9.31
- --------------------------------------------------------------------------------
SINCE INCEPTION
11/14/84 10.63 10.11
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
10
<PAGE>
FIXED INCOME II PORTFOLIO
OBJECTIVE
The Fixed Income II Portfolio 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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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 make 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
100% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE
SECURITES
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON BROAD INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPFDX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-741
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN
AND RICHARD B. WORLEY
- --------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on August 31, 1990
19.29% 7.03% 12.62% -5.15% 18.67% 5.53% 9.29% 7.54%
1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.64% -2.78%
- --------------------------------------------------------------------------------
<PAGE>
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
FIXED SALOMON BROAD
INCOME INVESTMENT
PORTFOLIO II GRADE INDEX
- --------------------------------------------------------------------------------
ONE YEAR 7.54 8.72
- --------------------------------------------------------------------------------
FIVE YEARS 6.90 7.30
- --------------------------------------------------------------------------------
SINCE INCEPTION
8/31/90 9.76 9.11
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
11
<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 United States, 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. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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. The Adviser may, in its discretion, use derivatives to hedge
currency risks. However, the Adviser cannot guarantee that it will succeed in
doing so. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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
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.
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES OF ISSUERS IN
AT LEAST 3 COUNTRIES, INCLUDING THE U.S.
- --------------------------------------------------------------------------------
95% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
UP TO 5% INVESTED IN HIGH YIELD
SECURITIES
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON WORLD
GOVERNMENT
BOND INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MAGFX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-683
PORTFOLIO MANAGERS
J. DAVID GERMANY, MICHAEL KUSHMA,
PAUL F. O'BRIEN, RAM WILLNER AND
RICHARD B. WORLEY
<PAGE>
- -------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- -------------------------------------------------------
Commenced operations on April 30, 1993
- -1.57% 20.02% 6.03% -0.02% 14.10%
1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/97
8.03% -4.11%
- --------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
GLOBAL FIXED SALOMON WORLD
INCOME GOVERNMENT
PORTFOLIO BOND INDEX
- --------------------------------------------------------------------------------
ONE YEAR 14.10 15.29
- --------------------------------------------------------------------------------
FIVE YEARS 7.40 7.85
- --------------------------------------------------------------------------------
SINCE INCEPTION
4/30/93 8.12 7.87
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
12
<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, investment grade corporate
bonds and, to a limited extent, MORTGAGE SECURITIES. 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. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment
opportunities.
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. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
GENERALLY AT LEAST 65% INVESTED IN
HIGH YIELD SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON HIGH
YIELD INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPHYX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-790
PORTFOLIO MANAGERS
ROBERT E. ANGEVINE, THOMAS L. BENNETT
AND STEPHEN F. ESSER
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on February 28, 1989
- -10.94% 44.17% 18.51% 24.57% -7.06% 23.94% 15.29% 15.98% 3.16%
1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/91 Quarter Ended 9/30/90
24.81% -12.74%
- --------------------------------------------------------------------------------
<PAGE>
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
SALOMON
HIGH YIELD HIGH YIELD
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR 3.16 3.61
- --------------------------------------------------------------------------------
FIVE YEARS 9.70 9.06
- --------------------------------------------------------------------------------
SINCE INCEPTION
2/28/89 11.19 11.00
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
13
<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. The Adviser may sell securities when
it believes that expected risk - adjusted return is low compared to other
investment opportunities.
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 make 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
100% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
AVERAGE DURATION 2-5 YEARS
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: LEHMAN BROTHERS
INTERMEDIATE
GOVERNMENT/
CORPORATE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MAIDX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-642
PORTFOLIO MANAGERS
ANGELO G. MANIOUDAKIS AND
SCOTT F. RICHARD
- ---------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO
- ---------------------------------------------------------
Commenced operations on October 3, 1994
15.38% 5.94% 8.07% 7.03%
1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/96
4.80% 0.20%
- ----------------------------------------------------------
<PAGE>
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
INTERMEDIATE INTERMEDIATE
DURATION GOVERNMENT/CORPORATE
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR 7.03 8.44
- --------------------------------------------------------------------------------
SINCE INCEPTION
10/3/94 8.38 8.29
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
14
<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. The Adviser may sell securities when it believes that expected risk-
adjusted return is low compared to other investment opportunities.
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. The Adviser may, in its discretion, use derivatives to
hedge currency risks. However, the Adviser cannot guarantee that it will succeed
in doing so. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
GENERALLY AT LEAST 80% INVESTED IN
FIXED INCOME SECURITIES OF ISSUERS IN
AT LEAST 3 COUNTRIES OTHER THAN
THE U.S.
- --------------------------------------------------------------------------------
95% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
UP TO 5% INVESTED IN HIGH YIELD
SECURITIES
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON WORLD
GOVERNMENT BOND
EX-U.S. INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPIFX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-816
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
J. DAVID GERMANY, MICHAEL KUSHMA,
PAUL F. O'BRIEN AND RICHARD B. WORLEY
<PAGE>
- ---------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO
- ---------------------------------------------------------------
Commenced operations on April 29, 1994
19.64% 6.20% -3.97% 17.74%
1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/95
10.86% -5.74%
- ----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
SALOMON WORLD
INTERNATIONAL GOVERNMENT
FIXED INCOME BOND EX-U.S.
PORTFOLIO INDEX
-------------------------------------------------------------------------------
ONE YEAR 17.74 17.79
- --------------------------------------------------------------------------------
SINCE INCEPTION
4/29/94 8.34 8.27
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
15
<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 yield 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 values as compared with U.S. Treasury securities, and takes into
account their yield spreads as adjusted to reflect option and credit risk. The
Adviser may sell securities when it believes that expected risk - adjusted
return is low compared to other investment opportunities.
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 make 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.
Brady Bonds are subject to certain risks, including the risk of default by the
issuer, and if denominated in foreign currencies, the risk that the currencies
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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
GENERALLY AT LEAST 65% INVESTED IN
FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
100% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
MAY INVEST IN BRADY BONDS
- --------------------------------------------------------------------------------
AVERAGE DURATION 1-3 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON 1-3
YEAR TREASURY/
GOVERNMENT
SPONSORED INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPLDX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-733
PORTFOLIO MANAGERS
MICHELE A. KREISLER AND
SCOTT F. RICHARD
- ----------------------------------------------------------
LIMITED DURATION PORTFOLIO
- ----------------------------------------------------------
Commenced operations on March 31, 1992
5.97% -0.07% 10.37% 5.27% 6.25% 5.63%
1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/94
3.23% -0.95%
- -----------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- -----------------------------------------------------------
<PAGE>
SALOMON 1-3
LIMITED YEAR TREASURY/
DURATION GOVERNMENT SPONSORED
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR 5.63 6.95
- --------------------------------------------------------------------------------
FIVE YEARS 5.44 5.94
- --------------------------------------------------------------------------------
SINCE INCEPTION
3/31/92 5.91 6.11
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
16
<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. The Adviser may sell securities when it
believes that expected risk - adjusted return is low compared to other
investment opportunities.
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 make 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN MORTGAGE SECURITIES
- -----------------------------------------------------------------------------
100% INVESTMENT GRADE SECURITIES
- -----------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 7 YEARS
- -----------------------------------------------------------------------------
AVERAGE DURATION GENERALLY 2-7 YEARS
- -----------------------------------------------------------------------------
BENCHMARK: LEHMAN MORTGAGE INDEX
- -----------------------------------------------------------------------------
TICKER SYMBOL: MPMBX
- -----------------------------------------------------------------------------
CUSIP NO.: 552-913-808
PORTFOLIO MANAGERS
KENNETH B. DUNN, SCOTT F. RICHARD
AND ROBERTO SELLA
- -----------------------------------------------------------------
MORTGAGE-BACKED SECURITIES PORTFOLIO
- -----------------------------------------------------------------
Commenced operations on January 31, 1992
8.19% -3.38% 17.41% 5.78% 9.31% 4.26%
1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/94
5.65% -1.92%
- -----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- ---------------------------------------------------------------------------
MORTGAGE-BACKED LEHMAN
SECURITIES MORTGAGE
PORTFOLIO INDEX
- ---------------------------------------------------------------------------
ONE YEAR 4.26 6.96
- ---------------------------------------------------------------------------
FIVE YEARS 6.46 7.23
- ---------------------------------------------------------------------------
SINCE INCEPTION
1/31/92 7.05 7.41
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
17
<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 MORTGAGE SECURITIES, HIGH YIELD SECURITIES
(commonly referred to as "junk bonds") and EMERGING MARKET 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. The
Adviser may sell securities when it believes that expected risk - adjusted
return is low compared to other investment opportunities.
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 make 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
manage these risks. The Adviser may, in its discretion, use derivatives to hedge
currency risks. However, the Adviser cannot guarantee that it will succeed in
doing so. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES
- ------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- ------------------------------------------------------------------------------
BENCHMARK: WEIGHTED BLEND OF QUARTERLY RETURNS OF THE FOLLOWING:
60% SALOMON BROAD INVESTMENT GRADE INDEX
20% SALOMON WORLD GOVERNMENT BOND EX-U.S. INDEX
12% SALOMON HIGH YIELD MARKET INDEX
8% J.P. MORGAN EMERGING MARKETS BOND
- ------------------------------------------------------------------------------
INDEX TICKER SYMBOL: MPMMX
- ------------------------------------------------------------------------------
CUSIP NO.: 552-913-352
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN, STEPHEN F. ESSER, J. DAVID GERMANY
AND RICHARD B. WORLEY
18
<PAGE>
MULTI-MARKET FIXED INCOME PORTFOLIO (Continued)
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.
- --------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on October 1, 1997
5.28%
1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
3.02% -0.71%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
MULTI-MARKET SALOMON SALOMON WORLD
FIXED INCOME BROAD GOVERNMENT BOND BLENDED
PORTFOLIO INDEX EX-U.S. INDEX INDEX*
- -------------------------------------------------------------------------------
ONE YEAR 5.28 8.72 17.79 7.85
- -------------------------------------------------------------------------------
SINCE INCEPTION
10/1/97 4.63 9.10 12.85 7.61
*The Blended Index is an unmanaged index comprised of 60% Salomon Broad
Investment Index, 20% Salomon World Government Bond Ex-U.S. Index, 12% Salomon
High Yield Market Index and 8% J.P. Morgan Emerging Markets Bond Index.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
19
<PAGE>
MUNICIPAL PORTFOLIO
OBJECTIVE
The Municipal Portfolio seeks to realize above-average total return over a
market cycle of three to five years, consistent with the conservation of capital
and the realization of current income that 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 federal
alternative minimum tax, and fixed income securities on which the interest
payments are 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. The
Adviser may sell securities when it believes that expected risk-adjusted return
is low compared to other investment opportunities.
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. Municipal securities may be subject to call risk, which
could result in the Portfolio having to reinvest the proceeds at a lower rate of
interest.
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.
GENERALLY AT LEAST 80% OF INCOME WILL BE EXEMPT FROM REGULAR FEDERAL INCOME TAX
- -------------------------------------------------------------------------------
80% INVESTMENT GRADE SECURITIES
- -------------------------------------------------------------------------------
UP TO 20% IN HIGH YIELD SECURITIES
- -------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY 5-10 YEARS
- -------------------------------------------------------------------------------
BENCHMARK: A WEIGHTED BLEND OF QUARTERLY RETURNS OF THE FOLLOWING:
50% LEHMAN 5-YEAR MUNICIPAL BOND INDEX
50% LEHMAN 10-YEAR MUNICIPAL BOND INDEX
- -------------------------------------------------------------------------------
TICKER SYMBOL: MPMFX
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-691
PORTFOLIO MANAGERS
STEVEN K. KREIDER AND NEIL STONE
<PAGE>
- ---------------------------------------------------------------
MUNICIPAL PORTFOLIO
- ---------------------------------------------------------------
Commenced operations on October 1, 1992
14.31% -6.30% 19.97% 5.60% 8.68% 5.82%
1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 3/31/95 Quarter Ended 3/31/94
8.94% -7.34%
- ---------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- -------------------------------------------------------------------------------
LEHMAN 5-YEAR LEHMAN 10-YEAR BLENDED
MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
PORTFOLIO BOND INDEX BOND INDEX INDEX*
ONE YEAR 5.82 5.84 6.76 6.30
- -------------------------------------------------------------------------------
FIVE YEARS 6.42 5.28 6.35 5.54
- -------------------------------------------------------------------------------
SINCE INCEPTION
10/1/92 7.66 5.85 7.42 7.14
* 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.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
20
<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. The Adviser alters the Portfolio's weightings in various sectors
based on its perception of value. The Adviser may sell securities when it
believes that expected risk-adjusted return is low compared to other investment
opportunities.
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 make 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES
- -------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- -------------------------------------------------------------------------------
MAY INVEST OVER 50% OF ASSETS IN MORTGAGE SECURITIES
- -------------------------------------------------------------------------------
BENCHMARK: SALOMON BROAD INVESTMENT GRADE INDEX
- -------------------------------------------------------------------------------
TICKER SYMBOL: MPSPX
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-725
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN AND RICHARD B. WORLEY
- ------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------
Commenced operations on March 31, 1992
14.85% -5.02% 19.70% 7.41% 10.04% 6.33%
1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 6/30/95 Quarter Ended 3/31/94
5.83% -2.74%
- ------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- -------------------------------------------------------------------------------
SPECIAL PURPOSE SALOMON BROAD
FIXED INCOME INVESTMENT GRADE
PORTFOLIO INDEX
- -------------------------------------------------------------------------------
ONE YEAR 6.33 8.72
- -------------------------------------------------------------------------------
FIVE YEARS 7.40 7.30
- -------------------------------------------------------------------------------
SINCE INCEPTION
3/31/92 9.28 8.19
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
21
<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 make the Portfolio's sensitivity to changes in interest rates equal to
that of the Merrill Lynch 1-3 Year Government Bond Index. The Adviser may sell
securities when it believes that expected risk - adjusted return is low compared
to other investment opportunities.
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 make 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. Certain hedging strategies or instruments
may not be available or practical in certain markets or under certain
conditions. 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.
No performance information is provided because the Targeted Duration
Portfolio had not commenced operations as of 12/31/98.
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES
- -------------------------------------------------------------------------------
AVERAGE DURATION WILL APPROXIMATE THE BENCHMARK (CURRENTLY 1.7 YEARS)
- -------------------------------------------------------------------------------
80% INVESTMENT GRADE SECURITIES
- -------------------------------------------------------------------------------
UP TO 20% HIGH YIELD SECURITIES
- -------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- -------------------------------------------------------------------------------
BENCHMARK: MERRILL LYNCH 1-3 YEAR GOVERNMENT BOND INDEX
- -------------------------------------------------------------------------------
TICKER SYMBOL.: NOT AVAILABLE
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-238
PORTFOLIO MANAGERS
MICHELE A. KREISLER AND SCOTT F. RICHARD
22
<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 MARKET 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. In determining whether securities should be sold, the
Adviser considers factors such as deteriorating earnings, cash flow and other
fundamentals, as well as high valuations relative to the Portfolio's investment
universe.
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 make 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 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. Brady Bonds are subject to
certain risks, including the risk of default by the issuer.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Brady Bonds also may 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, in its discretion, use derivatives and
other techniques to hedge currency risks. However, the Adviser cannot guarantee
that it will succeed in doing so. Certain hedging
GENERALLY 45-75% INVESTED IN EQUITIES, 25-55% IN FIXED INCOME SECURITIES
- -------------------------------------------------------------------------------
AT LEAST 25% INVESTED IN SENIOR FIXED INCOME SECURITIES
- -------------------------------------------------------------------------------
UP TO 25% INVESTED IN FOREIGN EQUITY AND FOREIGN FIXED INCOME SECURITIES
- -------------------------------------------------------------------------------
UP TO 10% INVESTED IN BRADY BONDS
(A TYPE OF EMERGING MARKET FIXED INCOME SECURITY)
- -------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1 BILLION
- -------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME SECURITIES GENERALLY GREATER
THAN 5 YEARS
- -------------------------------------------------------------------------------
BENCHMARK: WEIGHTED BLEND OF QUARTERLY RETURNS OF
60% S&P 500 INDEX
40% SALOMON BROAD INVESTMENT GRADE INDEX
- -------------------------------------------------------------------------------
TICKER SYMBOL: MPBAX
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-675
PORTFOLIO MANAGERS
THOMAS L. BENNETT, BARTON M. BIGGS, GARY G. SCHLARBAUM,
HORACIO A. VALEIRAS AND RICHARD B. WORLEY
23
BALANCED PORTFOLIO (Continued)
strategies or instruments may not be available or practical in certain markets
or under certain conditions. 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 the Portfolio's
overall 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.
- -----------------------------------------------------------------
BALANCED PORTFOLIO
- -----------------------------------------------------------------
Commenced operations on December 31, 1992
10.37% -1.93% 27.34% 15.37% 19.60% 15.40%
1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.06% -6.73%
- -----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- -------------------------------------------------------------------------------
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX*
- -------------------------------------------------------------------------------
ONE YEAR 15.40 28.57 8.72 21.24
- -------------------------------------------------------------------------------
FIVE YEARS 14.74 24.06 7.30 17.36
- -------------------------------------------------------------------------------
SINCE INCEPTION
12/31/92 14.00 21.61 7.73 16.10
* The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
24
<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. In determining whether securities
should be sold, the Adviser considers factors such as deteriorating earnings,
cash flows and other fundamentals, as well as high valuations relative to the
Portfolio's investment universe.
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 make 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 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.
GENERALLY AT LEAST 65% INVESTED IN ISSUERS LOCATED IN AT LEAST 3 COUNTRIES,
INCLUDING THE U.S.
- -------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1 BILLION
- -------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME SECURITIES GENERALLY GREATER
THAN 5 YEARS
- -------------------------------------------------------------------------------
BENCHMARK: A WEIGHTED BLEND OF QUARTERLY RETURNS OF
50% S&P 500 INDEX
14% MSCI EAFE-GDP WEIGHTED INDEX
24% SALOMON BROAD INVESTMENT GRADE INDEX
6% SALOMON WORLD GOVERNMENT BOND EX-U.S. INDEX
6% SALOMON HIGH YIELD MARKET INDEX
- -------------------------------------------------------------------------------
TICKER SYMBOL: MPGBX
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-634
PORTFOLIO MANAGERS
THOMAS L. BENNETT, BARTON M. BIGGS, J. DAVID GERMANY, GARY G. SCHLARBAUM,
ANN D. THIVIERGE, HORACIO A. VALEIRAS AND RICHARD B. WORLEY
25
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Continued)
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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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 the Portfolio's overall
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.
- ---------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- ---------------------------------------------------------------------
Commenced operations on July 29, 1994
24.62% 15.93% 17.48% 13.87%
1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.82% -8.64%
- ---------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALOMON BROAD MSCI EAFE-GDP
MULTI-ASSET-CLASS S&P 500 INVESTMENT WEIGHTED BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX INDEX*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 13.87 28.57 8.72 26.71 22.05
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
7/29/94 15.69 27.65 8.76 10.58 18.57
</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
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
26
<PAGE>
IMPORTANT INVESTMENT INFORMATION
Each Portfolio involves the risk that an investor may lose money. Some of the
Portfolios may actively trade their securities to achieve their investment
objectives. High levels of portfolio turnover are likely to lead to increased
transaction costs and possible tax consequences. Nonetheless, short-term trading
activities represented by high portfolio turnover rates are not incompatible
with these Portfolios' stated objectives of achieving long-term capital
appreciation or other multi-year goals, in that short-term trading can lead to
gains that ultimately will increase the value of the investor's shares.
The following 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 for purposes of foreign investment limitations.
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 an appropriate stock market 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
characteristics such as price/earnings and price/book ratios. Value stocks are
generally dividend paying common stocks. However, non-dividend paying stocks may
also be selected for their value characteristics.
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 price 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
27
<PAGE>
IMPORTANT INVESTMENT INFORMATION (Continued)
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 in the section below entitled "Foreign Securities".
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 United States. 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 United States. 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
28
<PAGE>
IMPORTANT INVESTMENT INFORMATION (Continued)
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 in
the section entitled "Derivatives and Other Investments". The Adviser may in its
discretion choose not to hedge against currency risk. In addition, certain
market conditions may make it impossible or uneconomical to hedge against
currency risk.
EMERGING MARKET SECURITIES
Investing in emerging market 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
economical way of pursuing a particular investment strategy, limiting certain
risks or enhancing potential returns.
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. 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 or 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.
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
29
<PAGE>
IMPORTANT INVESTMENT INFORMATION (Continued)
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.
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>
EQUITY
PORTFOLIOS
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
FEES AND EXPENSES OF THE PORTFOLIOS
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
EQUITY PORTFOLIO .500% NONE .109% .609%
- --------------------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO .500% NONE .120% .620%
- --------------------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750% NONE .153% .903%
- --------------------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO 1.000% NONE 3.830%* 4.830%**
- --------------------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO .750% NONE .110% .860%
- --------------------------------------------------------------------------------------------
VALUE PORTFOLIO .500% NONE .100% .600%
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* Other expenses are based on estimated amounts for the current year.
** 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 in the table below. 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.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
- ----------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO 1.150%
- ----------------------------------------------------------------------------
Example
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. For Portfolios that
have been in operation for 6 months or less, the example is limited to 3 years.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be equal to the amounts reflected in the table to the right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
EQUITY PORTFOLIO $ 62 $ 195 $ 340 $ 761
- ------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO $ 63 $ 199 $ 346 $ 774
- ------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO $ 92 $ 288 $ 500 $1,111
- ------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO $ 483 $ 1,453 $ -- $ --
- ------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO $ 88 $ 274 $ 477 $1,061
- ------------------------------------------------------------------------------
VALUE PORTFOLIO $ 61 $ 192 $ 335 $ 750
31
<PAGE>
FIXED INCOME
PORTFOLIOS
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH RESERVES PORTFOLIO .250% NONE .120% .370%**
- -------------------------------------------------------------------------------------------
DOMESTIC FIXED INCOME
PORTFOLIO .375% NONE .142% .517%**
- -------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375% NONE .107% .482%
- -------------------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO .375% NONE .128% .503%
- -------------------------------------------------------------------------------------------
GLOBAL FIXED INCOME
PORTFOLIO .375% NONE .187% .562%
- -------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .375% NONE .123% .498%
- -------------------------------------------------------------------------------------------
INTERMEDIATE DURATION
PORTFOLIO .375% NONE .147% .522%
- -------------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME
PORTFOLIO .375% NONE .145% .520%
- -------------------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO .300% NONE .121% .421%
- -------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
PORTFOLIO .375% NONE .197% .572%**
- -------------------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME
PORTFOLIO .450% NONE .181% .631%**
- -------------------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO .375% NONE .182% .557%**
- -------------------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED
INCOME PORTFOLIO .375% NONE .114% .489%
- -------------------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO .375% NONE .195%* .570%**
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* Other expenses are based on estimated amounts for the current year.
** 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 in the table below. 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.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT/ OFFSETS
- -------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO .320%
- -------------------------------------------------------------------------------
DOMESTIC FIXED INCOME
PORTFOLIO .500%
- -------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
PORTFOLIO .500%
- -------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME
PORTFOLIO .580%
- -------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO .500%
- -------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO .450%
32
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
EXAMPLE
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. For Portfolios that
have been in operation for 6 months or less, the example is limited to 3 years.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be equal to the amounts reflected in the table to the right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO $ 38 $ 119 $ 208 $ 468
- -----------------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO $ 53 $ 166 $ 289 $ 649
- -----------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO $ 49 $ 155 $ 270 $ 606
- -----------------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO $ 51 $ 161 $ 281 $ 632
- -----------------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO $ 57 $ 180 $ 314 $ 704
- -----------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO $ 51 $ 160 $ 279 $ 626
- -----------------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO $ 53 $ 167 $ 292 $ 655
- -----------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO $ 53 $ 167 $ 291 $ 653
- -----------------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO $ 43 $ 135 $ 236 $ 531
- -----------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES PORTFOLIO $ 58 $ 183 $ 319 $ 716
- -----------------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO $ 64 $ 202 $ 352 $ 788
- -----------------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO $ 57 $ 179 $ 311 $ 698
- -----------------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO $ 50 $ 157 $ 274 $ 615
- -----------------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO $ 58 $ 183 $ -- $ --
</TABLE>
33
<PAGE>
BALANCED
PORTFOLIOS
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO .450% NONE .138% .588%
- ------------------------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .650% NONE .174% .824%*
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* 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 in the table below. 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.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
- -------------------------------------------------------------------------
Multi-Asset-Class Portfolio .780%
- -------------------------------------------------------------------------
EXAMPLE
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
equal to the amounts reflected in the table at right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Balanced Portfolio $ 60 $ 188 $ 328 $ 735
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio $ 84 $ 263 $ 457 $1,018
34
<PAGE>
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, subject to acceptance by MAS Funds, 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. See the section below entitled
"Valuation of Shares". (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.
