<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999
File No. 2-89729
File No. 811-3980
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 53 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 56 [x]
MAS FUNDS
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(Exact Name of Registrant)
c/o Miller Anderson & Sherrerd, LLP
One Tower Bridge
P.O. Box 868
West Conshohocken, PA 19428-0868
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (610) 940-5065
--------------
Ms. Lorraine Truten
One Tower Bridge
West Conshohocken, PA 19428-0868
--------------------------------
(Name and Address of Agent for Service)
Copies to:
John H. Grady, Jr., Esquire
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
________________________________________________________________________________
Title of Securities Being Registered . . . Units of Beneficial Interest
________________________________________________________________________________
It is proposed that this filing will become effective (check appropriate box)
____ Immediately upon filing pursuant to paragraph (b), or
____ On [date] pursuant to paragraph (b), or
____ 60 days after filing pursuant to paragraph (a), or
X On January 28, 2000 pursuant to paragraph (a) of Rule 485, or
____
____ 75 days after filing pursuant to paragraph (a) of Rule 485.
____ On [date] pursuant to paragraph (a)(2) of Rule 485(b)
If appropriate, ckeck the following box:
____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
ADVISORY PORTFOLIO PROSPECTUS
[LOGO OF MAS FUNDS APPEARS HERE]
SUBJECT TO COMPLETION
NOVEMBER 5, 1999
JANUARY , 2000
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 28 different
investment portfolios, 1 of which is 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 portfolio (the "Portfolio"):
ADVISORY FOREIGN FIXED INCOME II 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 . WEST CONSHOHOCKEN, PA 19428
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to buy these securities in any state where the offer or sale is not
permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY
INVESTOR SUITABILITY..................................................... 1
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO............................... 2
IMPORTANT INVESTMENT INFORMATION
DESCRIPTION OF PRINCIPAL INVESTMENTS..................................... 3
FEES AND EXPENSES OF THE PORTFOLIO
SHAREHOLDER FEES AND ANNUAL PORTFOLIO OPERATING EXPENSES................. 6
PURCHASING SHARES.......................................................... 6
REDEEMING SHARES........................................................... 7
VALUATION OF SHARES........................................................ 7
GENERAL SHAREHOLDER INFORMATION
DIVIDENDS AND DISTRIBUTIONS AND TAXES.................................... 7
FUND MANAGEMENT
INFORMATION ABOUT THE ADVISER, THE PORTFOLIO MANAGERS AND THE
DISTRIBUTOR............................................................. 8
YEAR 2000 DISCLOSURE STATEMENT............................................. 8
</TABLE>
<PAGE>
INVESTMENT SUMMARY
This section explains the 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 Portfolio 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 Portfolio may be suitable for you if you are a long-term investor who
can accept the risks of investing in the bond markets. In fact, the
Portfolio strives to meet its investment objective over an extended period.
The Portfolio focuses on a market cycle of three to five years. This means
that the Portfolio will strive to meet its investment objective within that
period without regard to interim market fluctuations.
[_] The Portfolio is designed principally for investment by fiduciary investors
who are entrusted with the responsibility of investing assets held for the
benefit of others.
[_] While the Portfolio considers whether its securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
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ADVISORY FOREIGN FIXED INCOME II PORTFOLIO
OBJECTIVE
THE ADVISORY FOREIGN FIXED INCOME II PORTFOLIO SEEKS ABOVE-AVERAGE TOTAL
RETURN OVER A MARKET CYCLE OF THREE TO FIVE YEARS.
GENERALLY AT LEAST 65% INVESTED IN FIXED
INCOME SECURITIES OF ISSUERS IN COUNTRIES
OTHER THAN THE U.S.
- ----------------------------------------------
100% OF SECURITIES RATED BBB OR HIGHER
- ----------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------------
CUSIP No.:
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F.
O'BRIEN AND CHRISTIAN G. ROTH
APPROACH
This Portfolio is available only to the Adviser's private advisory clients. It
invests primarily in FOREIGN FIXED INCOME SECURITIES which include foreign
government, corporate and MORTGAGE-RELATED 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,
DURATION, sector and security 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.
No performance information is provided because the Advisory Foreign Fixed
Income II Portfolio had not commenced operations as of 12/31/98.