ADDITIONAL INVESTMENTS
You may make additional investments of Institutional Class Shares (minimum
additional investment $1,000) at the NAV 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.
35
<PAGE>
PURCHASING SHARES (Continued)
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 Client Services 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 Client
Services 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 19428-0868.
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.
36
<PAGE>
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:
[ ] Equity portfolios as of the close of the NYSE (normally 4:00 p.m.
Eastern Time).
[ ] Fixed-income portfolios as of one hour after the close of the bond
markets (normally 4:00 p.m. Eastern Time).
[ ] 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.
[ ] Cash Reserves Portfolio as of 12:00 noon (Eastern Time).
Each Portfolio values its securities at market value, except the Cash Reserves
Portfolio which values its securities using amortized cost valuation. 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. In
addition, the Cash Reserves Portfolio is closed on Columbus Day and Veteran's
Day. The value of certain portfolio securities 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.
GENERAL SHAREHOLDER INFORMATION
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, or by facsimile with a follow-up phone call.
Exchange requests can also be made by telephone, provided the telephone
redemption option has been authorized. We reserve the right to change the terms
or conditions of the exchange privilege upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and raise
its expenses. Therefore, we may not accept any request for an exchange when we
think the exchange privilege is being used as a tool for market timing, and we
may bar a shareholder who trades excessively from making further purchases for
an indefinite period.
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 gain distributions
may be taxable at different rates depending on the length of time the Fund holds
its assets.
The Municipal Portfolio intends 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 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 they 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.
37
<PAGE>
GENERAL SHAREHOLDER INFORMATION (Continued)
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
PORTFOLIO MONTHLY QUARTERLY ANNUALLY
- -----------------------------------------------------------------------------
EQUITY X
- -----------------------------------------------------------------------------
MID CAP GROWTH X
- -----------------------------------------------------------------------------
MID CAP VALUE X
- -----------------------------------------------------------------------------
SMALL CAP GROWTH X
- -----------------------------------------------------------------------------
SMALL CAP VALUE X
- -----------------------------------------------------------------------------
VALUE X
- -----------------------------------------------------------------------------
CASH RESERVES X
- -----------------------------------------------------------------------------
DOMESTIC FIXED INCOME X
- -----------------------------------------------------------------------------
FIXED INCOME X
- -----------------------------------------------------------------------------
FIXED INCOME II X
- -----------------------------------------------------------------------------
GLOBAL FIXED INCOME X
- -----------------------------------------------------------------------------
HIGH YIELD X
- -----------------------------------------------------------------------------
INTERMEDIATE DURATION X
- -----------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME X
- -----------------------------------------------------------------------------
LIMITED DURATION X
- -----------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES X
- -----------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME X
- -----------------------------------------------------------------------------
MUNICIPAL X
- -----------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME X
- -----------------------------------------------------------------------------
TARGETED DURATION X
- -----------------------------------------------------------------------------
BALANCED X
- -----------------------------------------------------------------------------
MULTI-ASSET-CLASS 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. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
38
<PAGE>
FUND MANAGEMENT
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in 1969.
The Adviser is wholly owned by indirect subsidiaries of Morgan Stanley Dean
Witter & Co. (MSDW), and is a division of Morgan Stanley Dean Witter Investment
Management. The Adviser is located at One Tower Bridge, West Conshohocken, PA
19428-0868. The Adviser provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1998, Morgan Stanley Dean Witter Investment Management had in
excess of $163 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 annual contractual and actual rates of compensation
for the Fund's 1998 fiscal year.
CONTRACTUAL FY 1998
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- ------------------------------------------------------------------------------
EQUITY PORTFOLIO .500 .500
- ------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO .500 .500
- ------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750 .750
- ------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO 1.000 .000
- ------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO .750 .750
- ------------------------------------------------------------------------------
VALUE PORTFOLIO .500 .500
- ------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO .250 .197
- ------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO .375 .361
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO .300 .300
- ------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES PORTFOLIO .375 .305
- ------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO .450 .403
- ------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO .375 .334
- ------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO .375 --
- ------------------------------------------------------------------------------
BALANCED PORTFOLIO .450 .450
- ------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .650 .608
* The Adviser is voluntarily waiving a portion of its fees and/or reimbursing
certain expenses for the Cash Reserves Portfolio, the Domestic Fixed Income
Portfolio, the Mortgage-Backed Securities Portfolio, the Multi-Market Fixed
Income Portfolio, the Municipal Portfolio, the Multi-Asset-Class Portfolio,
the Small Cap Growth Portfolio and the Targeted Duration Portfolio to keep
Total Operating Expenses from exceeding .32%, .50%, .50%, .58%, .50%, .78%,
1.15%, and .45% respectively.
39
<PAGE>
FUND MANAGEMENT (Continued)
PORTFOLIO MANAGERS
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, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
ARDEN C. ARMSTRONG, Managing Director, MSDW, 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, MSDW, 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, MSDW, 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 Portfolios
in 1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in
1996 and the Multi-Market Fixed Income Portfolio in 1997.
BARTON M. BIGGS, Managing Director of MSDW since 1975, Chairman of Morgan
Stanley Dean Witter Investment Management Inc. since 1980 and a director of
Morgan Stanley Group, Inc. He is also a director and chairman of various
registered investment companies to which Morgan Stanley Dean Witter Investment
Management, Inc. and certain of its affiliates provide investment advisory
services. He joined the management teams for the Balanced, Balanced Plus and
Multi-Asset Class Portfolios in 1999.
DAVID P. CHU, Vice President, MSDW, 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, Principal, MSDW, 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, MSDW, 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.
STEPHEN F. ESSER, Managing Director, MSDW, 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, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1985. She has served as a Fixed Income Portfolio
Manager since 1989. She joined the management team for the Cash Reserves
Portfolio in 1996.
WILLIAM B. GERLACH, Principal, MSDW, joined MAS in 1991. He served as a Research
Associate from 1991 to 1996 and has served as an Equity Portfolio Manager since
1996. He joined the management team for the Small Cap Value and Mid Cap Value
Portfolios in 1996.
40
<PAGE>
FUND MANAGEMENT (Continued)
J. DAVID GERMANY, Managing Director, MSDW, 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, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
NICHOLAS J. KOVICH, Managing Director, MSDW, 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, MSDW, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
CoreStates Investment Advisors, from 1985 to 1997. He joined the management team
for the Equity Portfolio in 1998.
STEVEN K. KREIDER, Principal, MSDW, joined MAS in 1988. He joined the management
team for the Municipal and the PA Municipal Portfolios in 1992.
MICHELE A. KREISLER, Principal, MSDW, 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, MSDW, joined Morgan Stanley Dean Witter Investment
Management Inc. in 1987. He served as a Global Fixed Income Strategist from 1987
to 1995, and has served as the Senior Global Fixed Income Portfolio Manager
since 1995. He joined the management team for the Global Fixed Income and
International Fixed Income Portfolios in 1996.
CHRIS LEAVY, Vice President, MSDW, 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 to 1994. He joined the management team for the
Mid Cap Value and Small Cap Value Portfolio in 1998.
ANGELO G. MANIOUDAKIS, Principal, MSDW, 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, MSDW, 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, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1997. He served as Vice President/Portfolio
Manager at J.P. Morgan & Co. from 1987 to 1996 and as Vice President/Senior
Portfolio Manager at Citibank Global Asset Management from 1996 to 1997. He
joined the management team for the Cash Reserves Portfolio in 1998.
PAUL F. O'BRIEN, Principal, MSDW, 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.
41
<PAGE>
FUND MANAGEMENT (Continued)
SCOTT F. RICHARD, Managing Director, MSDW, 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.
GARY G. SCHLARBAUM, Managing Director, MSDW; 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, MSDW, joined MAS in 1992. He served as a Research
Associate from 1992-1995, and has served as a Fixed Income Portfolio Manager
since 1995. He joined the management team for the Mortgage-Backed Securities
Portfolio in 1998.
NEIL STONE, Principal, MSDW, 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.
ANN D. THIVIERGE, Managing Director, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1986, and has been a member of its asset
allocation committee since 1991. She joined the management team for the
Multi-Asset-Class Portfolio in 1999.
HORACIO A. VALEIRAS, Managing Director, MSDW, 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, MSDW, 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, MSDW, 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. Mr. Worley has also served as President of Morgan Stanley
Dean Witter Investment Management since 1998.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
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.
42
<PAGE>
YEAR 2000 DISCLOSURE STATEMENT (Continued)
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.
43
<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). As of the fiscal year ended September 30, 1998, the Targeted
Duration Portfolio had not commenced operations. This information has been
extracted from the Fund's financial statements which were audited by
PricewaterhouseCoopers LLP 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- -------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $29.45 $0.24 ($1.04) ($0.80) ($0.28) ($7.93) -- ($8.21)
1997 25.67 0.36 8.22 8.58 (0.40) (4.40) -- (4.80)
1996 24.43 0.50 3.26 3.76 (0.50) (2.02) -- (2.52)
1995 21.05 0.52 4.55 5.07 (0.52) (1.17) -- (1.69)
1994 22.82 0.44 0.41 0.85 (0.41) (2.21) -- (2.62)
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/30/90)
1998 $21.84 ($0.03) $0.24 $0.21 -- ($3.43) -- ($3.43)
1997 20.53 (0.01) 4.75 4.74 -- (3.43) -- (3.43)
1996 18.60 0.01 4.70 4.71 (0.03) (2.75) -- (2.78)
1995 16.29 0.03 4.21 4.24 (0.03) (1.90) -- (1.93)
1994 18.56 0.02 (0.58) (0.56) (0.01) (1.70) -- (1.71)
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1998+++ $21.80 $0.08 ($1.53) ($1.45) ($0.04) ($2.19) -- ($2.23)
1997+++ 14.49 0.05 8.37 8.42 (0.10) (1.01) -- (1.11)
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) -- (1.59)
1995 10.00 0.55### 2.90 3.45 -- -- -- --
SMALL CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 6/30/98)
1998 $10.00 ($0.01) ($1.42) ($1.43) -- -- -- --
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1998 $24.97 $0.16 ($4.33) ($4.17) ($0.14) ($3.29) -- ($3.43)
1997 19.64 0.15 8.39 8.54 (0.11) (3.10) -- (3.21)
1996 18.28 0.18 3.62 3.80 (0.20) (2.24) -- (2.44)
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) -- (2.07)
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) -- (1.18)
</TABLE>
<PAGE>
[RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return** (thousands) Net Assets+ Net Assets Rate
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 $20.44 (2.66%) $872,662 0.61% 0.94% 77%
1997 29.45 38.46 1,312,547 0.60 1.30 85
1996 25.67 16.48 1,442,261 0.60 1.95 67
1995 24.43 26.15 1,597,632 0.61 2.39 67
1994 21.05 4.11 1,193,017 0.60 2.10 41
1998 $18.62 2.00% $429,955 0.62% (0.13%) 172%
1997 21.84 28.05 446,963 0.63 (0.07) 134
1996 20.53 28.81 403,281 0.60 0.04 141
1995 18.60 30.56 373,547 0.61 0.21 129
1994 16.29 (3.28) 302,995 0.60 0.12 55
1998+++ $18.12 (6.92%) $420,555 0.90% 0.40% 213%
1997+++ 21.80 61.40 220,260 0.90++ 0.28 184
1996 14.49 22.30 50,449 0.88++ 1.61 377
1995 13.45 34.50 4,507 0.93*++ 10.13*### 639###
1998 $8.57 (14.30%) $3,004 1.16%*++ (0.46%*) 67%
1998 $17.37 (18.34%) $716,729 0.86% 0.71% 163%
1997 24.97 49.81 897,396 0.86 0.70 107
1996 19.64 24.00 585,457 0.86 0.99 145
1995 18.28 18.39 430,368 0.87 1.20 119
1994 17.67 8.04 308,156 0.88 0.91 162
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1998 $20.37 $0.34 ($3.38) ($3.04) ($0.36) ($1.81) -- ($2.17)
1997+++ 15.61 0.34 5.75 6.09 (0.30) (1.03) -- (1.33)
1996 14.89 0.30 2.20 2.50 (0.32) (1.46) -- (1.78)
1995 12.63 0.31 3.34 3.65 (0.31) (1.08) -- (1.39)
1994 12.76 0.30 0.59 0.89 (0.29) (0.73) -- (1.02)
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1998 $1.000 $.053 -- $ .053 ($.053) -- -- ($.053)
1997 1.000 .052 -- .052 (.052) -- -- (.052)
1996 1.000 .052 -- .052 (.052) -- -- (.052)
1995 1.000 .055 -- .055 (.055) -- -- (.055)
1994 1.000 .034 -- .034 (.034) -- -- (.034)
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1998 $11.27 $0.73 $0.32 $1.05 ($0.79) ($0.13) -- ($0.92)
1997 10.89 0.74 0.33 1.07 (0.67) (0.02) -- (0.69)
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61)
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23)
1994 11.99 0.94 (1.23) (0.29) (0.95) (0.73) (0.15)# (1.83)
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1998+++ $12.22 $0.78 $0.14 $0.92 ($0.75) ($0.17) -- ($0.92)
1997+++ 11.83 0.80 0.50 1.30 (0.78) (0.13) -- (0.91)
1996 11.82 0.78 0.08 0.86 (0.79) (0.06) -- (0.85)
1995 10.93 0.80 0.69 1.49 (0.60) -- -- (0.60)
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($0.13)# (1.42)
FIXED INCOME PORTFOLIO II (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1998 $11.46 $0.61 $0.40 $1.01 ($0.66) ($0.12) -- ($0.78)
1997 11.23 0.74 0.39 1.13 (0.79) (0.11) -- (0.90)
1996 11.33 0.70 (0.03) 0.67 (0.66) (0.08) (0.03)# (0.77)
1995 10.42 0.71 0.71 1.42 (0.51) -- -- (0.51)
1994 11.97 0.63 (1.16) (0.53) (0.67) (0.21) (0.14)# (1.02)
GLOBAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/30/93) <C>
1998 $10.64 $0.55 $0.38 $0.93 (0.39) ($0.15) -- ($0.54)
1997+++ 11.01 0.60 (0.22) 0.38 (0.59) (0.16) -- (0.75)
1996 11.05 0.63 0.09 0.72 (0.71) (0.05) -- (0.76)
1995 10.20 0.71 0.81 1.52 (0.67) -- -- (0.67)
1994 10.67 0.58 (0.61) (0.03) (0.41) (0.03) -- (0.44)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
- -------------------------------------------------------------------------------------------------
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return** (thousands) Net Assets+ Net Assets Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1998 $15.16 16.41% $2,288,236 0.60% 1.76% 56%
1997+++ 20.37 41.25 3,542,772 0.62 1.93 46
1996 15.61 18.41 1,844,740 0.61 2.07 53
1995 14.89 32.58 1,271,586 0.60 2.43 56
1994 12.63 7.45 981,337 0.61 2.40 54
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1998 $1.000 5.47% $168,228 0.32%++ 5.33% N/A
1997 1.000 5.32 98,464 0.33++ 5.20 N/A
1996 1.000 5.35 78,497 0.33++ 5.19 N/A
1995 1.000 5.57 44,624 0.33++ 5.45 N/A
1994 1.000 3.40 37,933 0.32++ 3.70 N/A
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1998 $11.40 9.83% $76,042 0.51%++ 6.32% 145%
1997 11.27 10.20 96,954 0.51++ 6.48 217
1996 10.89 4.41 95,362 0.52++ 5.73 168
1995 11.03 14.33 36,147 0.51++ 6.80 313
1994 9.87 (2.87) 36,521 0.50++ 7.65 78
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1998+++ $12.22 7.90% $4,625,015 0.48% 6.49% 121%
1997+++ 12.22 11.47 3,219,987 0.49 6.73 179
1996 11.83 7.63 1,790,146 0.48 6.77 162
1995 11.82 14.19 1,487,409 0.49 7.28 140
1994 10.93 (4.43) 1,194,957 0.49 6.79 100
FIXED INCOME PORTFOLIO II (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1998 $11.69 9.23% $443,923 0.50% 6.19% 92%
1997 11.46 10.58 226,662 0.50 6.54 182
1996 11.23 6.12 191,740 0.50 6.06 165
1995 11.33 14.13 176,945 0.51 6.75 153
1994 10.42 (4.76) 129,902 0.51 6.07 137
GLOBAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/30/93) <C>
1998 $11.03 9.18% $71,834 0.56% 5.11% 88%
1997+++ 10.64 3.53 77,493 0.57 5.65 137
1996 11.01 6.83 67,282 0.60 5.25 133
1995 11.05 15.54 55,147 0.58 6.34 118
1994 10.20 (0.29) 43,066 0.57 5.48 117
</TABLE>
45
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1998+++ $10.15 $0.85 ($0.93) ($0.08) ($0.82) ($0.26) -- ($1.08)
1997+++ 9.32 0.86 0.87 1.73 (0.87) (0.03) -- (0.90)
1996 9.08 0.88 0.28 1.16 (0.92) -- -- (0.92)
1995 8.97 0.90 0.19 1.09 (0.85) (0.08) ($0.05)# (0.98)
1994 9.49 0.75 (0.42) 0.33 (0.69) (0.16) -- (0.85)
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1998 $10.48 $0.58 $0.28 $0.86 ($0.56) ($0.10) -- ($0.66)
1997+++ 10.28 0.61 0.27 0.88 (0.53) (0.15) -- (0.68)
1996 10.68 0.60 0.03 0.63 (0.65) (0.38) -- (1.03)
1995 10.00 0.69 0.42 1.11 (0.43) -- -- (0.43)
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
1998 $10.19 $0.45 $0.56 $1.01 ($0.36) ($0.09) -- ($0.45)
1997 10.77 0.50 (0.44) 0.06 (0.38) (0.26) -- (0.64)
1996 11.01 0.52 0.12 0.64 (0.80) (0.08) -- (0.88)
1995 10.05 0.67 0.92 1.59 (0.63) -- -- (0.63)
1994 10.00 0.21 (0.11) 0.10 (0.05) -- -- (0.05)
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1998 $10.49 $0.59 $0.03 $0.62 ($0.57) -- -- ($0.57)
1997 10.38 0.62 0.08 0.70 (0.59) -- -- (0.59)
1996 10.41 0.58 (0.03) 0.55 (0.58) -- -- (0.58)
1995 10.19 0.56 0.22 0.78 (0.55) -- ($0.01)# (0.56)
1994 10.72 0.56 (0.52) 0.04 (0.51) ($0.04) (0.02)# (0.57)
MORTGAGE-BACKED SECURITIES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 1/31/92)
1998 $10.76 $0.81 ($0.24) $0.57 ($0.77) -- -- ($0.77)
1997 10.42 0.91 0.16 1.07 (0.73) -- -- (0.73)
1996 10.49 0.68 (0.07) 0.61 (0.68) -- -- (0.68)
1995 9.95 0.72 0.47 1.19 (0.65) -- -- (0.65)
1994 10.95 0.52 (0.83) (0.31) (0.45) ($0.21) ($0.03)# (0.69)
MULTI-MARKET FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/97)
1998 $10.00 $0.56 ($0.29) $0.27 ($0.40) -- ($0.01) ($0.41)
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return** (thousands) Net Assets+ Net Assets Rate
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1998+++ $8.99 (1.17%) $703,110 0.50% 8.74% 75%
1997+++ 10.15 19.90 523,899 0.51 9.05 96
1996 9.32 13.83 289,810 0.49 10.04 115
1995 9.08 13.58 220,785 0.50 10.68 96
1994 8.97 3.57 182,969 0.50 9.01 112
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1998 $10.68 8.57% $116,891 0.52% 5.84% 131%
1997+++ 10.48 8.93 72,119 0.55++ 5.93 204
1996 10.28 6.27 12,017 0.56++ 6.17 251
1995 10.68 11.39 19,237 0.52*++ 6.56* 168
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
1998 $10.75 10.38% $150,313 0.52% 4.59% 75%
1997 10.19 0.44 152,752 0.53 5.27 107
1996 10.77 6.13 143,137 0.53 5.39 124
1995 11.01 16.36 127,882 0.54 6.35 140
1994 10.05 1.01 66,879 0.60*++ 5.83* 31
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1998 $10.54 6.13% $252,711 0.42% 5.89% 107%
1997 10.49 6.98 155,570 0.43%++ 6.15 130
1996 10.38 5.47 123,227 0.43 5.65 174
1995 10.41 7.95 100,186 0.43++ 5.96 119
1994 10.19 0.40 62,775 0.41 4.16 192
MORTGAGE-BACKED SECURITIES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 1/31/92)
1998 $10.56 5.53% $28,672 0.50%++ 6.94% 168%
1997 10.76 10.70 38,085 0.50++ 7.79 164
1996 10.42 6.10 50,925 0.50++ 6.46 116
1995 10.49 12.52 49,766 0.50++ 6.35 107
1994 9.95 (2.95) 119,518 0.50++ 5.30 220
MULTI-MARKET FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/97)
1998 $9.86 2.72% $97,062 0.58%*++ 6.48%* 163%
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
- -------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other Total
of Period Income unrealized) Activities income) capital gains) Distributions Distributions
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1998 $11.64 $0.54 $0.28 $0.82 ($0.50) -- -- ($0.50)
1997 11.23 0.53 0.40 0.93 (0.52) -- -- (0.52)
1996 10.75 0.51 0.49 1.00 (0.52) -- -- (0.52)
1995 10.04 0.59 0.71 1.30 (0.59) -- -- (0.59)
1994 11.15 0.51 (1.01) (0.50) (0.54) -- ($0.07)## (0.61)
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1998 $12.58 $0.84 $0.03 $0.87 ($0.85) ($0.27) -- ($1.12)
1997+++ 12.26 0.85 0.52 1.37 (0.87) (0.18) -- (1.05)
1996 12.53 0.83 0.08 0.91 (0.88) (0.30) -- (1.18)
1995 11.52 0.91 0.75 1.66 (0.65) -- -- (0.65)
1994 13.40 0.80 (1.28) (0.48) (0.78) (0.53) ($0.09)# (1.40)
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1998+++ $15.30 $0.48 ($0.11) $0.37 ($0.49) ($1.72) -- ($2.21)
1997 13.81 0.51 2.91 3.42 (0.54) (1.39) -- (1.93)
1996 13.06 0.53 1.15 1.68 (0.50) (0.43) -- (0.93)
1995 11.28 0.54 1.78 2.32 (0.47) (0.07) -- (0.54)
1994 11.84 0.47 (0.45) 0.02 (0.43) (0.15) -- (0.58)
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1998+++ $13.64 $0.38 ($0.45) ($0.07) ($0.34) ($1.49) -- ($1.83)
1997+++ 12.28 0.38 2.57 2.95 (0.51) (1.08) -- (1.59)
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) -- (0.57)
1995 9.97 0.44 1.33 1.77 (0.40) -- -- (0.40)
1994 10.00 0.07 (0.10) (0.03) -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return** (thousands) Net Assets+ Net Assets Rate
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1998 $11.96 7.20% $82,282 0.52%++ 4.58% 140%
1997 11.64 8.47 75,120 0.51++ 4.70 54
1996 11.23 9.46 54,536 0.51++ 4.66 78
1995 10.75 13.37 36,040 0.50++ 5.64 58
1994 10.04 (4.64) 38,549 0.50++ 4.98 34
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1998 $12.33 7.31% $552,269 0.49% 6.89% 105%
1997+++ 12.58 11.78 492,784 0.49 6.88 198
1996 12.26 7.74 447,646 0.49 6.75 151
1995 12.53 14.97 390,258 0.49 7.33 143
1994 11.52 (4.00) 384,731 0.50 6.66 100
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1998+++ $13.46 2.85% $382,339 0.59% 3.36% 100%
1997 15.30 27.44 343,284 0.58 3.56 145
1996 13.81 13.47 300,868 0.57 3.85 110
1995 13.06 21.37 334,630 0.58 4.55 95
1994 11.28 0.19 309,596 0.58 4.06 75
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1998+++ $11.74 (0.46%) $165,039 0.78%++ 2.98% 107%
1997+++ 13.64 26.50 173,155 0.74++ 3.07 141
1996 12.28 13.75 29,558 0.58++ 3.82 122
1995 11.34 18.28 96,839 0.58++ 4.56 112
1994 9.97 (0.30) 51,877 0.58*++ 4.39* 20
</TABLE>
47
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
# Represents distributions in excess of net realized gains.
## Represents distributions in excess of net investment income.
### Net Investment Income, the Ratio of Net Investment Income to Average Net
Assets and the Portfolio Turnover Rate reflect activity relating to a
nonrecurring initiative to invest in higher-paying dividend income
producing securities.
+ For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods. Where
listed as N/A, if the expense offsets were included, the Ratio of Expenses
to Average Net Assets would not significantly differ.
PORTFOLIO 1995 1996 1997 1998
Equity 0.60 0.60 0.59 0.59
Mid Cap Growth 0.60 0.60 0.61 0.60
Mid Cap Value 0.88* 0.88 0.88 0.88
Small Cap Value 0.87 0.86 0.86 0.86
Small Cap Growth 1.15*
Value 0.60 0.60 0.61 0.59
Cash Reserves 0.32 0.32 0.32 0.32
Domestic Fixed Income 0.50 0.50 0.50 0.50
Fixed Income 0.48 0.48 0.48 0.47
Fixed Income II 0.49 0.49 0.49 0.49
Global Fixed Income 0.56 0.58 0.57 0.56
PORTFOLIO 1995 1996 1997 1998
High Yield 0.49% 0.48% 0.50% 0.48%
Intermediate Duration 0.52* 0.52 0.52 0.51
International Fixed Income 0.54 0.53 0.53 0.52
Limited Duration 0.42 0.42 0.42 0.41
Mortgage-Backed Securities 0.50 0.50 0.50 0.50
Multi-Market Fixed Income 0.58*
Municipal 0.50 0.50 0.50 0.50
Special Purpose Fixed Income 0.48 0.49 0.48 0.48
Balanced 0.57 0.57 0.56 0.57
Multi-Asset-Class 0.58 0.58 0.74 0.78
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
<TABLE>
<CAPTION>
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
<S> <C> <C> <C> <C> <C>
PORTFOLIO 1994 1995 1996 1997 1998
Mid Cap Value -- 2.13* 0.18 0.02 --
Small Cap Growth 3.67*
Cash Reserves 0.14% 0.11 0.09 0.07 0.05
Domestic Fixed Income 0.03 0.09 0.01 0.01 0.01
Intermediate Duration -- 0.08* 0.13 0.05 --
International Fixed Income 0.11* -- -- -- --
Limited Duration -- 0.02 -- 0.00(diamond) --
Mortgage-Backed Securities 0.01 0.01 0.04 0.04 0.07
Multi-Market Fixed Income 0.05*
Municipal 0.06 0.09 0.09 0.05 0.04
Multi-Asset-Class 0.26* 0.14 0.08 0.08 0.04
</TABLE>
+++ Per share amounts for the years ended September 30, 1997 and September 30,
1998, are based on average shares outstanding.
(diamond) Amount is less than 0.01%
48
<PAGE>
(This page intentionally left blank)
<PAGE>
MAS INSTITUTIONAL CLASS PROSPECTUS
- --------
MAS FUNDS
JANUARY 31, 1999
TRUSTEES OF THE FUND
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
C. Oscar Morong, Jr. Vincent R. McLean
OFFICERS OF THE FUND
James D. Schmid, President John H. Grady, Jr., Secretary
Lorraine Truten, Vice President Richard J. Shoch, Compliance Officer
James A. Gallo, Treasurer
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 below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by contacting
your financial intermediary.
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 and 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.
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428-0868.
FOR SHAREHOLDER INQUIRIES, CALL CLIENT SERVICES AT 1-800-354-8185.
PRICES AND INVESTMENT RESULTS ARE AVAILABLE AT 1-800-522-1525.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT ----------ONE TOWER BRIDGE O WEST CONSHOHOCKEN, PA 19428 O
<PAGE>
MAS
- ------------
MAS FUNDS
ADVISER CLASS PROSPECTUS
JANUARY 31, 1999
- --------------------------------------------------------------------------------
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 10 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Adviser Class Shares of the following portfolios (each a "Portfolio" and
collectively the "Portfolios"):
EQUITY PORTFOLIOS
-----------------
EQUITY
MID CAP GROWTH
MID CAP VALUE
SMALL CAP VALUE
VALUE
FIXED INCOME PORTFOLIOS
-----------------------
DOMESTIC FIXED INCOME
FIXED INCOME
HIGH YIELD
BALANCED PORTFOLIOS
-------------------
BALANCED
MULTI-ASSET-CLASS
INVESTMENT ADVISER
MILLER ANDERSON & SHERRERD, LLP
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 O WEST CONSHOHOCKEN, PA 19428
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INVESTMENT SUMMARY
INVESTOR SUITABILITY, INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES, RISKS AND PERFORMANCE ......................................... 1
EQUITY PORTFOLIOS
EQUITY .................................................................... 2
MID CAP GROWTH ............................................................ 3
MID CAP VALUE ............................................................. 4
SMALL CAP VALUE ........................................................... 5
VALUE ..................................................................... 6
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME ..................................................... 7
FIXED INCOME .............................................................. 9
HIGH YIELD ................................................................11
BALANCED PORTFOLIOS
BALANCED ..................................................................13
MULTI-ASSET-CLASS .........................................................15
IMPORTANT INVESTMENT INFORMATION
DESCRIPTION OF PRINCIPAL INVESTMENTS ......................................17
FEES AND EXPENSES OF THE PORTFOLIOS
SHAREHOLDER FEES AND ANNUAL PORTFOLIO OPERATING EXPENSES ..................22
PURCHASING SHARES ............................................................24
REDEEMING SHARES .............................................................25
VALUATION OF SHARES ..........................................................26
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE, DIVIDENDS AND DISTRIBUTIONS, AND TAXES ................26
FUND MANAGEMENT
INFORMATION ABOUT THE ADVISER, THE PORTFOLIO MANAGERS AND THE DISTRIBUTOR .28
DISTRIBUTION PLAN ............................................................31
YEAR 2000 DISCLOSURE STATEMENT ...............................................31
FINANCIAL HIGHLIGHTS .........................................................32
<PAGE>
- --------------------------------------------------------------------------------
Investment summary
- --------------------------------------------------------------------------------
This section explains each Portfolio's:
[] Investment Objective
[] Principal Investment Strategy
[] Principal Risks
The discussions on the following pages 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. In fact,
some of the Portfolios strive to meet their investment objectives over an
extended period. These Portfolios focus on a market cycle of three to five
years. This means that the Portfolios will strive to meet their respective
investment objectives within that period without regard to interim market
fluctuations.
[] 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 transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<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.
Inodetermining whether securities should be sold, the Adviser considers factors
such as high price/earnings ratios and relative valuations.
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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN EQUITY SECURITIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1 BILLION
- --------------------------------------------------------------------------------
BENCHMARK: S&P 500 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-345
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
ARDEN C. ARMSTRONG, JAMES J.
JOLINGER, NICHOLAS J. KOVICH, BRIAN
KRAMP, ROBERT J. MARCIN AND
GARY G. SCHLARBAUM
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on November 14, 1984
1989 28.28%
1990 -0.09%
1991 39.96%
1992 7.78%
1993 6.66%
1994 0.05%
1995 33.02%
1996 20.59%
1997 25.84%
1998 19.67%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
21.34% -15.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO S&P 500 INDEX
- --------------------------------------------------------------------------------
ONE YEAR 19.67 28.57
- --------------------------------------------------------------------------------
FIVE YEARS 19.41 24.06
- --------------------------------------------------------------------------------
TEN YEARS 17.48 19.21
- --------------------------------------------------------------------------------
SINCE INCEPTION
11/14/84 17.26 16.70
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5, and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
2
<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.
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.
<PAGE>
GENERALLY 65% INVESTED IN EQUITY SECURITIES OF MID CAP COMPANIES
- --------------------------------------------------------------------------------
FOCUS ON GROWTH SECURITIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE BENCHMARK (CURRENTLY $500 MILLION
TO $6 BILLION)
- --------------------------------------------------------------------------------
BENCHMARK: S&P MIDCAP 400 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MACGX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-436
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
ARDEN C. ARMSTRONG AND DAVID P. CHU
- --------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on January 31, 1997
1998 37.00%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
35.89% -19.21%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
MID CAP GROWTH S&P MIDCAP
PORTFOLIO 400 INDEX
- --------------------------------------------------------------------------------
ONE YEAR 37.00 19.12
- --------------------------------------------------------------------------------
SINCE INCEPTION
1/31/97 34.75 24.37
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
3
<PAGE>
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
OBJECTIVE
The Mid Cap 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
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. In determining whether securities should be sold, the Adviser considers
factors such as high valuations relative to other investment opportunities and
deteriorating short or long-term earnings growth projections. Sector weightings
normally are kept within 5% of those of the S&P MidCap 400 Index.
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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN EQUITY SECURITIES OF MID CAP COMPANIES
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE BENCHMARK (CURRENTLY $500 MILLION
TO $6 BILLION)
- --------------------------------------------------------------------------------
BENCHMARK: S&P MIDCAP 400 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-337
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
BRADLEY S. DANIELS, WILLIAM B. GERLACH, CHRIS LEAVY AND GARY G. SCHLARBAUM
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commended operations on December 30, 1994
1995 32.71%
1996 40.77%
1997 39.58%
1998 16.05%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
22.46% -13.80%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
MID CAP VALUE S&P MIDCAP
PORTFOLIO 400 INDEX
- --------------------------------------------------------------------------------
ONE YEAR 16.05 19.12
- --------------------------------------------------------------------------------
SINCE INCEPTION
12/30/94 31.87 9.65
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5, and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
4
<PAGE>
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO (Not currently being offered to new investors)
- --------------------------------------------------------------------------------
OBJECTIVE
The Small Cap 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 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 have lower price/earnings
and price/book ratios than the stocks in the Russell 2000 Index. In determing
whether securities should be sold, the Adviser considers factors such as high
valuations relative to other investment opportunities, and deteriorating short
or long-term earnings growth projections. The Portfolio will normally keep its
sector weightings within 5% of those of the index.
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.
GENERALLY AT LEAST 65% INVESTED IN EQUITIES OF SMALL CAP COMPANIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE BENCHMARK (CURRENTLY $100 MILLION
TO $2 BILLION)
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: RUSSELL 2000 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-261
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
BRADLEY S. DANIELS, WILLIAM B. GERLACH, CHRIS LEAVY AND GARY G. SCHLARBAUM
<PAGE>
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commended operations on July 1, 1986
1989 17.61%
1990 -16.55%
1991 63.78%
1992 22.77%
1993 21.16%
1994 2.18%
1995 21.04%
1996 35.15%
1997 30.63%
1998 -1.42%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 3/31/91 QUARTER ENDED 9/30/90
31.89% -27.20%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
SMALL CAP RUSSELL 2000
VALUE PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR -1.42 -2.55
- --------------------------------------------------------------------------------
FIVE YEARS 16.57 11.87
- --------------------------------------------------------------------------------
TEN YEARS 17.80 12.92
- --------------------------------------------------------------------------------
SINCE INCEPTION
7/1/86 13.25 10.23
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5 and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
5
<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.
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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN EQUITIES
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1.5 BILLION
- --------------------------------------------------------------------------------
FOCUS ON VALUE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: S&P 500 INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MPVAX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-451
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
RICHARD M. BEHLER, NICHOLAS J. KOVICH AND ROBERT J. MARCIN
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commended operations on July 17, 1996
1997 22.99%
1998 -3.11%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 6/30/97 QUARTER ENDED 9/30/98
14.57% -19.10%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
VALUE PORTFOLIO S&P 500 INDEX
- --------------------------------------------------------------------------------
ONE YEAR -3.11 28.57
- --------------------------------------------------------------------------------
SINCE INCEPTION
7/17/96 17.15 33.21
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the correspo nding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
6
<PAGE>
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
OBJECTIVE
The Domestic Fixed Income Portfolio seeks 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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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
<PAGE>
100% U.S. ISSUERS
- --------------------------------------------------------------------------------
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
80% OF FIXED INCOME SECURITIES RATED A OR HIGHER (OR EQUIVALENT)
- --------------------------------------------------------------------------------
UP TO 20% OF FIXED INCOME SECURITIES RATED BBB (OR EQUIVALENT)
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARKS: SALOMON BROAD INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO: 552-913-279
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
THOMAS L. BENNETT, KENNETH B. DUNN AND RICHARD B. WORLEY
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on September 29, 1987
1989 11.22%
1990 7.19%
1991 21.54%
1992 9.12%
1993 13.75%
1994 -3.89%
1995 18.85%
1996 3.89%
1997 9.62%
1998 7.23%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 7/30/91 QUARTER ENDED 3/31/92
7.48% -2.28%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
DOMESTIC FIXED SALOMON BROAD
INCOME PORTFOLIO INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
ONE YEAR 7.23 8.72
- --------------------------------------------------------------------------------
FIVE YEARS 6.88 7.30
- --------------------------------------------------------------------------------
TEN YEARS 9.63 9.31
- --------------------------------------------------------------------------------
SINCE INCEPTION
9/29/87 9.80 9.80
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5, and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
7
<PAGE>
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO (Continued)
- --------------------------------------------------------------------------------
securities, and make 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.
8
<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 shortenothe 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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
80% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
UP TO 20% HIGH YIELD SECURITIES
- --------------------------------------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- --------------------------------------------------------------------------------
BENCHMARKS: SALOMON BROAD INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MFXAX
- --------------------------------------------------------------------------------
CUSIP NO: 552-913-444
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
THOMAS L. BENNETT, KENNETH B. DUNN AND RICHARD B. WORLEY
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commended operations on November 7, 1996
1997 9.34%
1998 6.63%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 6/30/97 QUARTER ENDED 3/31/97
3.98% -0.17%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
FIXED INCOME SALOMON BROAD
PORTFOLIO INVESTMENT GRADE INDEX
- --------------------------------------------------------------------------------
ONE YEAR 6.63 8.72
- --------------------------------------------------------------------------------
SINCE INCEPTION
11/7/96 7.72 8.62
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the correspo nding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
9
<PAGE>
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (Continued)
- --------------------------------------------------------------------------------
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 Porfolio 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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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.
10
<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, investment grade corporate
bonds and, to a limited extent, MORTGAGE SECURITIES. 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. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
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 financ ial health, although changes in
market interest rates also will affect prices. Generally, fixed income
securities decrease in value as interest rates rise and vice versa. High yield
securities may experience reduced liquidity, and sudden and substantial
decreases in price, during certain market conditions.
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
GENERALLY AT LEAST 65% INVESTED IN HIGH YIELD SECURITIES
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON HIGH YIELD INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO. 552-913-428
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
ROBERT E. ANGEVINE, THOMAS L. BENNETT AND STEPHEN F. ESSER
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on January 31, 1997
1998 2.83%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
12.08% -6.81%
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
HIGH YIELD SALOMON HIGH
PORTFOLIO YIELD INDEX
- --------------------------------------------------------------------------------
ONE YEAR 2.83 3.61
- --------------------------------------------------------------------------------
SINCE INCEPTION
1/31/97 6.41 8.26
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the correspo nding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
11
<PAGE>
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (Continued)
- --------------------------------------------------------------------------------
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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
12
<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 MARKET 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. In determining whether securities should be sold, the
Adviser considers factors such as deteriorating earnings, cash flows and other
fundamentals, as well as high valuations relative to the Portfolio's investment
universe.
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 make 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 generally considered
to be less economically mature than developed nations. Emerging market
<PAGE>
GENERALLY 45-75% INVESTED IN EQUITIES, 25-55% IN FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
AT LEAST 25% INVESTED IN SENIOR FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
UP TO 25% INVESTED IN FOREIGN EQUITY AND FOREIGN FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
UP TO 10% INVESTED IN BRADY BONDS (A TYPE OF EMERGING MARKET FIXED INCOME
SECURITY)
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1 BILLION AVERAGE WEIGHTED
MATURITY OF FIXED INCOME SECURITIES GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: WEIGHTED BLEND OF
QUARTERLY RETURNS OF
60% S&P 500 INDEX
40% SALOMON BROAD
INVESTMENT GRADE
INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: MBAAX
- --------------------------------------------------------------------------------
CUSIP NO. 552-913-394
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
THOMAS L. BENNETT, BARTON M. BIGGS, GARY G. SCHLARBAUM, HORACIO A. VALEIRAS AND
RICHARD B. WORLEY
13
<PAGE>
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (Continued)
- --------------------------------------------------------------------------------
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. Brady Bonds are
subject to certain risks, including the risk of default by the issuer.
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Brady Bonds also may 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, in its discretion, use derivatives and
other techniques to hedge currency risks. However, the Adviser cannot guarantee
that it will succeed in doing so. Certain hedging strategies or instruments may
not be available or practical in certain markets or under certain conditions.
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 the Portfolio's
overall 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.
<PAGE>
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Commended operations on November 1, 1996
1997 19.26%
1998 15.09%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
12.08% -6.81%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX*
- --------------------------------------------------------------------------------
ONE YEAR 15.09 28.57 8.72 21.24
- --------------------------------------------------------------------------------
SINCE INCEPTION
11/1/96 17.67 31.59 8.86 22.59
*The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
14
<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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN ISSUERS LOCATED IN AT LEAST 3 COUNTRIES,
INCLUDING THE U.S
- --------------------------------------------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN $1 BILLION
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME SECURITIES GENERALLY GREATER THAN 5
YEARS
- --------------------------------------------------------------------------------
BENCHMARK: A WEIGHTED BLEND OF
QUARTERLY RETURNS OF
50% S&P 500 INDEX
14% MSCI EAFE-GDP
WEIGHTED INDEX
24% SALOMON BROAD
INVESTMENT GRADE INDEX
6% SALOMON WORLD
GOVERNMENT BOND
EX-U.S. INDEX
6% SALOMON HIGH YIELD
INDEX
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
CUSIP NO. 552-913-634
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
THOMAS L. BENNETT, BARTON M. BIGGS, J. DAVID GERMANY, GARY G. SCHLARBAUM,
ANN D. THIVIERGE, HORACIO A. VALEIRAS, AND RICHARD B. WORLEY.
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on July 29, 1994
1995 24.62%
1996 15.93%
1997 17.48%
1998 13.87%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
12.82% -8.64%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- -------------------------------------------------------------------------------------------
SALOMON BROAD MSCI EAFE-GDP
MULTI-ASSET-CLASS S&P 500 INVESTMENT WEIGHTED BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX INDEX*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 13.87 28.57 8.72 26.71 22.05
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
7/29/94 15.69 27.65 8.76 10.58 18.57
</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.
The bar chart and table above show the Portfolio's Institutuional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
Adviser Class Shares would have similar annual returns, but returns would have
generally been lower as expenses of this class are higher. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
15
<PAGE>
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO (Continued)
- --------------------------------------------------------------------------------
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 e quity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment. In determining whether securities
should be sold, the Adviser considers factors such as deteriorating earnings,
cash flows and other fundamentals, as well as high valuations relative to the
Portfolio's investment universe.
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 make 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 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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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 inte rest 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 the Portfolio's overall
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.
16
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
Each Portfolio involves the risk that an investor may lose money.Some of the
Portfolios may actively trade their securities to achieve their investment
objectives. High levels of portfolio turnover are likely to lead to increased
transaction costs and possible tax consequences. Nonetheless, short-term trading
activities represented by high portfolio turnover rates are not incompatible
with these Portfolios' stated objectives of achieving long-term capital
appreciation or other multi-year goals, in that short-term trading can lead to
gains that ultimately will increase the value of the investor's shares.
The following 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 for purposes of foreign investment limitations.
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 an appropriate stock market 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
characteristics such as price/earnings and price/book ratios. Value stocks are
generally dividend paying common stocks. However, non-dividend paying stocks may
also be selected for their value characteristics.
- --------------------------------------------------------------------------------
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.
17
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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 price changes than shorter term securities because they are
more sensitive to changes in interest rateor 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 in
the section below entitled "Foreign Securities."
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.
18
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
YANKEE BONDS
Yankee bonds are U.S.-dollar denominated fixed income instruments
issued by foreign governments and corporations and sold in the United States.
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 United States. 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 in the section below entitled
"Derivatives and Other Investments." The Adviser may in its discretion choose
not to hedge against currency risk. In addition, certain market conditions may
make it impossible or uneconomical to hedge against currency risk.
EMERGING MARKET SECURITIES
Investing in emerging market 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
19
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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 economical way of pursuing a particular investment strategy,
limiting certain risks or enhancing potential returns.
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. 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.
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 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
20
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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 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.
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.
21
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1)FEES EXPENSES EXPENSES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY PORTFOLIO .500% 0.25% .126% .876%
- -----------------------------------------------------------------------------------------------------------------
MID CAP GROWTH
PORTFOLIO .500% 0.25% .116% .866%
- -----------------------------------------------------------------------------------------------------------------
MID CAP VALUE
PORTFOLIO .750% 0.25% .235% 1.235%
- -----------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE
PORTFOLIO .750% 0.25% .110%* 1.110%
- -----------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO .500% 0.25% .097% .847%
- -----------------------------------------------------------------------------------------------------------------
DOMESTIC FIXED
INCOME PORTFOLIO .375% 0.25% .142%* .767%**
- -----------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375% 0.25% .108% .733%
- -----------------------------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .375% 0.25% .121% .746%
- -----------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO .450% 0.25% .136% .836%
- -----------------------------------------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO .650% 0.25% .174%* 1.074%**
</TABLE>
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO .750%
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO 1.030%
- --------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* Other expenses are based on estimated amounts for the current year.
** 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 in the table below. 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.
22
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
- --------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EQUITY PORTFOLIO $ 89 $279 $485 $1,080
- --------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO $ 88 $276 $480 $1,068
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO $126 $392 $678 $1,494
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO $113 $353 $612 $1,352
- --------------------------------------------------------------------------------
VALUE PORTFOLIO $ 86 $270 $470 $1,045
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO $ 78 $245 $426 $951
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO $ 75 $234 $408 $910
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO $ 76 $238 $415 $926
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO $ 85 $267 $464 $1,032
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO $110 $342 $592 $1,310
Example
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
equal to the amounts reflected in the table to the right.
23
<PAGE>
- --------------------------------------------------------------------------------
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, subject to acceptance by MAS Funds, by completing and
signing an Account Registration Form provided by Client Services ("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, notification must be given
to Client Services at 1-800-354-8185 prior to the determination of NAV. See the
section below entitled "Valuation of Shares." (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 Ban
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 (minimum additional
investment $1,000) at the NAV 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.
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.
24
<PAGE>
- --------------------------------------------------------------------------------
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 Client Services 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 Client
Services at 1-800-354-8185 and requesting that the redemption proceeds be mailed
or wired to you. You ca nnot 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 19428-0868.
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.
25
<PAGE>
- --------------------------------------------------------------------------------
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:
[ ] Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
[ ] Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
[ ] 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.
Each Portfolio values its securities at market value. 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. The value
of certain portfolio securities 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.