2
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IMPORTANT INVESTMENT INFORMATION
The Portfolio involves the risk that an investor may lose money. The Portfolio
may actively trade its securities to achieve its investment objective. 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 the
Portfolio's stated objective of achieving above-average total return over a
market cycle of three to five years, 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 the
Portfolio may make and some of the risks associated with those investments.
More information about these investments and risks is contained in the
Statement of Additional Information.
FIXED INCOME SECURITIES
Fixed income securities include a wide variety of investments, such as U.S.
Government securities, securities issued by federal or federally sponsored
agencies ("agencies"), corporate bonds, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Eurobonds, 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 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
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, the 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.
EUROBONDS
The Eurobonds that the Portfolio will purchase may include bonds issued and
denominated in euros (the new currency unit implemented on January 1, 1999 by
the countries participating in the European Monetary Union). Eurobonds may be
issued by government and corporate issuers in Europe. As a result, Eurobonds
carry the foreign investment risk and currency risk discussed below.
3
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IMPORTANT INVESTMENT INFORMATION (Continued)
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 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
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
Portfolio's 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 Portfolio may use derivatives to pursue its strategy and objective.
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 Portfolio may enter into
public or private over-the-counter derivatives transactions with counterparties
that meet the Fund's requirements for credit quality and collateral. The
Portfolio will not use derivatives to increase its level of risk above the
level that could be achieved using only traditional investment securities. The
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 Portfolio may use futures to gain
exposure to an entire market (e.g., stock index futures) or to control its
exposure to changing foreign currency exchange rates. The Portfolio may use
futures to control its exposure to changes in interest rates and to
4
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IMPORTANT INVESTMENT INFORMATION (Continued)
manage the overall maturity and duration of the Portfolio's 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 Portfolio may enter
into swap transactions which are contracts in which the 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 Investment
Company Act of 1940 (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 the Portfolio, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market for
the 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 limitations in the amount that the Portfolio may invest in futures and
options is as follows:
The 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.
The 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 the Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations. In
that position, the Portfolio 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 the 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 the Portfolio's yield to maturity and could cause the Portfolio to
lose money on the investment.
5
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ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT AREDEDUCTED 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 PORTFOLIO. THE PORTFOLIO DOES NOT CHARGE ANY
SALES LOADS OR SIMILAR FEES WHEN YOU PURCHASE OR REDEEM SHARES.
IMPORTANT INVESTMENT INFORMATION (Continued)
ADDITIONAL INFORMATION
When the Adviser believes that changes in economic, financial or political
conditions warrant, the 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 Portfolio may invest. If the Adviser incorrectly
predicts the effects of these changes, such defensive investments may adversely
affect the Portfolio's performance. Consistent with its investment policy, the
Portfolio 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 PORTFOLIO
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
---------- ------------ -------- -------------
ADVISORY FOREIGN FIXED
INCOME II PORTFOLIO .375% NONE .122%* .497%**
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 fiscal year.
** The Adviser has voluntarily agreed to reduce its advisory fee and reimburse
the Portfolio so that total expenses will not exceed .150%. 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
- ----------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME II PORTFOLIO .122%
EXAMPLE
This example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the 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 the Portfolio's operating expenses remain the same. Because the Portfolio
has 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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
ADVISORY FOREIGN FIXED
INCOME II PORTFOLIO $51 $159 $ -- $ --
PURCHASING SHARES
The Advisory Foreign Fixed Income II Portfolio is available only to private
advisory clients of Miller Anderson & Sherrerd, LLP, investment adviser to the
Fund.
Shares of the 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 the 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 the 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.
6
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REDEEMING SHARES
You may redeem shares of the 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. You may incur brokerage charges when you sell those securities.
VALUATION OF SHARES
We determine the NAV of the Portfolio as of one hour after the close of the
U.S. bond markets (normally 4:00 p.m. Eastern Time).
The 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 the Portfolio invests in foreign securities that trade on
days when the Fund is closed.
GENERAL SHAREHOLDER INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The Portfolio normally distributes substantially all of its net investment
income to shareholders each quarter.
If any net gains are realized from the sale of underlying securities, the
Portfolio normally distributes 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 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 the Portfolio in October,
November or December of the previous year are taxable to you in the previous
year.
A redemption of shares in the Portfolio is a taxable event.
7
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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 , 1999, Morgan Stanley Dean Witter Investment Management
had in excess of $ billion in assets under management.