- --------------------------------------------------------------------------------
GENERAL SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
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, or
by facsimile with a follow-up phone call. Exchange requests can also be made by
telephone, provided the telephone redemption option has been authorized. We
reserve the right to change the terms or conditions of the exchange privilege
upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and raise
its expenses. Therefore, we may not accept any request for an exchange when we
think the exchange privilege is being used as a tool for market timing, and we
may bar a shareholder who trades excessively from making further purchases for
an indefinite period.
26
<PAGE>
- --------------------------------------------------------------------------------
GENERAL SHAREHOLDER INFORMATION (Continued)
- --------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
- --------------------------------------------------------------------------------
PORTFOLIO QUARTERLY ANNUALLY
- --------------------------------------------------------------------------------
EQUITY CHECKMARK
- --------------------------------------------------------------------------------
MID CAP GROWTH CHECKMARK
- --------------------------------------------------------------------------------
MID CAP VALUE CHECKMARK
- --------------------------------------------------------------------------------
SMALL CAP VALUE CHECKMARK
- --------------------------------------------------------------------------------
VALUE CHECKMARK
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME CHECKMARK
- --------------------------------------------------------------------------------
FIXED INCOME CHECKMARK
- --------------------------------------------------------------------------------
HIGH YIELD CHECKMARK
- --------------------------------------------------------------------------------
BALANCED CHECKMARK
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS CHECKMARK
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. If you want to
change how your dividends are paid you must notify MAS Funds 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.
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 they 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.
27
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in 1969.
The Adviser is wholly owned by indirect subsidiaries of Morgan Stanley Dean
Witter & Co. (MSDW), and is a division of Morgan Stanley Dean Witter Investment
Management. The Adviser is located at One Tower Bridge, West Conshohocken, PA
19428-0868. The Adviser provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1998, Morgan Stanley Dean Witter Investment Management had in
excess of $163 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 annual contractual and actual rates of compensation
for the Fund's 1998 fiscal year.
- --------------------------------------------------------------------------------
CONTRACTUAL FY 1998
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO .500 .500
- --------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO .500 .500
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750 .750
- --------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO .750 .750
- --------------------------------------------------------------------------------
VALUE PORTFOLIO .500 .500
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO* .375 .361
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375 .375
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .375 .375
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO .450 .450
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO* .650 .608
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Domestic Fixed Income Portfolio and the Multi-Asset-
Class Portfolio to keep Total Operating Expenses from exceeding .750% and
1.030%, respectively.
PORTFOLIO MANAGERS
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, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
ARDEN C. ARMSTRONG, Managing Director, MSDW, 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.
28
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT (Continued)
- --------------------------------------------------------------------------------
RICHARD M. BEHLER, Principal, MSDW, 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, MSDW, 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 II
Portfolio in 1990, the Special Purpose Fixed Income and Balanced Portfolios
in 1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in
1996 and the Multi-Market Fixed Income Portfolio in 1997.
BARTON M. BIGGS, Managing Director of MSDW since 1975, Chairman of Morgan
Stanley Dean Witter Investment Management Inc. since 1980 and a director of
Morgan Stanley Group, Inc. He is also a director and chairman of various
registered investment companies to which Morgan Stanley Dean Witter Investment
Management, Inc. and certain of its affiliates provide investment advisory
services. He joined the management teams for the Balanced, Balanced Plus and
Multi-Asset Class Portfolios in 1999.
DAVID P. CHU, Vice President, MSDW, 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, Principal, MSDW, 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, MSDW, 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.
STEPHEN F. ESSER, Managing Director, MSDW, 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, MSDW, joined MAS in 1991. He served as a Research
Associate from 1991 to 1996 and has served as an Equity Portfolio Manager since
1996. He joined the management team for the Small Cap Value and Mid Cap Value
Portfolios in 1996.
J. DAVID GERMANY, Managing Director, MSDW, 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.
29
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT (Continued)
- --------------------------------------------------------------------------------
JAMES J. JOLINGER, Principal, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
NICHOLAS J. KOVICH, Managing Director, MSDW, 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 to 1997. He joined the management team
for the Equity Portfolio in 1998.
CHRIS LEAVY, Vice President, MSDW, joined MAS in 1997. He served as a Portfolio
Manager for Capitoline Investment Services from 1995 to 1997; a Portfolio
Manager for Premier Trust Company from 1994 to 1995; and as a Research Analyst
for Leavy Investment Management from 1993 to 1994. He joined the management team
for the Mid Cap Value and Small Cap Value Portfolio in 1998.
ROBERT J. MARCIN, Managing Director, MSDW, 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, MSDW; 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.
ANN D. THIVIERGE, Managing Director, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1986, and has been a member of its asset
allocation committee since 1991. She joined the management team for the
Multi-Asset-Class Portfolio in 1999.
HORACIO A. VALEIRAS, Managing Director, MSDW, 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, MSDW, 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 II Portfolio 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. Mr. Worley has also served as the President of Morgan Stanley
Dean Witter Investment Management since 1998.
30
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT (Continued)
- --------------------------------------------------------------------------------
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
prof essionals, 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.
31
<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. 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 extracted from the Fund's financial
statements which were audited by PricewaterhouseCoopers LLP, 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.
The Adviser Class Shares of the Small Cap Value, Domestic Fixed Income and
Multi-Asset-Class Portfolios had not commenced operations as of September 30,
1998, therefore Institutional Class Share information is provided to investors
for informational purposes only and should be referred to as a historical guide
to a portfolio's operations and expenses. Past performance does not indicate
future results.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET GAINS DIVIDEND
NET ASSET OR LOSSES DISTRIBUTIONS CAPITAL GAIN
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 1/16/98)
1998 $20.50 $0.10 ($0.09) $0.01 ($0.09) -- --
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 01/31/97)
1998 $21.81 ($0.03) $0.20 $0.17 -- ($3.43) --
1997 17.04 (0.02) 4.79 4.77 -- -- --
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 7/17/98)
1998 $21.82 $0.01 ($3.71) ($3.70) -- -- --
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1998 $24.97 $0.16 ($4.33) ($4.17) ($0.14) ($3.29) --
1997 19.64 0.15 8.39 8.54 (0.11) (3.10) --
1996 18.28 0.18 3.62 3.80 (0.20) (2.24) --
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) --
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) --
VALUE PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 07/17/96)
1998 $20.35 $0.29 ($3.38) ($3.09) ($0.32) ($1.81) --
1997+++ 15.61 0.30 5.74 6.04 (0.27) (1.03) --
1996 14.11 0.01 1.49 1.50 -- -- --
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1998 $11.27 $0.73 $0.32 $1.05 ($0.79) ($0.13) --
1997 10.89 0.74 0.33 1.07 (0.67) (0.02) --
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)#
1995 9.87 0.52 0.87 1.39 (0.23) -- --
1994 11.99 0.94 (1.23) (0.29) (0.95) (0.73) (0.15)#
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO
TOTAL END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
DISTRIBUTIONS PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 1/16/98)
1998 ($0.09) $20.42 (0.02%) $373 0.88%* 0.65%* 77%
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 01/31/97)
1998 ($3.43) $18.55 1.79% $51,058 0.87% (0.25%) 172%
1997 -- 21.81 27.99 1,200 0.88* (0.41)* 134
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 7/17/98)
1998 -- $18.12 (16.96%) $4,919 1.24%* 0.25%* 213%
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1998 ($3.43) $17.37 18.34% $716,729 0.86% 0.71% 163%
1997 (3.21) 24.97 49.81 897,396 0.86 0.70 107
1996 (2.44) 19.64 24.00 585,457 0.86 0.99 145
1995 (2.07) 18.28 18.39 430,368 0.87 1.20 119
1994 (1.18) 17.67 8.04 308,156 0.88 0.91 162
VALUE PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 07/17/96)
1998 ($2.13) $15.13 (16.66%) $325,272 0.85% 1.52% 56%
1997+++ (1.30) 20.35 40.87 201,253 0.90 1.63 46
1996 -- 15.61 10.63 15,493 0.86* 1.66* 53
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1998 ($0.92) $11.40 9.83% $76,042 0.51%++ 6.32% 145%
1997 (0.69) 11.27 10.20 96,954 0.51++ 6.48 217
1996 (0.61) 10.89 4.41 95,362 0.52++ 5.73 168
1995 (0.23) 11.03 14.33 36,147 0.51++ 6.80 313
1994 (1.83) 9.87 (2.87) 36,521 0.50++ 7.65 78
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Continued)
NET GAINS DIVIDEND
NET ASSET OR LOSSES DISTRIBUTIONS CAPITAL GAIN
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/07/96)
1998+++ $12.22 $0.75 $0.14 $0.89 ($0.71) ($0.17) --
1997+++ 12.04 0.70 0.20 0.90 (0.59) (0.13) --
HIGH YIELD PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 01/31/97)
1998+++ $10.15 $0.83 ($0.93) ($0.10) ($0.80) ($0.26) --
1997+++ 9.39 0.56 0.59 1.15 (0.39) -- --
BALANCED PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/01/96)
1998+++ $15.30 $0.44 ($0.12) $0.32 ($0.47) ($1.72) --
1997 14.05 0.42 2.60 3.02 (0.38) (1.39) --
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1998+++ $13.64 $0.38 ($0.45) ($0.07) ($0.34) ($1.49) --
1997+++ 12.28 0.38 2.57 2.95 (0.51) (1.08) --
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) --
1995 9.97 0.44 1.33 1.77 (0.40) -- --
1994 10.00 0.07 (0.10) (0.03) -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO
TOTAL END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
DISTRIBUTIONS PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/07/96)
1998+++ ($0.88) $12.23 7.63% $131,303 0.73% 6.22% 121%
1997+++ (0.72) 12.22 7.79 76,683 0.77*++ 6.50* 179
HIGH YIELD PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 01/31/97)
1998+++ ($1.06) $8.99 (1.37%) $10,236 0.75% 8.55% 75%
1997+++ (0.39) 10.15 12.63 4,327 0.78* 8.68* 96
BALANCED PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/01/96)
1998+++ ($2.19) $13.43 2.49% $24,654 0.84% 3.11% 100%
1997 (1.77) 15.30 23.82 27,366 0.85*++ 3.24* 145
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1998+++ ($1.83) $11.74 (0.46%) $165,039 0.78%++ 2.98% 107%
1997+++ (1.59) 13.64 26.50 173,155 0.74++ 3.07 141
1996 (0.57) 12.28 13.75 29,558 0.58++ 3.82 122
1995 (0.40) 11.34 18.28 96,839 0.58++ 4.56 112
1994 -- 9.97 (0.30) 51,877 0.58*++ 4.39* 20
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Continued)
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL HIGHLIGHTS
*Annualized
**Total return figures for partial years are not annualized.
#Represents distribution in excess of net realized gains.
+For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would be as follows for the respective periods.
PORTFOLIO 1995 1996 1997 1998
Equity -- -- -- 0.82
Mid Cap Value -- -- -- 1.17*
Mid Cap Growth -- -- 0.86* 0.84
Value -- 0.85* 0.89 0.84
Domestic Fixed Income 0.50 0.50 0.50 0.50
Fixed Income -- -- 0.76* 0.72
High Yield -- -- 0.76* 0.73
Balanced -- -- 0.84* 0.82
Multi-Asset-Class 0.58 0.58 0.74 0.78
Small Cap Value 0.87 0.86 0.86 0.86
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep total operating expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and reimbursed expenses totaled the below listed amounts.
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
PORTFOLIO 1994 1995 1996 1997 1998
Domestic Fixed Income 0.03% 0.09 0.01 0.01 0.01
Fixed Income -- -- -- 0.01* --
Balanced -- -- -- 0.03* --
Multi-Asset-Class 0.26* 0.14 0.08 0.08 0.04
+++Per share amounts for the years ended September 30, 1997 and September 30,
1998, are based on average shares outstanding.
34
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<PAGE>
- -------- MAS ------------------------------------ ADVISER CLASS PROSPECTUS
---------
MAS FUNDS
JANUARY 31, 1999
TRUSTEES OF THE FUND
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
C. Oscar Morong, Jr. Vincent R. McLean
OFFICERS OF THE FUND
James D. Schmid, President John H. Grady, Jr., Secretary
Lorraine Truten, Vice President Richard J. Shoch, Compliance Officer
James A. Gallo, Treasurer
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 pr ospectus 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 below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by contacting
your financial intermediary.
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 Securitie s and 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.
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428-0868.
FOR SHAREHOLDER INQUIRIES, CALL CLIENT SERVICES AT 1-800-354-8185.
PRICES AND INVESTMENT RESULTS ARE AVAILABLE AT 1-800-522-1525.
MORGAN STANLEY DEAN WITTER
- --------------------------
INVESTMENT MANAGEMENT -------- ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428
<PAGE>
- ----------------------------------------------- MAS ------------------
---------
MAS FUNDS
------------------------
ADVISER CLASS PROSPECTUS
JANUARY 31, 1999
------------------------
MORGAN STANLEY DEAN WITTER
--------------------------
INVESTMENT MANAGEMENT
- ---------- ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185 -------
<PAGE>
MAS INVESTMENT CLASS PROSPECTUS
- ---------
MAS FUNDS
JANUARY 31, 1999
- -------------------------------------------------------------------------------
Client Services: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
- -------------------------------------------------------------------------------
MAS Funds (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 8 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Investment Class Shares of the following portfolios (each a
"Portfolio" and collectively the "Portfolios"):
EQUITY PORTFOLIOS
EQUITY
MID CAP VALUE
VALUE
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME
FIXED INCOME
HIGH YIELD
BALANCED PORTFOLIOS
BALANCED
MULTI-ASSET-CLASS
INVESTMENT ADVISER
MILLER ANDERSON & SHERRERD, LLP
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 ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428
INVESTMENT MANAGEMENT
<PAGE>
TABLE OF CONTENTS
INVESTMENT SUMMARY
INVESTOR SUITABILITY, INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES, RISKS AND PERFORMANCE......................................... 1
EQUITY PORTFOLIOS
EQUITY .................................................................. 2
MID CAP VALUE ........................................................... 3
VALUE ................................................................... 4
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME ................................................... 5
FIXED INCOME ............................................................ 6
HIGH YIELD ............................................................. 7
BALANCED PORTFOLIOS
BALANCED ................................................................ 8
MULTI-ASSET-CLASS ....................................................... 10
IMPORTANT INVESTMENT INFORMATION
DESCRIPTION OF PRINCIPAL INVESTMENTS .................................... 12
FEES AND EXPENSES OF THE PORTFOLIOS
SHAREHOLDER FEES AND ANNUAL PORTFOLIO OPERATING EXPENSES ................ 16
PURCHASING SHARES .......................................................... 17
REDEEMING SHARES ........................................................... 17
VALUATION OF SHARES ........................................................ 18
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE, TAXES, DIVIDENDS AND DISTRIBUTIONS .................. 19
FUND MANAGEMENT
INFORMATION ABOUT THE ADVISER, THE PORTFOLIO MANAGERS, AND THE
DISTRIBUTOR ........................................................... 20
SERVICE PLAN ............................................................... 22
YEAR 2000 DISCLOSURE STATEMENT ............................................. 23
FINANCIAL HIGHLIGHTS ....................................................... 24
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
o Investment Objective
o Principal Investment Strategy
o Principal Risks
The discussions on the following pages 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
o 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. In fact, some of
the Portfolios strive to meet their investment objectives over an extended
period. These Portfolios focus on a market cycle of three to five years. This
means that the Portfolios will strive to meet their respective investment
objectives within that period without regard to interim market fluctuations.
o 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.
o While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<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.
In determining whether securities should be sold, the Adviser considers factors
such as high price/earnings ratios and relative valuations.
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.
Generally at least 65% invested in equity securities
- -------------------------------------------------------------------------------
Equity capitalization generally greater than $1 billion
- -------------------------------------------------------------------------------
Benchmark: S&P 500 Index
- -------------------------------------------------------------------------------
Ticker Symbol: Not Available
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-584
PORTFOLIO MANAGERS
Arden C. Armstrong, James J. Jolinger,
Nicholas J. Kovich, Brian Kramp,
Robert J. Marcin and Gary G. Schlarbaum
- -----------------------------------------------------
EQUITY PORTFOLIO
- -----------------------------------------------------
Commenced operations on April 10, 1996
25.58% 19.52%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
21.29% -14.45%
- -----------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
EQUITY PORTFOLIO S&P 500 INDEX
- ---------------------------------------------------------------
One Year 19.52 28.57
- ---------------------------------------------------------------
Since Inception 4/10/96 22.09 28.64
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
<PAGE>
MID CAP VALUE PORTFOLIO
OBJECTIVE
The Mid Cap 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
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. In determining whether securities should be sold, the Adviser considers
factors such as high valuations relative to other investment opportunities and
deteriorating short or long-term earnings growth projections. Sector weightings
normally are kept within 5% of those of the S&P MidCap 400 Index.
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.
Generally at least 65% invested in equity securities of mid cap companies
- -------------------------------------------------------------------------------
Focus on value securities
- -------------------------------------------------------------------------------
Equity capitalization generally matching the benchmark
(currently $500 million to $6 billion)
- -------------------------------------------------------------------------------
Benchmark: S&P MidCap
400 Index
- -------------------------------------------------------------------------------
Ticker Symbol: MPMIX
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-477
PORTFOLIO MANAGERS:
Bradley S. Daniels, William B. Gerlach,
Chris Leavy and Gary G. Schlarbaum
- -------------------------------------------------------
MID CAP VALUE PORTFOLIO
- -------------------------------------------------------
Commenced operations on May 10, 1996
39.28% 15.93%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
22.48% -13.80%
- -------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
MIDCAP S&P MIDCAP
VALUE PORTFOLIO 400 INDEX
- -------------------------------------------------------
One Year 15.93 19.12
- -------------------------------------------------------
Since Inception
5/10/96 28.17 22.72
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
3
<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.
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.
Generally at least 65% invested in equities
- -------------------------------------------------------------------------------
Equity capitalization generally greater than $1.5 billion
- -------------------------------------------------------------------------------
Focus on value securities
- -------------------------------------------------------------------------------
Benchmark: S&P 500 Index
- -------------------------------------------------------------------------------
Ticker Symbol: MPVIX
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-576
PORTFOLIO MANAGERS:
Richard M. Behler, Nicholas J. Kovich and Robert J. Marcin
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on May 6, 1996
23.18% -3.02%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 6/30/97 Quarter Ended 9/30/98
14.62% -19.08%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
VALUE PORTFOLIO S&P500 INDEX
- --------------------------------------------------------------------------------
One Year -3.02 28.57
- --------------------------------------------------------------------------------
Since Inception
5/6/96 13.54 30.13
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
4
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO
OBJECTIVE
The Domestic Fixed Income Portfolio seeks 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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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 make 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.
100% U.S. issuers
- -------------------------------------------------------------------------------
Generally at least 65% invested in fixed income securities
- -------------------------------------------------------------------------------
80% of fixed income securities rated A or higher (or equivalent)
- -------------------------------------------------------------------------------
Up to 20% of fixed income securities rated BBB (or equivalent)
- -------------------------------------------------------------------------------
Average weighted maturity generally greater than 5 years
- -------------------------------------------------------------------------------
May invest over 50% in mortgage securities
- -------------------------------------------------------------------------------
Benchmarks: Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
Ticker Symbol: Not Available
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-550
PORTFOLIO MANAGERS:
Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
<PAGE>
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on September 29, 1987
11.22% 7.19% 21.54% 9.12% 13.75% -3.89% 18.85% 3.89% 9.62% 7.23%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.48% -2.28%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
DOMESTIC SALOMON
FIXED INCOME BROAD INVESTMENT
PORTFOLIO GRADE INDEX
- ------------------------------------------------------------------
One Year 7.23 8.72
- ------------------------------------------------------------------
Five Years 6.88 7.30
- ------------------------------------------------------------------
Ten Years 9.63 9.31
- ------------------------------------------------------------------
Since Inception 9/29/87 9.80 9.48
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5 and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Investment Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
5
<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. The Adviser alters the Portfolio's weightings
in various sectors based on its perception of value. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
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 make 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 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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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.
<PAGE>
Generally at least 65% invested in fixed income securities
- --------------------------------------------------------------------------------
Average weighted maturity generally greater than 5 years
- --------------------------------------------------------------------------------
80% investment grade securities
- --------------------------------------------------------------------------------
Up to 20% high yield securities
- --------------------------------------------------------------------------------
May invest over 50% in mortgage securities
- --------------------------------------------------------------------------------
Benchmarks: Salomon Broad Investment Grade Index
- --------------------------------------------------------------------------------
Ticker Symbol: Not Available
- --------------------------------------------------------------------------------
CUSIP No.: 552-913-568
PORTFOLIO MANAGERS:
Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley
- -----------------------------------------------------
FIXED INCOME PORTFOLIO
- -----------------------------------------------------
Commenced operations on October 15, 1996
9.52% 6.72%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 6/30/97 Quarter Ended 3/31/97
3.98% -0.09%
- -----------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
FIXED SALOMON
INCOME BROAD INVESTMENT
PORTFOLIO GRADE INDEX
- -------------------------------------------------------------
One Year 6.72 8.72
- -------------------------------------------------------------
Since Inception 10/15/96 8.60 9.28
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
6
<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, and investment grade corporate
bonds and, to a limited extent, MORTGAGE SECURITIES. 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. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
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. Generally, fixed income securities
decrease in value as interest rates rise and vice versa. 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. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
Average weighted maturity generally greater than 5 years
- -------------------------------------------------------------------------------
Generally at least 65% invested in high yield securities
- -------------------------------------------------------------------------------
Benchmark: Salomon High Yield Index
- -------------------------------------------------------------------------------
Ticker Symbol: Not Available
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-527
PORTFOLIO MANAGERS:
Robert E. Angevine, Thomas L. Bennett and Stephen F. Esser
<PAGE>
- -------------------------------------------------
HIGH YIELD PORTFOLIO
- -------------------------------------------------
Commenced operations on May 21, 1996
15.73% 2.94%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 6/30/97 Quarter Ended 9/30/98
6.90% -6.35%
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
HIGH SALOMON
YIELD HIGH YIELD
PORTFOLIO INDEX
- -------------------------------------------------------
One Year 2.94 3.61
- -------------------------------------------------------
Since Inception 5/21/96 10.85 9.73
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
7
<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 MARKET 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. In determining whether securities should be sold, the
Adviser considers factors such as deteriorating earnings, cash flows and other
fundamentals, as well as high valuations relative to the Portfolio's investment
universe.
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 make 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 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. Brady
Bonds are subject to certain risks, including the risk of default by the issuer.
Generally 45-75% invested in equities, 25-55% in fixed income securities
- -------------------------------------------------------------------------------
At least 25% invested in senior fixed income securities
- -------------------------------------------------------------------------------
Up to 25% invested in foreign equity and foreign fixed income securities
- -------------------------------------------------------------------------------
Up to 10% invested in Brady Bonds
(a type of emerging market fixed income security)
- -------------------------------------------------------------------------------
Equity capitalization generally greater than $1 billion
- -------------------------------------------------------------------------------
Average weighted maturity of fixed income securities generally greater
than 5 years
- -------------------------------------------------------------------------------
Benchmark: weighted blend of quarterly returns of
60% S&P 500 Index
40% Salomon Broad Investment Grade Index
- -------------------------------------------------------------------------------
Ticker Symbol: Not Available
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-493
PORTFOLIO MANAGERS:
Thomas L. Bennett, Barton M. Biggs, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley
8
<PAGE>
BALANCED PORTFOLIO (Continued)
Many of the Portfolio's foreign securities will be denominated in a foreign
currency. Brady Bonds also may 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. The Adviser may, in its discretion, use derivatives to hedge
currency risk. However, the Adviser cannot guarantee that it will succeed in
doing so. Certain hedging strategies or instruments may not be available or
practical in certain markets or under certain conditions. 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.
- ------------------------------------------------
BALANCED PORTFOLIO
- ------------------------------------------------
Commenced operations on April 4, 1997
15.09%
1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.08% -6.73%
- ------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT GRADE BLENDED
PORTFOLIO INDEX INDEX INDEX*
- -------------------------------------------------------------------------------
One Year 15.09 28.57 8.72 21.24
- -------------------------------------------------------------------------------
Since Inception
4/4/97 19.31 34.83 10.75 25.40
*The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
9
<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. In determining whether securities
should be sold, the Adviser considers factors such as deteriorating earnings,
cash flows and other fundamentals, as well as high valuations relative to the
Portfolio's investment universe.
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 make 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 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.
Generally at least 65% invested in issuers located in at least 3 countries,
including the U.S.
- -------------------------------------------------------------------------------
Equity capitalization generally greater than $1 billion
- -------------------------------------------------------------------------------
Average weighted maturity of fixed income securities generally greater
than 5 years
- -------------------------------------------------------------------------------
Benchmark: a weighted blend of quarterly returns of
50% S&P 500 Index
14% MSCI EAFE-GDP Weighted Index
24% Salomon Broad Investment Grade Index
6% Salomon World Government Bond Ex-U.S. Index
6% Salomon High Yield Index
- -------------------------------------------------------------------------------
Ticker Symbol: Not Available
- -------------------------------------------------------------------------------
CUSIP No.: 552-913-485
PORTFOLIO MANAGERS:
Thomas L. Bennett, Barton M. Biggs, J. David Germany, Gary G. Schlarbaum,
Ann D. Thivierge, Horacio A. Valeiras and Richard B. Worley
10
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Continued)
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. Certain hedging strategies or
instruments may not be available or practical in certain markets or under
certain conditions. 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.
- ---------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- ---------------------------------------------------------
Commenced operations on June 10, 1996
17.21% 13.80%
1997 1998
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.83% -8.71%
- ---------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
<TABLE>
<CAPTION>
SALOMON BROAD MSCI EAFE-GDP
MULTI-ASSET-CLASS S&P 500 INVESTMENT WEIGHTED BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX INDEX*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year 13.80 28.57 8.72 26.71 22.05
- ----------------------------------------------------------------------------------------------
Since Inception
6/10/96 15.36 28.84 9.86 13.86 19.98
</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.
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
11
<PAGE>
IMPORTANT INVESTMENT INFORMATION
Each Portfolio involves the risk that an investor may lose money. Some of the
Portfolios may actively trade their securities to achieve their investment
objectives. High levels of portfolio turnover are likely to lead to increased
transaction costs and possible tax conquences. Nonetheless, short-term trading
activities represented by high portfolio turnover rates are not incompatible
with these Portfolios' stated objectives of achieving long-term capital
appreciation or other multi-year goals, in that short-term trading can lead to
gains that ultimately will increase the value of the investors shares.
The following 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 for purposes of foreign investment limitations.
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 an appropriate stock market 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
characteristics such as price/earnings and price/book ratios. Value stocks are
generally dividend paying common stocks. However, non-dividend paying stocks may
also be selected for their value characteristics.
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 se curities; 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 price 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.
12
<PAGE>
IMPORTANT INVESTMENT INFORMATION (Continued)
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 i nterest 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 in
the section below entitled "Foreign Securities."
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 United States. 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 United States. 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
13
<PAGE>
IMPORTANT INVESTMENT INFORMATION (Continued)
Portfolios' assets. The Adviser may use certain derivatives to offset this risk.
The risks of hedging currency risk are described in the section below entitled
"Derivatives and Other Investments." The Adviser may in its discretion choose
not to hedge against currency risks. In addition, certain market conditions may
make it impossible or uneconomical to hedge against currency risk.
EMERGING MARKET SECURITIES
Investing in emerging market 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
economical way of pursuing a particular investment strategy, limiting certain
risks, or enhancing potential returns.
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. 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.
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
14
<PAGE>
IMPORTANT INVESTMENT INFORMATION
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 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 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.
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 wi th 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.
15
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES SHAREHOLDER ANNUAL FUND
MANAGEMENT DISTRIBUTION (EX SHAREHOLDER SERVICING OPERATING
FEES (12B-1) FEES SERVICING FEES) FEES EXPENSES
<S> <C> <C> <C> <C> <C>
Equity Portfolio .500% None .110% 0.15% .760%
- ------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio .750% None .154% 0.15% 1.054%
- ------------------------------------------------------------------------------------------------------
Value Portfolio .500% None .096% 0.15% .746%
- ------------------------------------------------------------------------------------------------------
Domestic Fixed Income
Portfolio .375% None .142%* 0.15% .667%**
- ------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .375% None .109% 0.15% .634%
- ------------------------------------------------------------------------------------------------------
High Yield Portfolio .375% None .125% 0.15% .650%
- ------------------------------------------------------------------------------------------------------
Balanced Portfolio .450% None .137% 0.15% .737%
- ------------------------------------------------------------------------------------------------------
Multi-Asset-Class
Portfolio .650% None .174% 0.15% .974%**
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* Other expenses are based on estimated amounts for the current year.
** 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 in the table below. 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.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
- -------------------------------------------------------------------------------
Domestic Fixed Income Portfolio .650%
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio .930%
EXAMPLE
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
equal to the amounts reflected in the table to the right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Equity Portfolio $ 78 $243 $422 $942
- -------------------------------------------------------------------------------
Mid Cap Value Portfolio $107 $335 $582 $1,287
- -------------------------------------------------------------------------------
Value Portfolio $ 76 $238 $415 $926
- -------------------------------------------------------------------------------
Domestic Fixed Income Portfolio $ 68 $213 $372 $831
- -------------------------------------------------------------------------------
Fixed Income Portfolio $ 65 $203 $353 $791
- -------------------------------------------------------------------------------
High Yield Portfolio $ 66 $206 $358 $802
- -------------------------------------------------------------------------------
Balanced Portfolio $ 75 $236 $410 $915
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio $ 99 $310 $538 $1,194
16
<PAGE>
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, subject to acceptance by MAS Funds, 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 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, notification must be
given to Client Services at 1-800-354-8185 prior to the determination of NAV.
See the section below entitled "Valuation of Shares." (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 (minimum
additional investment $1,000) at the NAV 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.
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.
17
<PAGE>
REDEEMING SHARES (Continued)
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 Client Services 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 Client
Services 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 19428-0868.
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 y ou 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 portfolios are 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.
Each Portfolio values its securities at market value. 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.
18
<PAGE>
VALUATION OF SHARES (Continued)
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. The value
of certain portfolio securities 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.
GENERAL SHAREHOLDER INFORMATION
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, or by facsimile with a follow-up phone call. Exchange requests can
also be made by telephone, provided the telephone redemption option has been
authorized. We reserve the right to change the terms or conditions of the
exchange privilege upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and raise
its expenses. Therefore, we may not accept any request for an exchange when we
think the exchange privilege is being used as a tool for market timing, and we
may bar a shareholder who trades excessively from making further purchases for
an indefinite period.
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.
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 they 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.
19
<PAGE>
GENERAL SHAREHOLDER INFORMATION (Continued)
DIVIDENDS AND
DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
PORTFOLIO QUARTERLY ANNUALLY
- ------------------------------------------------------------------
Equity X
- ------------------------------------------------------------------
Mid Cap Value X
- ------------------------------------------------------------------
Value X
- ------------------------------------------------------------------
Domestic Fixed Income X
- ------------------------------------------------------------------
Fixed Income X
- ------------------------------------------------------------------
High Yield X
- ------------------------------------------------------------------
Balanced X
- ------------------------------------------------------------------
Multi-Asset-Class 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. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
FUND MANAGEMENT
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in 1969.
The Adviser is wholly owned by indirect subsidiaries of Morgan Stanley Dean
Witter, & Co. (MSDW), and is a division of Morgan Stanley Dean Witter Investment
Management. The Adviser is located at One Tower Bridge, West Conshohocken, PA
19428-0868. The Adviser provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
as of December 31, 1998, Morgan Stanley Dean Witter Investment Management had in
excess of $163 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 annual contractual and actual rates of compensation
for the Fund's 1998 fiscal year.
CONTRACTUAL FY 1998
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- ------------------------------------------------------------------------------
Equity Portfolio .500 .500
- ------------------------------------------------------------------------------
Mid Cap Value Portfolio .750 .750
- ------------------------------------------------------------------------------
Value Portfolio .500 .500
- ------------------------------------------------------------------------------
Domestic Fixed Income Portfolio* .375 .361
- ------------------------------------------------------------------------------
Fixed Income Portfolio .375 .375
- ------------------------------------------------------------------------------
High Yield Portfolio .375 .375
- ------------------------------------------------------------------------------
Balanced Portfolio .450 .450
- ------------------------------------------------------------------------------
Multi-Asset-Class Portfolio* .650 .608
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Domestic Fixed Income Portfolio and Multi-Asset-Class
Portfolio to keep Total Operating Expenses from exceeding 0.650% and 0.930%,
respectively.
20
<PAGE>
FUND MANAGEMENT (Continued)
PORTFOLIO MANAGERS
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, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
ARDEN C. ARMSTRONG, Managing Director, MSDW, 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, MSDW, 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, MSDW, 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 II
Portfolio in 1990, the Special Purpose Fixed Income and Balanced Portfolios in
1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in
1996 and the Multi-Market Fixed Income Portfolio in 1997.
BARTON M. BIGGS, Managing Director of MSDW since 1975, Chairman of Morgan
Stanley Dean Witter Investment Management Inc. since 1980 and director of Morgan
Stanley Group, Inc. He is also a director and chairman of various registered
investment companies to which Morgan Stanley Dean Witter Investment Management,
Inc. and certain of its affiliates provide investment advisory services. He
joined the management teams for the Balanced, Balanced Plus and Multi-Asset
Class Portfolios in 1999.
BRADLEY S. DANIELS, Vice President, MSDW, 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, MSDW, 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.
STEPHEN F. ESSER, Managing Director, MSDW, 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, MSDW, joined MAS in 1991. He served as a Research
Associate from 1991 to 1996 and has served as an Equity Portfolio Manager since
1996. He joined the management team for the Small Cap Value and Mid Cap Value
Portfolios in 1996.
J. DAVID GERMANY, Managing Director, MSDW, 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, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
NICHOLAS J. KOVICH, Managing Director, MSDW, 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, MSDW, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
CoreStates Investment Advisors, from 1985 to 1997. He joined the management team
for the Equity Portfolio in 1998.
21
<PAGE>
GENERAL SHAREHOLDER INFORMATION (Continued)
CHRIS LEAVY, Vice President, MSDW, 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, MSDW, 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, MSDW; 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.
ANN D. THIVIERGE, Managing Director, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1986, and has been a member of its asset
allocation committee since 1991. She joined the management team for the
Multi-Asset-Class Portfolio in 1999.
HORACIO A. VALEIRAS, Managing Director, MSDW, 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, MSDW, 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 II Portfolio 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. Mr. Worley has served as President of Morgan Stanley Dean
Witter Management since 1998.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
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.
22
<PAGE>
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.
23
<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. 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 extracted from the Fund's financial
statements which were audited by PricewaterhouseCoopers LLP, 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.
The Investment Class shares of the Domestic Fixed Income Portfolio had not
commenced operations as of September 30, 1998, therefore,Institutional Class
share financial information is provided to investors for informational purposes
only and should be referred to as an historical guide to the Portfolio's
operations and expenses. Past performance does not indicate future results.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain Net Asset
Value- Net on Securities Total from (net Distributions Value-
Beginning Investment (realized and Investment investment (realized net Other Total End of
of Period Income unrealized) Activities income) capital gains) Distributions Distributions Period
- -----------------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 04/10/96)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $29.42 $0.20 ($1.03) ($0.83) ($0.24) ($7.93) -- ($8.17) $20.42
1997 25.66 0.34 8.17 8.51 (0.35) (4.40) -- (4.75) 29.42
1996 24.31 0.22 1.24 1.46 (0.11) -- -- (0.11) 25.66
MID CAP VALUE GROWTH PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/10/96)
1998+++ $21.75 $0.05 ($1.53) ($1.48) ($0.03) ($2.19) -- ($2.22) $18.05
1997+++ 14.48 0.01 8.36 8.37 (0.09) (1.01) -- (1.10) 21.75
1996 13.77 0.04 0.67 0.71 -- -- -- -- 14.48
VALUE PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/06/96)
1998 $20.36 $0.31 ($3.38) ($3.07) ($0.33) ($1.81) -- ($2.14) $15.15
1997+++ 15.60 0.31 5.75 6.06 (0.27) (1.03) -- (1.30) 20.36
1996 14.97 0.12 0.58 0.71 (0.08) -- -- (0.08) 15.60
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1998 $11.27 $0.73 $0.32 $1.05 ($0.79) ($0.13) -- ($0.92) $11.40
1997 10.89 0.74 0.33 1.07 (0.67) (0.02) -- (0.69) 11.27
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61) 10.89
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23) 11.03
1994 11.99 0.94 (1.23) (0.29) (0.95) (0.73) (0.15)# (1.83) 9.87
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 10/15/96)
1998+++ $12.22 $0.76 $0.14 $0.90 ($0.73) ($0.17) -- ($0.90) $12.22
1997+++ 11.80 0.75 0.40 1.15 (0.60) (0.13) -- (0.73) 12.22
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 5/21/96)
1998+++ $10.16 $0.83 ($0.93) ($0.10) ($0.80) ($0.26) -- ($1.06) $9.00
1997+++ 9.31 0.84 0.88 1.72 (0.84) (0.03) -- (0.87) 10.16
1996 9.06 0.31 0.16 0.47 (0.22) -- -- (0.22) 9.31
</TABLE>
<PAGE>
[RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Net Assets- Ratio of Ratio of
End of Expenses Net Income Portfolio
Total Period to Average to Average Turnover
Return** (thousands) Net Assets+ Net Assets Rate
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 (2.78%) $2,029 0.76% 0.78% 77%
1997 38.12 2,354 0.80++ 1.12 85
1996 6.02 113 0.75* 1.83* 67
1998 (7.08%) $18,861 1.05% (0.25%) 213%
1997 61.05 1,238 1.09++ 0.04 184
1996 5.16 127 1.03*++ 0.86* 377
1998 (16.55%) $24,527 0.75% 1.62% 56%
1997+++ 41.01 29,847 0.80++ 1.75 46
1996 4.78 9,244 0.76* 2.05* 53
1998 9.83% $76,042 0.51%++ 6.32% 145%
1997 10.20 96,954 0.51++ 6.48 217
1996 4.41 95,362 0.52++ 5.73 168
1995 14.33 36,147 0.51++ 6.80 313
1994 (2.87) 36,521 0.50++ 7.65 78
1998+++ 7.72% $48,944 0.63% 6.31% 121%
1997+++ 10.07 9,527 0.66*++ 6.57* 179
1998+++ (1.37%) $11,262 0.65% 8.58% 75%
1997+++ 19.77 10,916 0.70%++ 8.84% 96
1996 5.34 5,139 0.62* 11.06* 115
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain Net Asset
Value- Net on Securities Total from (net Distributions Value-
Beginning Investment (realized and Investment investment (realized net Other Total End of
of Period Income unrealized) Activities income) capital gains) Distributions Distributions Period
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio (Commencement of Investment Class Operations 04/04/97)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998+++ $15.30 $0.46 ($0.13) $0.33 ($0.46) ($1.72) -- ($2.18) $13.45
1997 13.11 0.30 2.09 2.39 (0.20) -- -- (0.20) 15.30
Multi-Asset-Class Portfolio (Commencement of Investment Class Operations 6/10/96)
1998+++ $13.63 $0.36 ($0.45) ($0.09) ($0.31) ($1.49) -- ($1.80) $11.74
1997+++ 12.27 0.36 2.57 2.93 (0.49) (1.08) -- (1.57) 13.63
1996 12.17 0.13 0.08 0.21 (0.11) -- -- (0.11) 12.27
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Net Assets- Ratio of Ratio of
End of Expenses Net Income Portfolio
Total Period to Average to Average Turnover
Return** (thousands) Net Assets+ Net Assets Rate
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998+++ 2.56% $445 0.74% 3.24% 100%
1997 18.40 3,943 0.73* 3.32* 145
1998+++ (0.61%) $6,233 0.93%++ 2.86% 107%
1997+++ 26.32 5,075 0.96++ 2.85 141
1996 1.75 3,074 0.73*++ 3.68* 122
</TABLE>
<PAGE>
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
# Represents distributions in excess of net realized gains.
+ For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following Portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
PORTFOLIO 1995 1996 1997 1998
Equity -- 0.75%* 0.80% 0.74%
Mid Cap Value -- 1.03* 1.07 1.03
Value -- 0.75* 0.79 0.74
Domestic Fixed Income 0.50% 0.50 0.50 0.50
Fixed Income -- -- 0.65* 0.62
High Yield -- 0.61* 0.69 0.63
Balanced -- -- 0.70* 0.72
Multi-Asset-Class -- 0.73* 0.96 0.93
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
<TABLE>
<CAPTION>
Voluntarily waived and/or reimbursed expenses for:
<S> <C> <C> <C> <C> <C>
PORTFOLIO 1994 1995 1996 1997 1998
Equity -- -- -- 1.28% --
Mid Cap Value -- -- 0.14%* 4.60 --
Value -- -- -- 0.09 --
Domestic Fixed Income 0.03% 0.09% 0.01 0.01 0.01%
Fixed Income -- -- -- 0.12* --
High Yield -- -- -- 0.22 --
Multi-Asset-Class -- -- 0.08* 0.55 0.04
</TABLE>
+++ Per share amounts for the years ended September 30, 1997 and September 30,
1998, are based on average shares outstanding.
25
<PAGE>
MAS INVESTMENT CLASS PROSPECTUS
- ---------
MAS FUNDS
JANUARY 31, 1999
TRUSTEES OF THE FUND
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
C. Oscar Morong, Jr. Vincent R. McLean
OFFICERS OF THE FUND
James D. Schmid, President John H. Grady, Jr., Secretary
Lorraine Truten, Vice President Richard J. Shoch, Compliance Officer
James A. Gallo, Treasurer
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 pr ospectus 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 below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by contacting
your financial intermediary.
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 Securitie s and 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.
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428-0868. FOR SHAREHOLDER INQUIRIES,
CALL CLIENT SERVICES AT 1-800-354-8185. PRICES AND INVESTMENT RESULTS ARE
AVAILABLE AT 1-800-522-1525.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428
<PAGE>
[LOGO]
ADVISORY PORTFOLIOS PROSPECTUS
JANUARY 31, 1999
- --------------------------------------------------------------------------------
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is a no-load mutual fund consisting of 30 different
investment portfolios, 2 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, 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
INVESTMENT ADVISER
MILLER ANDERSON & SHERRERD, LLP
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 O WEST CONSHOHOCKEN, PA 19428
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INVESTMENT SUMMARY
INVESTOR SUITABILITY ......................................................1
ADVISORY FOREIGN FIXED INCOME PORTFOLIO....................................2
ADVISORY MORTGAGE PORTFOLIO ...............................................3
IMPORTANT INVESTMENT INFORMATION
DESCRIPTION OF PRINCIPAL INVESTMENTS ......................................4
FEES AND EXPENSES OF THE PORTFOLIOS
SHAREHOLDER FEES AND ANNUAL PORTFOLIO OPERATING EXPENSES ..................7
PURCHASING SHARES.............................................................8
REDEEMING SHARES .............................................................8
VALUATION OF SHARES ..........................................................8
GENERAL SHAREHOLDER INFORMATION
DIVIDENDS AND DISTRIBUTIONS AND TAXES .....................................9
FUND MANAGEMENT
INFORMATION ABOUT THE ADVISER, THE PORTFOLIO MANAGERS AND THE DISTRIBUTOR..9
YEAR 2000 DISCLOSURE STATEMENT ..............................................10
FINANCIAL HIGHLIGHTS ........................................................11
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
This section explains each Portfolio's:
[ ] Investment Objective
[ ] Principal Investment Strategy
[ ] Principal Risks
The discussions on the following pages 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. In fact,
some of the Portfolios strive to meet their investment objectives over an
extended period. These Portfolios focus on a market cycle of three to five
years. This means that the Portfolios will strive to meet their respective
investment objectives within that period without regard to interim market
fluctuations.
[ ] 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 transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<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 Adviser selects particular securities for the
Portfolio in various sectors within the overall guidelines set by the team. The
Adviser may sell securities when it believes that expected risk-adjusted return
is low compared to other investment opportunities.
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. Certain hedging strategies or instruments may not be
available or practical in certain markets or under certain conditions. 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 issuers. The Portfolio also is 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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN FIXED INCOME SECURITIES OF ISSUERS IN AT
LEAST 3 COUNTRIES OTHER THAN THE U.S.
- --------------------------------------------------------------------------------
100% OF SECURITIES RATED A OR HIGHER
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 5 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT GRADE
INDEX
- -------------------------------------------------------------------------------
CUSIP NO.: 552-913-626
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F. O'BRIEN AND RICHARD B. WORLEY
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on October 7, 1994
1995 17.50%
1996 14.98%
1997 9.83%
1998 10.74%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
10/95 - 12/95 1/96 - 3/96
6.58% 0.46%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
ADVISORY FOREIGN SALOMON BROAD
FIXED INCOME INVESTMENT
PORTFOLIO GRADE INDEX
- --------------------------------------------------------------------------------
ONE YEAR 10.74 8.72
- --------------------------------------------------------------------------------
SINCE INCEPTION
10/7/94 12.90 9.61
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
2
<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. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
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 make 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.
<PAGE>
GENERALLY AT LEAST 65% INVESTED IN MORTGAGE SECURITIES
- --------------------------------------------------------------------------------
100% INVESTMENT GRADE SECURITIES
- --------------------------------------------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- --------------------------------------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN 7 YEARS
- --------------------------------------------------------------------------------
AVERAGE DURATION GENERALLY 2-7 YEARS
- --------------------------------------------------------------------------------
BENCHMARK: LEHMAN MORTGAGE
INDEX
- --------------------------------------------------------------------------------
CUSIP NO.: 552-913-592
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
KENNETH B. DUNN AND SCOTT F. RICHARD
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on April 12, 1995
1996 6.52%
1997 10.43%
1998 7.60%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
4/97 - 6/97 1/96 - 3/96
3.76% -0.10%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE LEHMAN MORTGAGE
PORTFOLIO INDEX
- --------------------------------------------------------------------------------
ONE YEAR 7.60 6.96
- --------------------------------------------------------------------------------
SINCE INCEPTION
4/12/95 9.20 8.54
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
3
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
Each Portfolio involves the risk that an investor may lose money. Some of the
Portfolios may actively trade their securities to achieve their investment
objectives. High levels of portfolio turnover are likely to lead to increased
transaction costs and possible tax consequences. Nonetheless, short-term trading
activities represented by high portfolio turnover rates are not incompatible
with these Portfolios' stated objectives of achieving long-term capital
appreciation or other multi-year goals, in that short-term trading can lead to
gains that ultimately will increase the value of the investor's shares.
The following 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 se curities; 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 price 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 i nterest 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
below in the section entitled "Foreign Securities".
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
4
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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 United States. 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.
issuers. 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 United States. 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 Advisory Foreign Fixed Income Portfolio's 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
Advisory Foreign Fixed Income Portfolio 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 in the section entitled "Derivatives and Other Investments". The
Adviser may in its discretion choose not to hedge against currency risk. In
addition, certain market conditions may make it impossible or uneconomical to
hedge against currency risk.
EMERGING MARKET SECURITIES
Investing in emerging market 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 includ e futures, options, forward contracts, swaps,
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), and structured notes. Derivatives sometimes offer the most
economical way of pursuing a particular investment strategy, limiting certain
risks, or enhancing potential returns.
5
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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.
Forward contracts are used to protect against uncertainty in the level of future
foreign currency exchangerates. 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 or commodity indices. Swaps may be used to manage the
maturity and duration of a fixe d 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.
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
Collateralized mortgage obligations (CMOs) and stripped mortgage backed
securities (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,
6
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT INVESTMENT INFORMATION (Continued)
- --------------------------------------------------------------------------------
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 wi th 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
- --------------------------------------------------------------------------------
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO .375% NONE .120% .495%*
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO .375% NONE .117% .492%*
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements.