The Adviser makes investment decisions for the Portfolio and places its
purchase and sales orders. The Portfolio, in turn, pays the Adviser an annual
advisory fee calculated by applying a quarterly rate. The table below 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 II PORTFOLIO* .375 N/A
* The Adviser is voluntarily waiving its fee and reimbursing certain expenses
for the Portfolio to keep Total Operating Expenses from exceeding .150%.
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 Portfolio is as follows:
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 and Advisory Foreign Fixed Income
Portfolios in 1994, the Multi-Market Fixed Income Portfolio in 1997, and the
Advisory Foreign Fixed Income II Portfolio in 1999.
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, International Fixed Income and Advisory Foreign Fixed
Income Portfolios in 1996, and the Advisory Foreign Fixed Income II Portfolio
in 1999.
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, International Fixed Income and
Advisory Foreign Fixed Income Portfolios in 1996, and the Advisory Foreign
Fixed Income II Portfolio in 1999.
Christian G. Roth, Principal, MSDW, joined MAS in 1991. He served as a
Portfolio Manager for the Limited Duration and Intermediate Duration Portfolios
from 1994 until 1998. He joined the management team for the Global Fixed
Income, International Fixed Income and Advisory Foreign Fixed Income II
Portfolios in 1999.
DISTRIBUTOR
Shares of the Portfolio 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.
8
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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 Portfolio's
investments may be adversely affected.
9
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[LOGO OF MAS FUNDS APPEARS HERE]
ADVISORY PORTFOLIO PROSPECTUS
JANUARY , 2000
TRUSTEES OF THE FUND
--------------------
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
Vincent R. McLean C. Oscar Morong, Jr.
OFFICERS OF THE FUND
--------------------
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, Vice President John H. Grady, Jr., Assistant
& Treasurer Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January , 2000, which contains additional, more
detailed information about the Fund and the Portfolio. 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 the 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 the 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.
[LETTERHEAD OF MORGAN STANLEY DEAN WITTER APPEARS HERE]
<PAGE>
SUBJECT TO COMPLETION
NOVEMBER 5, 1999
MAS FUNDS
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
JANUARY ____, 2000
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to buy these securities in
any state where the offer or sale is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-eight
portfolios offering a variety of investment alternatives. This Statement of
Additional Information (the "SAI") sets forth information about the Advisory
Foreign Fixed Income II Portfolio (the "Portfolio"). The Portfolio had not
commenced operations as of September 30, 1999.
This Statement is not a prospectus but should be read in conjunction with the
Portfolio's Prospectus dated January ___, 2000, as revised from time to time.
To obtain this prospectus, please call the Client Services Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
THE PORTFOLIO'S INVESTMENTS AND STRATEGIES.................................... 2
INVESTMENT STRATEGIES......................................................... 3
INVESTMENTS................................................................... 5
INVESTMENT LIMITATIONS........................................................28
PURCHASE OF SHARES............................................................30
REDEMPTION OF SHARES..........................................................30
TRANSACTIONS WITH BROKER/DEALERS..............................................30
VALUATION OF SHARES...........................................................31
MANAGEMENT OF THE FUND........................................................31
INVESTMENT ADVISER............................................................33
PRINCIPAL UNDERWRITER.........................................................34
FUND ADMINISTRATION...........................................................34
OTHER SERVICE PROVIDERS.......................................................34
LITIGATION....................................................................35
BROKERAGE TRANSACTIONS........................................................35
GENERAL INFORMATION...........................................................36
TAX CONSIDERATIONS............................................................39
PERFORMANCE INFORMATION.......................................................41
COMPARATIVE INDEX.............................................................44
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS................................45
<PAGE>
THE PORTFOLIO'S INVESTMENTS AND STRATEGIES
The prospectus describes the investment objective, principal investment
strategies and principal risks associated with the Portfolio. The following
table summarizes the permissible strategies and investments for the Portfolio.
The table excludes investments that the Portfolio may make solely for temporary
defensive purposes. More details about the strategies and investments are
provided in the discussion that follows the table.