* The Adviser has voluntarily agreed to reduce its advisory fee and reimburse
the Portfolios so that total expenses will not exceed .150% and .080% for the
Advisory Foreign Fixed Income Portfolio and Advisory Mortgage Portfolio,
respectively. 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.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSET
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO .120%
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO .080%
- --------------------------------------------------------------------------------
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO $51 $159 $270 $622
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO $50 $158 $275 $618
ANNUAL PORTFOLIO
OPERATING EXPENSES
(expenses that are
deducted from Portfolio
assets)
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right 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.
7
<PAGE>
- --------------------------------------------------------------------------------
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. Institutional Class shares
are available to clients of the Adviser with combined investments of $5,000,000
(minimum additional investment $1,000).
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 at no charge by writing to Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 or
by calling 1-800-762-1155. The value of shares redeemed may be more or less than
the purchase price, depending on the NAV at the time of redemption.
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 y ou are redeeming. You may incur brokerage charges when
you sell those securities.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
- --------------------------------------------------------------------------------
We determine the NAV of the Portfolios as of one hour after the close of the
U.S. bond markets (normally 4:00 p.m. Eastern Time).
Each Portfolio values its securities at market value. 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 primary market
for the securities, 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. The value
of certain portfolio securities 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.
8
<PAGE>
- --------------------------------------------------------------------------------
GENERAL SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
PORTFOLIO MONTHLY QUARTERLY
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME [CHECK]
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE [CHECK]
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. If you want to
change how your dividends are paid you must notify MAS Funds 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.
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.
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in 1969.
The Adviser is wholly owned by indirect subsidiaries of Morgan Stanley Dean
Witter & Co. (MSDW), and is a division of Morgan Stanley Dean Witter Investment
Management. The Adviser is located at One Tower Bridge, West Conshohocken, PA
19428-0868. The Adviser provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1998, Morgan Stanley Dean Witter Investment Management had in
excess of $163 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 annual 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* .375% .000%
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO* .375 .000
* The Adviser is voluntarily waiving a portion of its fee and reimbursing
certain expenses for the Advisory Foreign Fixed Income and Advisory Mortgage
Portfolios to keep Total Operating Expenses from exceeding .150 % and .080 %,
respectively.
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investmentprofessionals who are primarily responsible for the day-to-day
management of the Fund's portfolios is as follows:
KENNETH B. DUNN, Managing Director, MSDW, 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,
9
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT (Continued)
- --------------------------------------------------------------------------------
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, MSDW, 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, MSDW, joined MSDW in 1987. He served as a Global
Fixed Income Strategist from 1987 to 1995, and has served as the Senior Global
Fixed Income Portfolio Manager since 1995. He joined the management team for the
Global Fixed Income and International Fixed Income Portfolios in 1996.
PAUL F. O'BRIEN, Principal, MSDW, 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, MSDW, 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 Portfolios in
1995.
RICHARD B. WORLEY, Managing Director, MSDW, 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. Mr. Worley has also served as President of Morgan Stanley
Dean Witter Investment Management since 1998.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
- --------------------------------------------------------------------------------
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.
10
<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. 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 extracted from the Fund's financial statements which
were audited by PricewaterhouseCoopers LLP, 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.
<TABLE>
<CAPTION>
NET GAINS DIVIDEND
NET ASSET OR LOSSES DISTRIBUTIONS CAPITAL GAIN NET ASSET
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS VALUE-
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER TOTAL END OF
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO (COMMENCEMENT OF OPERATIONS 10/7/94)
1998+++ $10.32 $0.48 $0.48 $0.96 ($1.10) $ -- $ -- ($1.10) $10.18
1997+++ 11.73 0.58 0.80 1.38 (1.88) (0.88) (0.03)# (2.79) 10.32
1996 10.80 0.68 1.02 1.70 (0.66) (0.11) -- (0.77) 11.73
1995 10.00 0.74 0.44 1.18 (0.38) -- -- (0.38) 10.80
ADVISORY MORTGAGE PORTFOLIO (COMMENCEMENT OF OPERATIONS 4/12/95)
1998 $10.59 $0.69 $0.36 $1.05 ($0.67) ($0.11) $ -- ($0.78) $10.86
1997 10.29 0.75 0.34 1.09 (0.71) (0.08) -- (0.79) 10.59
1996 10.41 0.72 (0.06) 0.66 (0.72) (0.03) (0.03)# (0.78) 10.29
1995 10.00 0.25 0.35 0.60 (0.19) -- -- (0.19) 10.41
NET ASSETS- RATIO OF RATIO OF
END OF EXPENSES NET INCOME PORTFOLIO
TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
- ------------------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO (COMMENCEMENT OF OPERATIONS 10/7/94)
1998+++ 10.19% $ 17,683 0.12%++ 4.84% 318%
1997+++ 14.08 93,939 0.14++ 5.68 208
1996 16.47 236,092 0.12++ 6.06 170
1995 12.12 537,133 0.16*++ 7.44* 96
ADVISORY MORTGAGE PORTFOLIO (COMMENCEMENT OF OPERATIONS 4/12/95)
1998 10.36% $6,396,764 0.09%++ 6.83% 126%
1997 11.03 3,071,427 0.09++ 7.55 144
1996 6.56 1,974,592 0.09++ 7.17 139
1995 6.03 1,443,038 0.10*++ 6.72* 110
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
# Represents distribution in excess of net realized gains.
+ For the periods ended September 30, 1995, September 30, 1996, September 30,
1997 and September 30, 1998, the Ratio of Expenses to Average Net Assets for
the Advisory Foreign Fixed Income and Advisory Mortgage Portfolios excludes
the effect of expense offsets. If expense offsets were included, the Ratio
of Expenses to Average Net Assets would be 0.15%* and 0.08%*, respectively,
for 1995, 0.12% and 0.08%, respectively, for 1996, 0.14% and 0.08%,
respectively, for 1997, and 0.12% and 0.08%, respectively, for 1998.
++ The Adviser has voluntarily agreed to waive its advisory fees and/or
reimburse certain expenses to the extent necessary in order to keep Total
Operating Expenses actually deducted from portfolio assets for the Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios from exceeding 0.15%
and 0.08%, respectively. Voluntarily waived and/or reimbursed expenses
totaled 0.38%* and 0.49%*, respectively, for the period ended September 30,
1995, 0.38% and 0.39%, respectively, for the year ended September 30, 1996,
0.38% and 0.40%, respectively, for the year ended September 30, 1997, and
0.38% and 0.40%, respectively for the year ended September 30, 1998.
+++ Per share amounts for the years ended September 30, 1997 and September 30,
1998 are based on average shares outstanding.
11
<PAGE>
[LOGO]
ADVISORY PORTFOLIOS PROSPECTUS
JANUARY 31, 1999
TRUSTEES OF THE FUND
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
C. Oscar Morong, Jr. Vincent R. McLean
OFFICERS OF THE FUND
James D. Schmid, President John H. Grady, Jr., Secretary
Lorraine Truten, Vice President Richard J. Shoch, Compliance Officer
James A. Gallo, Treasurer
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 below.
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 Securitie s and 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.
MAS FUNDS
ONE TOWER BRIDGE, WEST CONSHOHOCKEN, PA 19428-0868.
FOR SHAREHOLDER INQUIRIES, CALL CLIENT SERVICES AT 1-800-354-8185.
PRICES AND INVESTMENT RESULTS ARE AVAILABLE AT 1-800-522-1525.
MORGAN STANLEY DEANWITTER
INVESTMENT MANAGEMENT
ONE TOWER BRIDGE O WEST CONSHOHOCKEN, PA 19428
<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 ("SAI") 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.
The Fund's most recent annual report is a separate document supplied with this
SAI and includes the Fund's audited financial statements, which are incorporated
by reference into this SAI.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES.....................................2
INVESTMENT STRATEGIES..........................................................6
INVESTMENTS...................................................................10
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........................................................45
FUND ADMINISTRATION...........................................................46
OTHER SERVICE PROVIDERS.......................................................47
LITIGATION....................................................................47
BROKERAGE TRANSACTIONS........................................................47
GENERAL INFORMATION...........................................................51
TAX CONSIDERATIONS............................................................54
PRINCIPAL HOLDERS OF SECURITIES...............................................57
PERFORMANCE INFORMATION.......................................................62
COMPARATIVE INDICES...........................................................74
FINANCIAL STATEMENTS..........................................................79
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS................................79
<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 Mid
Markets International Cap
Balanced 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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Mid Multi- Small Small
Cap Asset Cap 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>
2
<PAGE>
<TABLE>
<CAPTION>
Emerging Mid
Markets International Cap
Balanced 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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Mid Multi- Small Small
Cap Asset Cap 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>
3
<PAGE>
<TABLE>
<CAPTION>
Emerging Mid
Markets International Cap
Balanced 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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Mid Multi- Small Small
Cap Asset Cap Cap
Value Class Growth Value Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Multi- Special
International Mortgage- Market Purpose
Fixed Limited Backed Fixed NY Fixed
Income Duration Securities Income Municipal Municipal Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Strategies
- ---------------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing x x
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation x
- ---------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing x x x
- ---------------------------------------------------------------------------------------------------------------------------
Foreign Investing x x x
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Investing x x x x
- ---------------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management x x x x x x x
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage Investing x x x x x x x
- ---------------------------------------------------------------------------------------------------------------------------
Money Market Investing
- ---------------------------------------------------------------------------------------------------------------------------
Municipals Management x x
- ---------------------------------------------------------------------------------------------------------------------------
Value Investing x 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 x
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Advisory
Foreign
Targeted Fixed Advisory
Duration Income Mortgage
Portfolio Porfolio Portfolio
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategies
- --------------------------------------------------------------------------------
Emerging Markets Investing x
- --------------------------------------------------------------------------------
Fixed Income and Asset Allocation
- --------------------------------------------------------------------------------
Foreign Fixed Income Investing x x
- --------------------------------------------------------------------------------
Foreign Investing x x
- --------------------------------------------------------------------------------
High Yield Investing x
- --------------------------------------------------------------------------------
Maturity and Duration Management x x x
- --------------------------------------------------------------------------------
Mortgage Investing x x x
- --------------------------------------------------------------------------------
Money Market Investing
- --------------------------------------------------------------------------------
Municipals Management
- --------------------------------------------------------------------------------
Value Investing x x x
- --------------------------------------------------------------------------------
Investments
- --------------------------------------------------------------------------------
Agencies x x x
- --------------------------------------------------------------------------------
Asset-Backeds x x x
- --------------------------------------------------------------------------------
Brady Bonds x x
- --------------------------------------------------------------------------------
</TABLE>
4
<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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Multi- Special
International Mortgage- Market Purpose
Fixed Limited Backed Fixed NY Fixed
Income Duration Securities Income Municipal Municipal Income
Portfolio Portfolio Portfolio Portfolio 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 x
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Convertibles x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Corporates x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Floaters x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Currency x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Securities x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Forwards x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Futures x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Securities x x 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 x
- ------------------------------------------------------------------------------------------------------------------------------------
Municipals x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
NY Municipals x
- ------------------------------------------------------------------------------------------------------------------------------------
Options x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock 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 x
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Lending x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Short Sales x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Structured Investments x x
- ------------------------------------------------------------------------------------------------------------------------------------
Structured Notes x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Swaps x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Governments x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Advisory
Foreign
Targeted Fixed Advisory
Duration Income Mortgage
Portfolio Porfolio Portfolio
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Cash Equivalents x x x
- --------------------------------------------------------------------------------
CMOs x x x
- --------------------------------------------------------------------------------
Commercial Paper x x x
- --------------------------------------------------------------------------------
Convertibles x x
- --------------------------------------------------------------------------------
Corporates x x
- --------------------------------------------------------------------------------
Emerging Markets Securities x
- --------------------------------------------------------------------------------
Floaters x x x
- --------------------------------------------------------------------------------
Foreign Currency x x
- --------------------------------------------------------------------------------
Foreign Equity
- --------------------------------------------------------------------------------
Foreign Fixed Income Securities x x
- --------------------------------------------------------------------------------
Forwards x x
- --------------------------------------------------------------------------------
Futures x x x
- --------------------------------------------------------------------------------
High Yield Securities x
- --------------------------------------------------------------------------------
Inverse Floaters x x x
- --------------------------------------------------------------------------------
Investment Companies x x x
- --------------------------------------------------------------------------------
Loan Participations and Assignments x
- --------------------------------------------------------------------------------
Mortgage Securities x x x
- --------------------------------------------------------------------------------
Municipals x x
- --------------------------------------------------------------------------------
NY Municipals
- --------------------------------------------------------------------------------
Options x x x
- --------------------------------------------------------------------------------
Preferred Stock x x
- --------------------------------------------------------------------------------
Repurchase Agreements x x x
- --------------------------------------------------------------------------------
Reverse Repurchase Agreements x x x
- --------------------------------------------------------------------------------
SMBS x x x
- --------------------------------------------------------------------------------
Securities Lending x x x
- --------------------------------------------------------------------------------
Short Sales x x x
- --------------------------------------------------------------------------------
Structured Investments
- --------------------------------------------------------------------------------
Structured Notes x x x
- --------------------------------------------------------------------------------
Swaps x x x
- --------------------------------------------------------------------------------
U.S. Governments x x x
- --------------------------------------------------------------------------------
</TABLE>
5
<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>
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants x
- ------------------------------------------------------------------------------------------------------------------------------------
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>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Multi- Special
International Mortgage- Market Purpose
Fixed Limited Backed Fixed NY Fixed
Income Duration Securities Income Municipal Municipal Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants x
- ------------------------------------------------------------------------------------------------------------------------------------
When-Issued Securities x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Yankees x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Zero Coupons x x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Advisory
Foreign
Targeted Fixed Advisory
Duration Income Mortgage
Portfolio Porfolio Portfolio
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Warrants
- --------------------------------------------------------------------------------
When-Issued Securities x x x
- --------------------------------------------------------------------------------
Yankees x x x
- --------------------------------------------------------------------------------
Zero Coupons 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 or 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
6
<PAGE>
outweighs these risks and the cost of investment. Investing in emerging markets
also involves an extra degree of custodial and/or market risk, especially where
the securities purchased are not traded on an official exchange or where
ownership records regarding the securities are maintained by an unregulated
entity (or even the issuer itself).
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
7
<PAGE>
seek to diversify investments broadly among both developed and newly
industrializing foreign countries. Where appropriate, a Portfolio may also
invest in regulated investment companies or Investment funds which invest in
such countries to the extent allowed by applicable law.
MATURITY AND DURATION MANAGEMENT: One of two primary components of the Adviser's
fixed-income investment strategy is maturity and duration management. The
maturity and duration structure of a Portfolio investing in fixed-income
securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-day
movements in the market, but instead are implemented in anticipation of longer
term shifts in the levels of interest rates. Adjustments made to shorten
portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators. See value investing for a description of the second primary
component of the Adviser's fixed-income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations also
have call provisions. Depending on the relative magnitude of these payments and
the nature of the call provisions, the market values of debt obligations may
respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed-income securities. Duration is a
measure of the expected life of a fixed-income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
Fixed-income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MONEY MARKET INVESTING: 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.
8
<PAGE>
A-1 and Prime-1 Commercial Paper Ratings: Commercial paper rated A-1 by Standard
& Poor's has the following characteristics: (1) liquidity ratios are adequate to
meet cash requirements; (2) long-term senior debt is rated "A" or better; (3)
the issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances; (5) typically, the issuer's industry is well established
and the issuer has a strong position within the industry; and (6) the
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
A-1, A-2, or A-3. The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
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
9
<PAGE>
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.
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
10
<PAGE>
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury Zero Coupon
Obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments 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);
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(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others;
(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.
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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
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 United States. Portfolios may invest in sponsored and
unsponsored GDRs and EDRs. For purposes of the Fund's investment policies, a
Portfolio's investments in GDRs or EDRs will be deemed to be investments in the
underlying securities.
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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.
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 engages 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.
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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
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 the Euro. 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.
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Foreign currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to
purchase additional warrants, thereby incurring additional transaction costs. In
the case of any exercise of warrants, there may be a time delay between the time
a holder of warrants gives instructions to exercise and the time the exchange
rate relating to exercise is determined, during which time the exchange rate
could change significantly, thereby affecting both the market and cash
settlement values of the warrants being exercised. The expiration date of the
warrants may be accelerated if the warrants should be delisted from an exchange
or if their trading should be suspended permanently, which would result in the
loss of any remaining "time value" of the warrants (i.e., the difference between
the current market value and the exercise value of the warrants), and, in the
case where the warrants were "out-of-the-money," in a total loss of the purchase
price of the warrants.
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 on 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.
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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
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 means that financial
transactions and market information, including share quotations and company
accounts, in participating countries are now 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.
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A Portfolio may use currency exchange contracts in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies (transaction hedge) or to lock in the U.S.
dollar value of portfolio positions (position hedge). In addition, the
Portfolios may cross hedge currencies by entering into a transaction to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which a Portfolio has or expects to have portfolio exposure.
Portfolios may also engage in proxy hedging which is defined as entering into
positions in one currency to hedge investments denominated in another currency,
where the two currencies are economically linked. A Portfolio's entry into
forward contracts, as well as any use of cross or proxy hedging techniques will
generally require the Portfolio to hold liquid securities or cash equal to the
Portfolio's obligations in a segregated account throughout the duration of the
contract.
A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the foreign currency value of the security and adopt a synthetic
investment position reflecting the credit quality of the U.S. dollar-denominated
security.
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.
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Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. A Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's custodian or with a futures
commission merchant as approved by the 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
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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 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
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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 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" security, 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
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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
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, deemed by the Advisor to be of equivalent 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.
Average Life. The average life of pass-through pools varies with the maturities,
coupon rates, and type of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
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Returns of Mortgage 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 borrowers on their 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 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-Backed Securities. 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 mortgages ("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.
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, banks, commercial banks, credit unions, mortgage bankers,
state and local housing finance agencies and other financial institutions.
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.
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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 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.
Commercial Mortgage-Backed Securities ("CMBS"): CMBS are generally multi-class
or pass-through securities backed by a mortgage loan or a pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments. The commercial mortgage loans that underlie CMBS have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. That is, at their maturity date, repayment
of the remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan of sale of the property. Unlike most single
family residential mortgages, commercial real estate property loans often
contain provisions which substantially reduce the likelihood that such
securities will be prepaid. The provisions generally impose significant
prepayment penalties on loans and, in some cases there may be prohibitions on
principal payments for several years following origination.
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.
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The two principal classifications of municipal bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues.
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
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.
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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.
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
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negotiation of the parties. The Portfolios expect generally to enter into OTC
Options that have cash settlement provisions, although it is not required to do
so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC Option will be
satisfied. The staff of the SEC currently takes the position that OTC Options
purchased by the Portfolios or sold by them (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to each Portfolio's
limitation on investing in illiquid securities.
The Portfolios may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to protect against a decline in the U.S. dollar value
of a currency due to the changes of exchange rates vis a vis the U.S. dollar and
the option is written for a currency other than the currency in which the
security is denominated. In such circumstances, the Portfolios will follow the
coverage requirements as described in the preceding paragraph.
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.
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The Portfolios may write options on foreign currencies for the same purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolios may only write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or liquid securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars, marked-to-market
daily.
The Portfolios may also write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the 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
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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.
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
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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 and counterparty 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.
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 receives
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.
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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
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
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rate indices, fixed income indices, stock indices and commodity indices (as well
as amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed-income index for the
return generated by a second fixed-income index. The currency swaps in which the
Portfolios may enter will generally involve an agreement to pay interest streams
in one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon national amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to a swap defaults, a Portfolio's risk of
loss consists of the net amount of payments that a Portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the Counterparty, the Portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap Counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities to avoid any potential leveraging of the Portfolio. To the
extent that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to a Portfolio's borrowing restrictions. All of the Portfolios, 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.
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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. 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.
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As a matter of non-fundamental policy, no Portfolio will:
(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
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be priced at the net asset value net computed after such orders are accepted by
an authorized broker or the broker's authorized designee.
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
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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
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, 10/4/47, * Chairman of the Board of Trustees; Managing
Director, Morgan Stanley Dean Witter & Co. ("MSDW"); 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, 7/13/41 , 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, 2/20/43, Trustee; Headmaster, Ethical Culture Fieldston
School; Trustee Springside School; formerly Headmaster, Haverford School; Dean,
Hobart College; Associate Dean, William & Mary College.
JOSEPH J. KEARNS, 8/2/42, 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, 6/1/31, 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., 4/22/35, 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.
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JAMES D. SCHMID, 8/8/50, President, MAS Funds; Principal, MSDW; 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, 5/11/61, CFA, Vice President, MAS Funds; Principal, MSDW; Head
of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund
Distribution, Inc.
JAMES A. GALLO, 6/18/64, Treasurer, MAS Funds; Vice President, MSDW; Head of
Fund Administration, Miller Anderson & Sherrerd, LLP; formerly, Manager,
Internal Accounting and then Vice President and Director of Investment
Accounting, PFPC, Inc.
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JOHN H. GRADY, JR., 6/1/60, Secretary, MAS Funds; Partner, Morgan, Lewis &
Bockius LLP.
RICHARD J. SHOCH, 10/28/62, Assistant Secretary, MAS Funds; Vice President,
MSDW; 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 66,000 55,875 66,000
Joseph P. Healey 66,000 8,827 66,000
Joseph J. Kearns 66,000 53,037 66,000
C. Oscar Morong, Jr. 66,000 51,279 66,000
Vincent R. McLean 66,000 62,823 66,000
</TABLE>
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act.
40
<PAGE>
# 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.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP is wholly
owned by indirect subsidiaries of Morgan Stanley Dean Witter & Co. (MSDW), and
is a division of Morgan Stanley Dean Witter Investment Management. The Adviser
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors. As of December 31, 1998, Morgan
Stanley Dean Witter Investment Management had in excess of $163 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
41
<PAGE>
Portfolio Rate (%)
- ---------
Intermediate Duration Portfolio 0.375
International Fixed Income Portfolio 0.375
Limited Duration Portfolio 0.300
Mortgage-Backed Securities Portfolio 0.375
Municipal Portfolio 0.375
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
Emerging Markets Value, Cash Reserves, Domestic Fixed Income, Mortgage Backed
Securities, Multi-Market Fixed Income, Municipal, Multi-Asset-Class, Small
Cap Growth, Advisory Foreign Fixed Income and Advisory Mortgage Portfolios from
exceeding 1.18%, .32%, .50%, .50%, .58%, .50%, .78%, 1.15%, .150% and .080% of
their 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 Multi-Asset-Class Portfolio from exceeding .930% and 1.030% 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 $244 195 19 $42 30 92
Equity Portfolio 7,785 6,928 5,809 0 0 0
</TABLE>
42
<PAGE>
<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>
Growth Portfolio * * * * * *
International Equity Portfolio 3,458 3,236 2,821 0 0 0
Mid Cap Growth Portfolio 1,986 1,961 2,551 0 0 0
Mid Cap Value Portfolio 142 896 2,700 46 28 0
Small Cap Growth Portfolio * * 0 * * 8
Small Cap Value Portfolio 3,464 5,161 6,499 0 0 0
Value Portfolio 7,716 14,010 18,304 0 0 0
Value II Portfolio * * * * * *
Cash Reserves Portfolio 86 166 252 52 65 68
Domestic Fixed Income Portfolio 249 372 300 8 11 7
Fixed Income Portfolio 5,917 9,431 15,592 0 0 0
Fixed Income II Portfolio 773 776 1,213 0 0 0
Global Fixed Income Portfolio 205 289 264 0 0 0
Multi-Market Fixed Income Portfolio * * 255 * * 28
High Yield Portfolio 1,073 1,558 2,363 0 0 0
Intermediate Duration Portfolio 34 144 405 18 23 0
International Fixed Income Portfolio 555 549 551 0 0 0
Limited Duration Portfolio 351 404 647 0 4 0
Mortgage-Backed Securities Portfolio 156 173 118 21 22 27
Municipal Portfolio 129 211 282 38 30 34
NY Municipal Portfolio * * * * * *
Special Purpose Fixed Income Portfolio 1,517 1,816 2,045 0 0 0
Targeted Duration Portfolio * * * * * *
Balanced Portfolio 1,521 1,527 1,781 0 0 0
Balanced Plus Portfolio * * * * * *
Multi-Asset-Class Portfolio 523 797 1,125 112 126 78
Advisory Foreign Fixed Income Portfolio 0 0 0 1,933 713 699
Advisory Mortgage Portfolio 0 0 0 6,056 9,155 16,638
* Not in operation during the period.
</TABLE>
43
<PAGE>
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 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
$142,685 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.
44
<PAGE>
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 Equity, Mid Cap
Growth, Mid Cap Value, Value, Domestic Fixed Income, Fixed Income, High Yield
and Balanced Portfolios paid $196, $67,000, $3,000, $908,000, $0, $264,000,
$26,215 and $69,000, respectively, in distribution fees pursuant to the
Distribution Plan. Other than $72,509 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:
-----------------------------------
Administrative Fees Paid
- --------------------------------------------------------------------------------
Portfolio 1996 1997 1998
(000) (000) (000)
- --------------------------------------------------------------------------------
Emerging Markets Value Portfolio $38 24 12
- --------------------------------------------------------------------------------
Equity Portfolio 1,246 1,136 931
- --------------------------------------------------------------------------------
Growth Portfolio * * *
- --------------------------------------------------------------------------------
International Equity Portfolio 553 544 452
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio 318 314 408
- --------------------------------------------------------------------------------
Mid Cap Value Portfolio 20 123 288
- --------------------------------------------------------------------------------
Small Cap Growth Portfolio * * 1
- --------------------------------------------------------------------------------
Small Cap Value Portfolio 369 550 694
- --------------------------------------------------------------------------------
Value Portfolio 1,235 2,285 2,930
- --------------------------------------------------------------------------------
Value II Portfolio * * *
- --------------------------------------------------------------------------------
Cash Reserves Portfolio 44 74 102
- --------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 55 82 66
- --------------------------------------------------------------------------------
Fixed Income Portfolio 1,262 2,030 3,327
- --------------------------------------------------------------------------------
Fixed Income II Portfolio 165 165 259
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio 44 62 57
- --------------------------------------------------------------------------------
45
<PAGE>
-----------------------------------
Administrative Fees Paid
- --------------------------------------------------------------------------------
Portfolio 1996 1997 1998
(000) (000) (000)
- --------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio * * 50
- --------------------------------------------------------------------------------
High Yield Portfolio 229 356 504
- --------------------------------------------------------------------------------
Intermediate Duration Portfolio 11 36 86
- --------------------------------------------------------------------------------
International Fixed Income Portfolio 118 117 118
- --------------------------------------------------------------------------------
Limited Duration Portfolio 93 109 173
- --------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 38 42 31
- --------------------------------------------------------------------------------
Municipal Portfolio 36 51 67
- --------------------------------------------------------------------------------
NY Municipal Portfolio * * *
- --------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 323 414 436
- --------------------------------------------------------------------------------
Targeted Duration Portfolio * * *
- --------------------------------------------------------------------------------
Balanced Portfolio 271 280 317
- --------------------------------------------------------------------------------
Balanced Plus Portfolio * * *
- --------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 113 143 148
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 412 152 149
- --------------------------------------------------------------------------------
Advisory Mortgage Portfolio 1,292 1,954 3,549
- --------------------------------------------------------------------------------
* Not in operation during the period.
OTHER SERVICE PROVIDERS
CUSTODIAN. The Chase Manhattan Bank, New York, NY serves as custodian 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. PricewaterhouseCoopers LLP, located at 160 Federal
Street, Boston MA 02110, 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.
46
<PAGE>
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 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.
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.
47
<PAGE>
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 "Affiliated 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 DID NOT PAY ANY BROKERAGE COMMISSIONS TO ANY
AFFILIATES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
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 64% 104%
- --------------------------------------------------------------------------------
Equity Portfolio 85% 77%
- --------------------------------------------------------------------------------
Growth Portfolio N/A N/A
- --------------------------------------------------------------------------------
International Equity Portfolio 62% 75%
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio 134% 172%
- --------------------------------------------------------------------------------
Mid Cap Value Portfolio 184% 213%
- --------------------------------------------------------------------------------
Small Cap Growth Portfolio N/A 67%
- --------------------------------------------------------------------------------
Small Cap Value Portfolio 107% 163%
- --------------------------------------------------------------------------------
Value Portfolio 46% 56%
- --------------------------------------------------------------------------------
Value II Portfolio N/A N/A
- --------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 217% 145%
- --------------------------------------------------------------------------------
Fixed Income Portfolio 179% 121%
- --------------------------------------------------------------------------------
Fixed Income II Portfolio 182% 92%
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio 137% 88%
- --------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio N/A 163%
- --------------------------------------------------------------------------------
High Yield Portfolio 96% 75%
- --------------------------------------------------------------------------------
Intermediate Duration Portfolio 204% 131%
- --------------------------------------------------------------------------------
International Fixed Income Portfolio 107% 75%
- --------------------------------------------------------------------------------
Limited Duration Portfolio 130% 107%
- --------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 164% 168%
- --------------------------------------------------------------------------------
Municipal Portfolio 54% 140%
- --------------------------------------------------------------------------------
NY Municipal Portfolio N/A N/A
- --------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 198% 105%
- --------------------------------------------------------------------------------
Targeted Duration Portfolio N/A N/A
- --------------------------------------------------------------------------------
Balanced Portfolio 145% 100%
- --------------------------------------------------------------------------------
Balanced Plus Portfolio N/A N/A
- --------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 141% 107%
- --------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 208% 318%
- --------------------------------------------------------------------------------
Advisory Mortgage Portfolio 144% 126%
- --------------------------------------------------------------------------------
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 $18,252,335, $19,134,219
and $26,885,547, respectively. For the fiscal years ended September 30, 1996,
1997 and 1998, the Fund paid in the aggregate $406,000, $3,693 and $0,
respectively, as brokerage commissions to Morgan Stanley & Co. Incorporated
("Morgan Stanley"), an affiliated broker-dealer, which represented 2.22%, .02%,
and 0% of the total amount of brokerage commissions paid in each respective
period. For the fiscal years ended September 30, 1996, 1997 and 1998, the Fund
paid in the aggregate $0, $118,000, and $0, respectively, as brokerage
commissions to Dean Witter Reynolds, Inc., an affiliated broker-dealer, which
represented 0%, .67%, and 0% of the total amount of brokerage commissions paid
in each respective period.
For the fiscal year ended September 30, 1998, the Fund did not
pay any brokerage commissions to any affiliated broker-dealer.
49
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
BROKERAGE COMMISSIONS PAID DURING FISCAL YEAR ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------
COMMISSIONS PAID TO ANY AFFILIATED BROKER
- ------------------------------------------------------------------------------------------------
TOTAL PERCENT OF TOTAL
COMMISSIONS PERCENT OF TOTAL BROKERED
PORTFOLIO PAID TOTAL COMMISSIONS COMMISSIONS TRANSACTIONS
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Emerging Markets Value 121,356 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Equity 3,085,032 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Growth N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
International Equity 2,449,947 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Mid Cap Growth 4,270,694 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Mid Cap Value 3,502,970 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Small Cap Growth 2,716 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Small Cap Value 7,855,958 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Value 4,601,291 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Value II N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Cash Reserves N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Domestic Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Fixed Income II N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Global Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
High Yield N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Intermediate Duration N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
International Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Limited Duration N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Mortgage-Backed Securities N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Multi-Market Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Municipal N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
NY Municipal N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Special Purpose Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Targeted Duration N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Balanced 641,164 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Balanced Plus N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Multi-Asset-Class 354,419 0 N/A N/A
- ------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Advisory Mortgage N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<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
------------------------------------- ------------------------------------------------
PERCENT OF TOTAL PERCENT OF TOTAL PERCENT OF TOTAL
TOTAL COMMISSIONS TO MORGAN TOTAL COMMISSIONS TO COMMISSIONS TO
($) STANLEY & CO. ($) MORGAN STANLEY DWR
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Emerging Markets Value 333,998.57 6.45 228,613 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Equity 3,280,757.49 .06 3,869,410 .17 N/A
- -----------------------------------------------------------------------------------------------------------------
Growth N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
International Equity 3,406,775.80 8.61 2,482,244 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Mid Cap Growth 3,250,653.45 2.79 3,051,138 .11 N/A
- -----------------------------------------------------------------------------------------------------------------
Mid Cap Value 526,474.51 .42 1,249,687 N/A 2.9
- -----------------------------------------------------------------------------------------------------------------
Small Cap Growth N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Small Cap Value 3,760,255.31 .26 3,954,424 N/A 1.94
- -----------------------------------------------------------------------------------------------------------------
Value 2,868,806.38 .81 3,391,575 N/A .24
- -----------------------------------------------------------------------------------------------------------------
Value II N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Cash Reserves N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Domestic Fixed Income N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Fixed Income N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Fixed Income II N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Global Fixed Income N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
High Yield N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Intermediate Duration N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
International Fixed Income N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Limited Duration N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Municipal N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
NY Municipal N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Special Purpose Fixed N/A N/A N/A N/A N/A
Income
- -----------------------------------------------------------------------------------------------------------------
Targeted Duration N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Balanced 387,680,527.00 0 573,940 N/A .03
- -----------------------------------------------------------------------------------------------------------------
Balanced Plus N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Multi-Asset-Class 163,286,430.00 .01 333,188 .08 .07
- -----------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed N/A N/A N/A N/A N/A
Income
- -----------------------------------------------------------------------------------------------------------------
Advisory Mortgage N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------ ----------------
</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.
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.
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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 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.
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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
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.
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 and 90% of its investment company taxable income; (ii) at the close
of each quarter of a Portfolio's taxable year, at least 50% of its total assets
must be represented by cash and cash items, U.S. 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 certain
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.
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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 Internal Revenue Code (The "Code") provides constructive sales treatment for
appreciated financial positions such as stock which has increased in value in
the hands of a Portfolio. Under this constructive sales treatment, the Portfolio
may be treated as having sold such stock and be required to recognize gain if it
enters into a short sale, an offsetting notional principal contract, a futures
or forward contract, or a similar transaction with respect to such stock or
substantially identical property.
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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.
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 twelve
months and short-term if for twelve months or less. Generally, long-term capital
gains are currently taxed at a maximum rate of 20% 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 at the end of a Portfolio's year, 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.
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If a Portfolio makes the above-described election, the Portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the Portfolio. The shareholders of
the Portfolios will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
Portfolio; (ii) treat their pro rata share of foreign taxes as paid by them;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the Portfolio
which represents income from sources within foreign countries; and (iv) either
deduct their pro rata share of foreign taxes in computing their taxable income
or use it within the limitations set forth in the 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 advisers 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. 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.
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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.
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 15, 1999, the following persons owned of record or beneficially 5%
or more of the shares of a Portfolio:
Equity Portfolio: Institutional Class - Northern Trust Company as Trustee, FBO
Potomac Electric Power Co Gen Ret, Chicago, IL 60675, 5.81%; First Union
National Bank, FBO: Diocese of Camden, Charlotte, NC 28288, 5.27%
Value Portfolio: Institutional Class - Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, San
Francisco, CA 94104, 18.35%; Donaldson Lufkin & Jenrette, Pershing Division,
Jersey City, NJ 07303, 7.24%
Small Cap Value Portfolio: Institutional Class - The J. Paul Getty Trust, c/o
The Northern Trust Company, Chicago, IL 60675, 10.62%; The Northern Trust
Company, FBO Silicon Graphics, Chicago, IL 60675, 7.39%; American Red Cross
Retirement System, Falls Church, VA 22042- 1203, 5.70%
Mid Cap Growth: Institutional Class - The J. Paul Getty Trust, c/o The Northern
Trust Company, Chicago, IL 60675, 22.80%; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, San Francisco, CA
941014, 11.38%; Reho & Company, Buffalo, NY 14240-1377, 8.98%; MAS Funds Omnibus
Account for TFM and Merged Shareholders, Boston, MA 02108, 6.76%; Mac & Co,
Pittsburgh, PA 15230-3198, 5.33%
Domestic Fixed Income: Institutional Class - Fidelity Investments Institutional
Operations (FIIOC) as Agent for Certain EE Benefit Plans, Covington, KY 41015,
40.82 %; Fidelity Management Trust Co as Trustee for US Airways, Inc. - Cap
Growth, Boston, MA 02109, 11.18%; Fleet National Bank Custodian for NECA-IBEW
Local Union No. 35 Pension Fund, Rochester, NY 14692-8900, 6.34%; Fidelity
Management Trust Co as Trustee for US Airways, Inc. -- Moderate, Boston, MA
02109, 5.35%; Saxon & Company, FBO: 78 Weirton Med Ctr MAS, Philadelphia, PA
19182, 5.01%
Cash Reserves Portfolio: Institutional Class - The Northern Trust Company as
TTEE, FBO Morgan Stanley Plan 8504, Chicago, IL 60675, 28.96%; Skadden Arps
Slate Meagher & Flom LLP, New York, NY 10022-3897, 7.13%; Cooper Union for the
Advancement of Science and Art (Temp Cash Acct), New York, NY 10003, 5.94%;
Bankers Trust Co FBO CNMC #174351, New York, NY 10008, 5.60%; Salkeld & Co. ,
c/o Bankers Trust Company, New York, NY 10008, 5.42%
International Equity Portfolio: Institutional Class - Western Metal Industry,
c/o Miller Anderson & Sherrerd, West Conshohocken, PA 19428, 14.77%; Puerto Rico
Telephone Company Pension Plan, San Juan, PR 00936, 9.74%; Carnegie Corp of New
York, Treasurers Dept, New York, NY 10004, 9.48%; Chemical Bank as Custodian for
Smithsonian Institution, New York, NY 10004, 6.02%.
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Fixed Income II: Institutional Class - University of Illinois, Urbana, IL
61801-3620, 18.79%; Regions Bank as TTEE for Infirmary Health Systems Pension,
Mobile, AL 36622-0001, 10.53%; Mercantile Safe Deposit & Trust Company Trustee
for JHU Pension 2750; Linthicum, MD 21090, 7.36%; First Union National Bank,
FBO: Diocese of Camden, Charlotte, NC 28288, 6.70%; Bankers Trust Co. as
Custodian, New York, 10008, 6.01%
High Yield Portfolio: Institutional Class - Charles Schwab & Co, Inc., Special
Custody Account for the Exclusive Benefit of Customers, San Francisco, CA 94104,
7.99%; Donaldson Lufkin & Jenrette, Pershing Division, Jersey City, NJ 07303,
6.51%; KPMG Peat Marwick, Montvale, NJ 07645, 6.31%; Barron Hilton Charitable
Remainder Trust (High Yield), Beverly Hills, CA 90210, 6.10%
Special Purpose Fixed: Institutional Class - Fleet National Bank, FBO Hartford
Hospital, Rochester, NY 14692-8900, 5.96%; Robertson Research Fund, Cold Spring
Harbor, NY 11724- 0100, 5.42%
Limited Duration: Institutional Class - Skadden Arps Slate Meagher Flom LLP, New
York, NY 10022-3897, 13.63%; Union Bank of California as TTEE: Los Angeles
Hotel-Restaurant Employer Union Welfare Fund, Los Angeles, CA 90060-0348,
12.48%; National Financial Services Corp FBO Their Customers, New York, NY
10008-3908, 8.82%; Citibank, NA TTEE for Fieldcrest Cannon Hourly Retirement
Plan, Citicorp North America, Inc., Tampa, FL 33610- 9122, 7.53%; Northern
California Bakery Drivers Security Fund c/o ATPA, Alameda, CA 94502, 6.78%;
Sheet Metal Workers Local 100 Health Benefit Fund, Washington, D.C., 20018,
5.05%
Mortgage-Backed Portfolio: Institutional Class - John S. Donovan, Trustee for
Cives Corporation Savings and Profit-Sharing Retirement Trust, Roswell, GA
30076, 52.89%, The Paper Magic Group, Inc., Scranton, PA 18510-2025, 32.24%
International Fixed: Institutional Class - First Union National Bank, FBO
Childrens Hospital of Philadelphia, Philadelphia, PA 19106, 15.17%; The Skillman
Foundation, Detroit, MI 48243, 14.33%; ARMCO Master Pension Trust, Pittsburgh,
PA 15219-1415, 13.23%; Northern Trust Co. as Custodian, FBO: The J. Paul Getty
Trust, Chicago, IL 60675, 10.65%; Chemical Bank as Custodian for Smithsonian
Institution, New York, NY 10004, 7.83%; Western Metal Industry Pension Fund, c/o
Miller Anderson & Sherrerd, West Conshohocken, PA 19428, 7.62%; Wellesley
College, Wellesley, MA 02481, 7.34%; Syntex (U.S.A.) Inc., Pension Trust, P.O.
Box 10850, 7.10%
Emerging Markets Value: Institutional Class - Chemical Bank as Custodian for
Smithsonian Institution, New York, NY 10004, 69.13%; Washington Drama Society,
Inc., T/A Arena Stage, Washington DC 20024, 6.63%; NABANK & CO., Tulsa, OK
74101-2180, 6.07%; Philadelphia Orchestra Assoc Employee Pension & Retirement
Plan, Philadelphia, PA 19102-5024, 5.92%
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Municipal Portfolio: Institutional Class - Charles Schwab & Co., Inc., Special
Custody Account FBO Customers, San Francisco, CA 94104, 10.91%; Robert A. Fox,
C/O R.A.F. Industries, Jenkintown, PA 19046, 6.87%; Wachovia Bank, N.A., TTEE
U/A 6/20/95 W/ Sylvia M. Thompson for Grantor; Winston-Salem, NC 27150, 6.85%;
JR Trueman Qualified Subchapter S Trust, Amlin, OH 43002, 6.63%; Balsa & Co
(Reinvest), c/o Chase Manhattan Bank, New York, NY 10163-1768, 5.00%
Balanced Portfolio: Institutional Class - Northern Trust Co. as TTEE, FBO
AllIanz Defined Cont. Plan, Master Trust A/C 22-45889, Chicago, IL 60675,
28.91%; Wendel & Co. #507415, Trustee for A&P Savings Plan, c/o The Bank of New
York, Mutual Funds Reorg Dept, New York, NY 10268, 8.89%; Wendel & Co. A/C
#018768, c/o The Bank of New York, New York, NY 10268, 7.81%; Wendel & Co. A/C
#017735, c/o The Bank of New York, New York, NY 10268, 6.87%
Global Fixed Income: Institutional Class - The Charles A Dana Foundation Inc.,
New York, NY 10151, 32.89%; All for Her Fund, c/o Family Rosary Inc., Albany, NY
12205-5520, 15.22%; Hudson-Webber Foundation, Detroit, MI 48226-3134, 13.73%;
Abilene Christian University, Abilene, TX 79699-9120, 9.48%; State Street Bank &
Trust Trustee, Forest Oil Corporation Pension Trust, Boston, MA 02105, 8.61%;
Rockefeller Family Fund Inc., New York, NY 10022-7001, 5.46%
Intermediate Dur: Institutional Class - Southwest National Bank of PA, Trust and
Financial Mgmt, Services, Greensburg, PA 15601-0760, 27.72%; Union Bank of
California, as TTEE: Los Angeles Hotel-Restaurant Employer Union Welfare Fund,
Los Angeles, CA 90060-0348, 17.525; VKAC Trust Company Trustee, MS Stable Value
Fund Retail Credit Suisse Contract, Houston, TX 77001-0944, 8.57%; Boston Safe
Deposit and Trust Co as Trustee of Scovill Inc., Medford, MA 02181, 7.56%;
Northumberland County Employees Retirement Fund, c/o Keystone Financial Trust
OPS, Altoona, PA 16603, 6.66%; Nyack Hospital, Nyack, NY 10960, 5.54%; VKAC
Trust Company, Trustee MS Stable Value Fund II Inst'l JP Morgan Contract,
Houston, TX 77001-0944, 5.17%
Multi-Asset-Class: Institutional Class - Albany Medical College A-29 Combined
Funds, Albany, NY 12208, 19.71%; Chase Manhattan Bank as Trustee for Milbank
Tweed Hadley & McCloy Master Trust, Brooklyn, NY 11245, 10.27%; The Library
Company of Philadelphia No. 1: Common Trust Fund, Philadelphia, PA 19107, 9.63%;
Wachovia Bank, NA, The W-S Foundation & The W-S Foundation Inc. Mastr Cust. &
Sub-Acctg Serv. Agrmnt, Winston-Salem, NC 27101-2506, 6.10%; The National
Center for State Courts, Williamsburg, VA 23185, 5.74%; Northern Trust as TTEE
FBO Scotsman Industries, Chicago, IL 60675, 5.72%
Advisory Foreign Fixed Income: Adviser Class - Chemical Bank as Custodian for
Smithsonian Institution, New York, NY 10004, 8.39%; The Boston Co, Pittsburgh,
PA 15230-3198, 8.37%; Minnesota State Board of Investments, St Paul, MN 55155,
7.67%; Ford Motor Company
60
<PAGE>
Master Trust, Dearborn, MI 448121, 6.34%; Kaiser Foundation (DB Plan), Oakland,
CA 94612, 5.28%
Mid Cap Value: Institutional Class - Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, San Francisco, CA 94104, 10.73%;
Commonwealth of Pennsylvania Public School Employees Retirement Sys.,
Harrisburg, PA 17108-0125, 8.97%; MAS Funds Omnibus Account for TFM and Merged
Shareholders, Boston, MA 02108, 7.16%; The Bank of New York as TTEE for The BF
Goodrich Co. Master Trust, New York, NY 10286, 6.06%; Georgetown Memorial
Hospital Funded Depreciation Account, Georgetown, SC 29442, 5.08%
Advisory Mortgage: Adviser Class - The Boston Co, Attn: Mutual Fund Operations
FBO Lacera A/C LCRF0391002, Pittsburgh, PA 15230-3198, 7.38%; Ford Motor Company
Master Trust, Dearborn, MI 4448121, 6.79%
Small Cap Growth: Institutional Class - Richard B. Worley, West Conshohocken, PA
19428, 22.7%; A. Morris Williamson Jr. & Rugh W. Williams Tenants by Entirety,
Gladwyne, PA 19035-1531, 11.35%; Chase Manhattan Bank, N.A. Cust For John E.
Knob, Deceased IRA FBO Maryann Maiwald as Beneficiary, Media, PA 19063, 5.91%
Multi-Market Fixed Income: Institutional Class - Connelly Foundation, W.
Conshohocken, PA 19428, 61.46%; The Healthcare Fund of New Jersey, Roseland, NJ
07068, 10.55%; The Greenwald Foundation, New York, NY 10016-5603, 10.28%;
National City Bank FBO Jeannett Memorial Hospital Employee Pen U/A DTD 6/21/94,
Cleveland, OH 44101-4984, 7.17%; Y & H Soda Foundation, Orinda, CA 94563-3346,
5.28%
Equity Portfolio: Institutional Class - Shadyside Presbyterian Church, William
E. Saul Endowment Fund, Pittsburgh, PA 15232, 47.93%; Janet A. Sloane Endowment
c/o Deafness Research Foundation, New York, NY 10018, 31.61%; Insurance Trust of
The Pennsylvania Institute of CPAS, Philadelphia, PA 19103-5457, 15.94%
Value Portfolio: Institutional Class - Southwest Guaranty Trust Co., Attn:
Fiduciary-Cash- Mutual Funds, Houston, TX 77056, 12.69%; Suntrust Bank Atlanta
TTEE FBO Institute of Nuclear Power OPS Pension Plan UAD 12/29/80, Atlanta, GA
30348-5870, 11.79%; Chase Manhattan Bank TTEE For NY State Deferred Comp. Plan,
New York, NY 10003, 8.30%; Firstnat, Co., First National Bank of West Chester,
West Chester, PA 19381-3105, 7.22%; Doctors Community Hospital Cash Balance
Pension Plan, Lanham, MD 20706-3596, 6.87%; First Union National Bank,
Charlotte, NC 28288-1151, 6.05%; First Union National Bank Cust For James A.