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO
Strategies:
- ----------
Emerging Markets Investing
Foreign Fixed Income Investing
Foreign Investing
Maturity and Duration Management
Mortgage Investing
Value Investing
Investments:
- -----------
Agencies
Asset-Backeds
Brady Bonds
Cash Equivalents
CMOs
Commercial Paper
Convertibles
Corporates
Emerging Markets Securities
Eurobonds
Floaters
Foreign Currency
Foreign Fixed Income Securities
Forwards
Futures
Inverse Floaters
Investment Companies
Loan Participations and Assignments
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Mortgage Securities
Municipals
Options
Preferred Stock
Repurchase Agreements
Reverse Repurchase Agreements
Securities Lending
Short Sales
SMBS
Structured Investments
Structured Notes
Swaps
U.S. Governments
When-Issued Securities
Zero Coupons
INVESTMENT STRATEGIES
EMERGING MARKETS INVESTING: The Adviser's approach to emerging markets investing
is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this SAI, 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. The Portfolio will focus its investments on
those emerging market countries in which the Adviser believes the potential for
market appreciation outweighs these risks and the cost of investment. Investing
in emerging markets also involves an extra degree of custodial and/or market
risk, especially where the securities purchased are not traded on an official
exchange or where ownership records regarding the securities are maintained by
an unregulated entity (or even the issuer itself).
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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 the Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, the 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 the 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 the 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 the Portfolio receives from the companies comprising the Portfolio's
investments.
MATURITY AND DURATION MANAGEMENT: One of two primary components of the
Adviser's fixed income investment strategy is maturity and duration management.
The maturity and duration structure of the Portfolio 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.
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Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed income securities. Duration is a
measure of the expected life of a fixed income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a fixed
income security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter
the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MORTGAGE INVESTING: The Portfolio 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. Securities issued by private issuers will be rated investment
grade by Moody's or Standard & Poor's or be deemed by the Adviser to be of
comparable investment quality.
VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is value investing. 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 the Portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged.
INVESTMENTS
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 United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service its debt. Debt from certain other
agencies and instrumentalities, including the Federal Home Loan Bank and Fannie
Mae, are
5
<PAGE>
not guaranteed by the United States, but those institutions are protected by the
discretionary authority of the U.S. Treasury to purchase certain amounts of
their securities to assist 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 may 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. The Portfolio will only invest in Brady Bonds consistent with
quality specifications.
Dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds or
floating rate discount bonds. These Brady Bonds are generally collateralized in
full as to principal due at maturity by U.S. Treasury Zero Coupon Obligations
having the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery 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
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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).
The Portfolio may invest in obligations of U.S. banks, and 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 SAI.
The Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal amount of such investment is insured in
full by the Federal Deposit Insurance Corporation, (ii) in the case of U.S.
banks, it is a member of the Federal Deposit Insurance Corporation, and (iii) in
the case of foreign branches of U.S. banks, the security is deemed by the
Adviser to be of an investment quality comparable with other debt securities
which the Portfolio may purchase.
(2) The Portfolio may invest in commercial paper rated at time of purchase by
one or more Nationally Recognized Statistical Rating Organizations ("NRSRO") in
one of their two highest categories, (e.g., A-l or A-2 by Standard & Poor's or
Prime 1 or Prime 2 by Moody's), or, if not rated, issued by a corporation having
an outstanding unsecured debt issue rated high-grade by a NRSRO (e.g., A or
better by Moody's, Standard & Poor's or Fitch Investors Services, Inc.
("Fitch")).
(3) Short-term corporate obligations rated high-grade at the time of purchase by
a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others; and
(6) repurchase agreements collateralized by securities listed above.
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
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interest-bearing. Commercial paper is unsecured, but is almost always backed by
bank lines of credit. Virtually all commercial paper is rated by Moody's or
Standard & Poor's.
CMOS: Collateralized mortgage obligations ("CMOs") are DERIVATIVES structured as
debt obligations or multiclass pass-through certificates. CMOs are issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated for federal income tax purposes as a Real
Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after
1991 must elect to be treated as a REMIC or it will be taxable as a corporation
under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of predictability
than do the underlying Mortgage Assets. As a general matter, the more
predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield on that tranche at the time of issue will be relative to
prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on other mortgage related securities with
similar average lives. Principal prepayments on the underlying Mortgage Assets
may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Because of the uncertainty of
the cash flows on these tranches, the market prices and yields of these tranches
are more volatile. In addition, some inverse floating rate obligation CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield
to maturity of these CMOs is sensitive not only to changes in interest rates,
but also to changes in prepayment rates on the related underlying Mortgage
Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
The magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
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.
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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 the 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.
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 Portfolio may
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. The Portfolio may
buy corporates subject to any quality constraints. If the 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.
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 SAI: CMOS, FORWARDS, FUTURES, OPTIONS, SMBS, STRUCTURED
INVESTMENTS, STRUCTURED NOTES, and SWAPS.