Turner Jr. DTD 6/27/97 #1028000117, Charlotte, NC 28262-1151, 5.34%; Employees
Profit Sharing Retirement Plan of United Conveyor Corporation, Waukegan, IL
60085, 5.20%; First Union National Bank Cust for Turner Trust DTD 11/23/98,
Charlotte, NC 28262-1151
61
<PAGE>
Fixed Income Portfolio: Investment Class - Testa and Co., c/o Chase Manhattan
Bank, Rochester, NY 14603-1412, 18.28%; Board of Trustees of the Overland Park
Police Dept Retirement Plan, Overland Park, KS 66212, 10.23%; Fleet Nat'l Bank
TTEE SA&W P/SH Ret Plan, Attn: 14723100, Rochester, NY 14692-8900, 10.18%;
Zoological Society of Philadelphia Endowment, Philadelphia, PA 19104-1196,
9.87%; Pennsylvania League of Cities and Municipalities - Penn Prime Workers
Compensation Trust A/C #56-1202-00, Harrisburg, PA 17101, 8.45%; LaSalle
National Bank TTEE FBO Woodlawn Cemetery Care Fund, Chicago, IL 60690, 7.85%;
Young Life, Colorado Springs, CO 80901-0520, 7.78%
International Equity Portfolio: Investment Class - J. Richard Jones, Radnor, PA
19087, 53.09%; Doctors Community Hospital Cash Balance Pension Plan, Lanhan, MD
20706-3596, 30.08%; Insurance Trust of the Pennsylvania Institute of CPAS,
Philadelphia, PA 19103-5457, 5.33%
High Yield Portfolio: Investment Class - Byrd & Co, c/o First Union National
Bank Mutual Funds Dividend Processing - PA4905, Philadelphia, PA 19101, 24.96%;
Fleet Nat'l Bank TTEE SA&W P/SH Ret Plan, Attn: 14723100, Rochester, NY
14692-8900, 22.23%; Attn: Mark Terbrack Luther & Co., c/o Michigan National
Bank, Farmington Hills, MI 48333, 19.36%; Northern Trust Company as Custodian
for Noblehouse International LTD, Chicago, IL 60675, 12.97%; The Philadelphia
Foundation, Philadelphia, PA 19102, 11.65%
Mid Cap Value Portfolio: Investment Class - First National Bank of Shelby Cust
for Gardner Webb University, Shelby, NC 28151-0168, 23.28%; Northern Trust
Trustee, FBO UA Local 467, Chicago, IL 60675, 19.94%; Kershaw County Medical
Center Employees Pension Fund, Camden, SC 29020-7003, 14.75%; Wendel & Co
159458, FAO Health Systems Group Retirement, New York, NY 10286, 12.93%; Wells
Fargo Bank FBO FCH General Hospital, Calabasas, CA 91372-9800, 8.05%; Trust
Company of America Cust FBO GIM, Englewood, CO 80155, 5.77%
Multi-Asset Class Portfolio: Investment Class - English Speaking Union Central
Florida Branch, Winter Park, FL 32789, 39.67%; Kano-Zimmerman Profit Sharing
Plan, Nashville, TN 37222, 36.46%; Gilson Family Trust, Oakland, CA 94611,
18.55%; Noble, Inc., DBA Noble of Indiana, Indianapolis, IN 46225, 5.01%
Balanced Portfolio: Investment Class - Chase Manhattan Bank Custodian for the
IRA of Roderick Dean Marcoux, Incline Village, NV 89450, 59.95%; Nabank &
Co./DRK, Attn: Trust Securities, Tulsa, OK 74101-2180, 31.17%; Chase Manhattan
Bank Custodian For The IRA of Anne Laura Marcoux, Incline Village, NV 89450,
8.88%
Equity Portfolio: Adviser Class - United States Equestrian Team Inc., Glastone,
NJ 07934, 41.44%; Nationwide Asset Allocation Trust, c/o Nationwide Advisory
Services, Inc 3-26-04, Aggressive Portfolio, Columbus, OH 43215, 29.60%;
Nationwide Asset Allocation Trust c/o Nationwide Advisory Service, Inc. 3-26-04,
Moderately Aggressive Portfolio, Columbus, OH
62
<PAGE>
43215, 15.17%; Nationwide Asset Allocation Trust c/o Nationwide Advisory
Service, Inc. 3-26-04, Moderate Portfolio, Columbus, OH 43215, 9.53%
Value Portfolio: Adviser Class - Fidelity Investments Institutional Operations
Co. (FIIOC) as Agent for Certain EE Benefit Plans, Covington, KY 41015, 33.87%;
State Street Bank TTEE FBO Boeing Company Master Trust, North Quincy, MA 02171,
32.69%; IBJ Funds Distributors/Transco & Co. FBO Intrust Bank, Columbus, OH
43219, 11.25%; IBJ Funds Distributors/Transco & Co. FBO Intrust Bank, Columbus,
OH 43219, 7.99%
Fixed Income Portfolio: Adviser Class - Fidelity Investments Institutional
Operations Co (FIIOC) as Agent for Certain EE Benefit Plans, Covington, KY
41015, 30.75%; IBJ Funds Distributors/Transco & Co. FBO Intrust Bank, Columbus,
OH 43219, 23.26%; IBJ Funds Distributors/Transco & Co. FBO Intrust Bank,
Columbus, OH 43219, 20.34%; The Queen's Health Systems, Honolulu, HI 96814-4923,
8.52%; Fidelity Management Trust Company, Boston, MA 02109, 8.13%
Balanced Portfolio: Adviser Class - Fidelity Investments Institutional
Operations Co (FIIOC) as Agent For Certain EE Benefit Plans, Covington, KY
41015, 96.53%
High Yield Portfolio: Adviser Class - Fidelity Investments Institutional
Operations Co (FIIOC) As Agent For Certain EE Benefit Plans, Covington, KY
41015, 43.70%; Donaldson Lufkin & Jenrette Secs Corp., Jersey City, NJ 07303,
41.27%; HUD & Co, c/o United States Trust Co, Boston, MA 02108, 7.36%
Mid Cap Growth: Adviser Class - Fidelity Investments Institutional Operations Co
(FIIOC) as Agent for Certain EE Benefit Plans, Covington, K 41015, 59.86%;
Merrill Lynch Trust Co TTEE FBO Qualified Retirement Plans, Somerset, NJ 08873,
27.69%
Mid Cap Value Portfolio: Adviser Class - MAS Funds Omnibus Account For TFM and
Merged Shareholders, Boston, MA 02108, 80.56%; The Union Central Life Insurance
Company-Group Separate Account, Cincinnati, OH 45240, 14.38%
63
<PAGE>
Beneficial ownership of 25% or more of the outstanding shares of a Portfolio
deems "control" (as that term is defined in the 1940 Act) of such a Portfolio.
Those persons with "control" would have the ability to vote a majority of the
shares of the Portfolio on any matter requiring the approval of shareholders of
such a Portfolio.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of its Portfolios. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods for computing performance follows.
TOTAL RETURN
A Portfolio's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5, and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5, and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
When considering average total return figures for periods longer than one year,
it is important to note that a Portfolio's annual total return for any one
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
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
64
<PAGE>
The average annual total return of the Institutional Class Shares of each
Portfolio for the periods noted is set forth below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
5 Years 10 Years
1 Year ended ended Inception to Inception
9/30/98 9/30/98 9/30/98 9/30/98 Date
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Emerging Markets Value Portfolio - 43.83 N/A N/A - 5.41 2/28/95
- -----------------------------------------------------------------------------------------------------------------------
Equity Portfolio - 2.66 15.57 15.44 15.97 11/14/84
- -----------------------------------------------------------------------------------------------------------------------
Growth Portfolio * N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
International Equity Portfolio - 8.36 6.12 N/A 7.58 11/25/88
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 2.00 16.27 N/A 18.97 3/30/90
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio - 6.92 N/A N/A 27.28 12/30/94
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio N/A N/A N/A - 14.30 6/30/98
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio - 18.34 14.17 16.21 12.23 7/1/86
- -----------------------------------------------------------------------------------------------------------------------
Value Portfolio - 16.41 14.77 14.95 15.64 11/5/84
- -----------------------------------------------------------------------------------------------------------------------
Value II Portfolio * N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 5.47 5.02 N/A 4.84 8/29/90
- -----------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 9.83 7.01 9.75 10.00 9/29/87
- -----------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 7.90 7.15 9.75 10.74 11/14/84
- -----------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 9.23 6.86 N/A 9.98 8/31/90
- -----------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 9.18 6.83 N/A 7.70 4/30/93
- -----------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio N/A N/A N/A 2.72 10/1/97
- -----------------------------------------------------------------------------------------------------------------------
High Yield Portfolio -1.17 9.67 N/A 10.90 2/28/89
- -----------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 8.57 N/A N/A 8.79 10/3/94
- -----------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 10.38 N/A N/A 7.61 4/29/94
- -----------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 6.13 5.35 N/A 6.01 3/31/92
- -----------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 5.53 6.24 N/A 7.20 1/31/92
- -----------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 7.20 6.59 N/A 7.83 10/1/92
- -----------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 7.31 7.36 N/A 9.45 3/31/92
- -----------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 2.85 12.58 N/A 12.41 12/31/92
- -----------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio - 0.46 N/A N/A 13.39 7/29/94
- -----------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 10.19 N/A N/A 13.26 10/7/94
- -----------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 10.36 N/A N/A 9.84 4/12/95
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Growth, Balanced Plus, Value II and NY Municipal Portfolios had not
commenced operations as of September 30, 1998.
65
<PAGE>
The average annual total return of the Investment Class shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
5 Years 10 Years
1 Year ended ended ended Inception to Inception
9/30/98 9/30/98 9/30/98 9/30/98 Date
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Equity Portfolio - 2.78 N/A N/A 15.32 4/10/96
- ----------------------------------------------------------------------------------------------------------------------
International Equity Portfolio - 8.51 N/A N/A 5.52 4/10/96
- ----------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio - 7.08 N/A N/A 20.87 5/10/96
- ----------------------------------------------------------------------------------------------------------------------
Value Portfolio - 16.55 N/A N/A 9.11 5/6/96
- ----------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio * N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 7.72 N/A N/A 9.08 10/15/96
- ----------------------------------------------------------------------------------------------------------------------
High Yield Portfolio - 1.37 N/A N/A 9.70 5/21/96
- ----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 2.56 N/A N/A 13.57 4/3/97
- ----------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio -0.61 N/A N/A 11.20 6/10/96
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Domestic Fixed Income 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>
- ----------------------------------------------------------------------------------------------------------------------
5 Years 10 Years
1 Year ended ended ended Inception to Inception
9/30/98 9/30/98 9/30/98 9/30/98 Date
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Equity Portfolio N/A N/A N/A - .02 1/16/98
- ----------------------------------------------------------------------------------------------------------------------
International Equity Portfolio * N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 1.79 N/A N/A 17.24 1/31/97
- ----------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio N/A N/A N/A - 13.80 7/17/98
- ----------------------------------------------------------------------------------------------------------------------
Value Portfolio - 16.66 N/A N/A 12.59 7/17/96
- ----------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio * N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 7.63 N/A N/A 8.15 11/7/96
- ----------------------------------------------------------------------------------------------------------------------
High Yield Portfolio - 1.37 N/A N/A 6.52 1/31/97
- ----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 2.49 N/A N/A 13.26 11/1/96
- ----------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio * N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The International Equity, Domestic Fixed Income and Multi-Asset-Class
Portfolios had not commenced operations as of September 30, 1998.
The Portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
Aggregate total returns may be shown by means of schedules, charts or graphs and
may include subtotals of the various components of total return (e.g., income
dividends or returns for specific types of securities such as industry or
country types). The formula for calculating aggregate total return can be
expressed as follows:
Aggregate Total Return = [(ERV) - 1]
-----------
P
66
<PAGE>
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 10 Years Ended Inception to
Portfolio 9/30/98 9/30/98 9/30/98
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Emerging Markets Value Portfolio N/A N/A - 18.07
- -------------------------------------------------------------------------------------------------------------
Equity Portfolio 106.17 320.45 681.52
- -------------------------------------------------------------------------------------------------------------
Growth Portfolio ** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
International Equity Portfolio 34.57 N/A 105.24
- -------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 112.45 N/A 338.04
- -------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio N/A N/A 147.13
- -------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio N/A N/A - 14.30
- -------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 94.01 349.27 310.82
- -------------------------------------------------------------------------------------------------------------
Value Portfolio 99.17 302.93 654.00
- -------------------------------------------------------------------------------------------------------------
Value II Portfolio ** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 27.75 N/A 46.61
- -------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 40.33 153.46 185.24
- -------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 41.27 153.46 311.92
- -------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 39.33 N/A 115.70
- -------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 39.12 N/A 49.46
- -------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio N/A N/A 2.72
- -------------------------------------------------------------------------------------------------------------
High Yield Portfolio 58.65 N/A 169.65
- -------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio N/A N/A 40.00
- -------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio N/A N/A 38.30
- -------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 29.79 N/A 46.14
- -------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 35.35 N/A 58.92
- -------------------------------------------------------------------------------------------------------------
Municipal Portfolio 37.61 N/A 57.15
- -------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio ** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 42.65 N/A 79.88
- -------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Balanced Portfolio 80.85 N/A 95.87
- -------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio ** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio N/A N/A 68.91
- -------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio N/A N/A 64.14
- -------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio N/A N/A 38.44
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively.
** The Growth, Value II, NY Municipal and Balanced Plus Portfolios had not
commenced operations as of September 30, 1998.
67
<PAGE>
The Portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Institutional Class
Portfolios are set forth below:
- ---------------------------------------------------------------------------
Portfolio Total Return (%)
- ---------------------------------------------------------------------------
Emerging Markets Value Portfolio - 4.3
- ---------------------------------------------------------------------------
Equity Portfolio 16.7
- ---------------------------------------------------------------------------
Growth Portfolio * N/A
- ---------------------------------------------------------------------------
International Equity Portfolio 8.3
- ---------------------------------------------------------------------------
Mid Cap Growth Portfolio 19.7
- ---------------------------------------------------------------------------
Mid Cap Value Portfolio 28.3
- ---------------------------------------------------------------------------
Small Cap Growth Portfolio - 14.0
- ---------------------------------------------------------------------------
Small Cap Value Portfolio 12.9
- ---------------------------------------------------------------------------
Value Portfolio 16.3
- ---------------------------------------------------------------------------
Value II Portfolio * N/A
- ---------------------------------------------------------------------------
Domestic Fixed Income Portfolio 10.5
- ---------------------------------------------------------------------------
Fixed Income Portfolio 11.3
- ---------------------------------------------------------------------------
Fixed Income II Portfolio 10.5
- ---------------------------------------------------------------------------
Global Fixed Income Portfolio 8.3
- ---------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 3.3
- ---------------------------------------------------------------------------
High Yield Portfolio 11.5
- ---------------------------------------------------------------------------
Intermediate Duration Portfolio 9.4
- ---------------------------------------------------------------------------
International Fixed Income Portfolio 8.2
- ---------------------------------------------------------------------------
Limited Duration Portfolio 6.4
- ---------------------------------------------------------------------------
Mortgage-Backed Securities Portfolio 7.8
- ---------------------------------------------------------------------------
Municipal Portfolio 8.4
- ---------------------------------------------------------------------------
NY Municipal Portfolio * N/A
- ---------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 10.0
- ---------------------------------------------------------------------------
Targeted Duration Portfolio N/A
- ---------------------------------------------------------------------------
Balanced Portfolio 13.0
- ---------------------------------------------------------------------------
Balanced Plus Portfolio * N/A
- ---------------------------------------------------------------------------
Multi-Asset-Class Portfolio 14.2
- ---------------------------------------------------------------------------
* As of September 30, 1998, the Growth, Value II, NY Municipal, and Balanced
Plus Portfolios had not commenced operations.
68
<PAGE>
The annualized since inception gross of fees returns of the Investment Class
Portfolios are set forth below:
- ---------------------------------------------------------------------------
Portfolio Total Return (%)
- ---------------------------------------------------------------------------
Equity Portfolio 16.2
- ---------------------------------------------------------------------------
International Equity Portfolio 6.4
- ---------------------------------------------------------------------------
Mid Cap Value 21.3
- ---------------------------------------------------------------------------
Value 9.9
- ---------------------------------------------------------------------------
Domestic Fixed Income * N/A
- ---------------------------------------------------------------------------
Fixed Income 9.7
- ---------------------------------------------------------------------------
High Yield 10.4
- ---------------------------------------------------------------------------
Balanced 14.9
- ---------------------------------------------------------------------------
Multi-Asset-Class 12.2
- ---------------------------------------------------------------------------
* As of September 30, 1998, the Domestic Fixed Income Portfolio had not
commenced operations.
The annualized since inception gross of fees returns of the Adviser Class
Portfolios are set forth below:
- ---------------------------------------------------------------------------
Portfolio Total Return (%)
- ---------------------------------------------------------------------------
Equity Portfolio 0.5
- ---------------------------------------------------------------------------
International Equity Portfolio * N/A
- ---------------------------------------------------------------------------
Mid Cap Growth 18.1
- ---------------------------------------------------------------------------
Mid Cap Value -13.5
- ---------------------------------------------------------------------------
Value 13.5
- ---------------------------------------------------------------------------
Domestic Fixed Income * N/A
- ---------------------------------------------------------------------------
Fixed Income 8.9
- ---------------------------------------------------------------------------
High Yield 7.3
- ---------------------------------------------------------------------------
Balanced 14.2
- ---------------------------------------------------------------------------
Multi-Asset-Class * N/A
- ---------------------------------------------------------------------------
* As of September 30, 1998, the International Equity, Domestic Fixed Income, and
Multi-Asset Class Portfolios had not commenced operations.
The annualized since inception gross of fees returns of the Advisory Portfolios
are set forth below:
- ---------------------------------------------------------------------------
Portfolio Total Return (%)
- ---------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 13.4
- ---------------------------------------------------------------------------
Advisory Mortgage Portfolio 9.9
- ---------------------------------------------------------------------------
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.
69
<PAGE>
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 7.80*/57.1** 7.50*/54.7**
============== ===============
*Annualized
**Cumulative
The federal tax rate used was 31%. All municipal interest was considered exempt
from federal taxes.
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 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:
6
Yield = 2 [ ( (a-b/cd) + 1) - 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:
70
<PAGE>
Institutional Class Portfolios Period Ending
9/30/98
Emerging Markets Value Portfolio 1.09
Equity Portfolio 1.02
Growth Portfolio* N/A
International Equity Portfolio 1.45
Mid Cap Growth Portfolio -.01
Mid Cap Value Portfolio .66
Small Cap Growth Portfolio -.73
Small Cap Value Portfolio .71
Value Portfolio 2.38
Value II Portfolio * N/A
Domestic Fixed Income Portfolio 6.74
Fixed Income Portfolio 6.30
Fixed Income II Portfolio 5.61
Global Fixed Income Portfolio 4.67
Multi-Market Fixed Income Portfolio 6.90
High Yield Portfolio 10.37
Intermediate Duration Portfolio 5.73
International Fixed Income Portfolio 3.96
Limited Duration Portfolio 5.35
Mortgage-Backed Securities Portfolio 8.22
Municipal Portfolio 4.43
NY Municipal Portfolio * N/A
Special Purpose Fixed Income Portfolio 6.56
Targeted Duration Portfolio N/A
Balanced Portfolio 3.62
Balanced Plus Portfolio * N/A
Multi-Asset-Class Portfolio 3.29
* As of September 30, 1998, the Growth, Value II, NY Municipal, and the Balanced
Plus Portfolios had not commenced operations.
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Investment Class Portfolios Period Ending
9/30/98
Equity Portfolio .88
International Equity Portfolio 1.25
Mid Cap Value Portfolio .52
Value Portfolio 2.22
Domestic Fixed Income * N/A
Fixed Income 6.15
High Yield 10.23
Balanced 3.48
Multi-Asset-Class 3.14
* As of September 30, 1998, the Domestic Fixed Income Portfolio had not
commenced operations.
Adviser Class Portfolios Period Ending
9/30/98
Equity Portfolio .77
International Equity Portfolio * N/A
Mid Cap Growth Portfolio -.25
Mid Cap Value Portfolio .43
Value Portfolio 2.12
Domestic Fixed Income * N/A
Fixed Income 6.04
High Yield 10.10
Balanced 3.38
Multi-Asset-Class * N/A
* As of September 30, 1998, the International Equity, Domestic Fixed Income, and
the Multi-Asset-Class Portfolios had not commenced operations.
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Advisory Portfolios Period Ending
9/30/98
Advisory Foreign Fixed Income Portfolio 5.71
Advisory Mortgage Portfolio 6.73
YIELD OF THE CASH RESERVES PORTFOLIO
The current yield of the Cash Reserves Portfolio is calculated daily on a base
period return of a hypothetical account having a beginning balance of one share
for a particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
the value of the account at the beginning of the period and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualizing of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by dividing the base period return by
7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the results.
Set forth below is an example, for purposes of illustration only, of the current
and effective yield calculations for the Cash Reserves Portfolio for the 7 day
base period ending September 30, 1998.
Period ending
9/30/98
Value at beginning of period $1.00
Value at end of period $1.00
Current yield 5.33%
Effective yield 5.47%
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.
OTHER PERFORMANCE INFORMATION
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
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From time to time, a Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising. 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.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.
The Portfolios may include in its advertisements, discussions or illustrations
of the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Portfolio (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Portfolio may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers by Morgan Stanley; and the portfolio
manager's goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Portfolios may include
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.
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The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
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.
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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.
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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.
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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.
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Russell 2500
The Russell 2500 Index consists of the 2,500 smallest of the 3,000 largest
stocks. Market capitalization is typically between $1.7 billion and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,500 stocks in the Russell 2500 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 3000
The Russell 3000 Index is a combination of the Russell 1000 Index and the
Russell 2000 Index.
Salomon 1-3 Year Treasury/Government Sponsored Index
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the index.
Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the index.
Salomon Broad Index
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed income market capitalization-weighted index, including U. S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U. S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the index is published monthly.
Salomon High-Yield Market Index
The Salomon High-Yield Market Index includes public, non-convertible corporate
bond issues with at least one year remaining to maturity and $50 million in par
amount outstanding which carry a below investment-grade quality rating from
either Standard & Poor's or Moody's rating services.
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.
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Salomon World Government Bond Index
The Salomon World Government Bond Index is designed to provide a comprehensive
measure of total return performance of the domestic Government bond market of
thirteen countries. The index has been constructed with the aim of choosing an
"all inclusive" universe of institutionally traded fixed-rate bonds. The
selection of security types to be included in the index is made with the aim of
being as comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
S&P 500
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the index. The
list is maintained by Standard & Poor's Corporation. It is market capitalization
weighted. Unlike the Russell indices, there are always 500 names in the S&P 500.
Changes are made by Standard & Poor's as needed.
S&P Mid Cap 400 Index
The S&P Mid Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is also a market-value
weighted index and was the first benchmark of 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 PriceWaterhouseCoopers LLP 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.
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Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection as to
principal and interest; AA: also qualify as high grade obligations, and in the
majority of instances differs from AAA issues only in small degree; A: regarded
as upper medium grade; have considerable investment strength but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe; BBB: regarded as borderline between
definitely sound obligations and those where the speculative element begins to
predominate; this group is the lowest which qualifies for commercial bank
investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
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BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
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CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as 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,
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and CCC are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations. Bb indicates the
lowest degree of speculation and CCC the highest degree of speculation. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions. CC: The rating CC is reserved for a preferred stock in arrears on
dividends or sinking fund payments but that is currently paying. C: A preferred
stock rated C is a non-paying issue. D: A preferred stock rated D is a
non-paying issue with the issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
D: Issuer is in default on its debt obligations and has filed for reorganization
or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
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