The Portfolio may use derivatives for various purposes. The Portfolio will use
derivatives only in circumstances where they offer the most economic means of
improving its risk/reward profile. The Portfolio will not use derivatives to
increase its risk above the level that it could achieve using only traditional
investment securities. The 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 Portfolio 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 the 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 the Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. If the Portfolio is in that position, it could be forced to
sell other securities that it wanted to retain or to realize unintended gains or
losses.
EMERGING MARKET 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
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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
the Portfolio's investments in those countries. It may be difficult to obtain
and enforce a judgment in a court outside the United States. The Portfolio may
also be exposed to an extra degree of custodial and/or market risk, especially
where the emerging market 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).
EUROBONDS: The Eurobonds that the Portfolio will purchase may include bonds
issued and denominated in euros (the new currenty unit implemented on January 1,
1999 by the countries participating in the European Monetary Union). Eurobonds
may be issued by government and corporate issuers in Europe. As a result,
Eurobonds carry the foreign investment risk and currency risk discussed below.
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 SAI:
AGENCIES, ASSET-BACKEDS, CASH EQUIVALENTS, CONVERTIBLES, CORPORATES, FLOATERS,
HIGH YIELD SECURITIES, INVERSE FLOATERS, LOAN PARTICIPATIONS AND ASSIGNMENTS,
MORTGAGE SECURITIES, MUNICIPALS, PREFERRED STOCK, REPURCHASE AGREEMENTS, U.S.
GOVERNMENTS, WHEN-ISSUED SECURITIES, EUROBONDS 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, the 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: The Portfolio will regularly transact security purchases and
sales in foreign currencies. The Portfolio may hold foreign currency or purchase
or sell currencies on a forward basis (see FORWARDS, below).
Foreign currency warrants. The Portfolio 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 United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
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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.
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 Options Clearing
Corporation ("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
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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 FIXED INCOME SECURITIES: Foreign fixed income securities are FIXED
INCOME SECURITIES denominated in foreign currency and issued and traded
primarily outside of the U.S., including: (1) obligations issued or guaranteed
by foreign national governments, their agencies, instrumentalities, or political
subdivisions; (2) debt securities issued, guaranteed or sponsored by
supranational organizations established or supported by several national
governments, including the World Bank, the European Community, the Asian
Development Bank and others; (3) non-government foreign corporate debt
securities; and (4) foreign mortgage securities and various other mortgages and
asset-backed securities. See also FOREIGN SECURITIES, below.
FOREIGN SECURITIES: Foreign Securities include BRADY BONDS, DEPOSITARY
RECEIPTS, EMERGING MARKET SECURITIES, FOREIGN CURRENCY, FOREIGN 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 Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the Portfolio will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The Portfolio may enter into forward foreign currency exchange
contracts to hedge its 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 United
States. 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 Portfolio will endeavor to achieve most favorable execution costs
in its Portfolio transactions, fixed commissions on many foreign 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
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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.
The Portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities denominated in foreign currencies (transaction hedge) or to lock in
the U.S. dollar value of portfolio positions (position hedge). In addition, the
Portfolio may cross hedge currencies by entering into a transaction to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Portfolio has or expects to have exposure. The
Portfolio may also engage in proxy hedging which is defined as entering into
positions in one currency to hedge investments denominated in another currency,
where the two currencies are economically linked. The Portfolio's entry into
forward contracts, as well as any use of cross or proxy hedging techniques will
generally require the Portfolio to hold liquid securities or cash equal to the
Portfolio's obligations in a segregated account throughout the duration of the
contract.
The Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, the Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, the Portfolio may be
able to lock in the foreign currency value of the security and adopt a synthetic
investment position reflecting the credit quality of the U.S. dollar-denominated
security.
Risks. Forward contracts are not traded on contract markets regulated by the
Securities and Exchange Commission ("SEC") or the Commodity Futures Trading
Commission ("CFTC"). They are traded through financial institutions acting as
market-makers. The Portfolio could lose amounts substantially in excess of
their initial investments, due to the margin and collateral requirements
associated with forward contracts.
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 United States of data on which to make
trading decisions, (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during non business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
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
the Portfolio's obligation under the forward contract. On the date of maturity,
the Portfolio may be exposed to some risk of loss from fluctuations in that
currency. Although the Adviser will attempt to hold such mismatching to a
minimum, there can be no assurance that the Adviser will be able to do so. For
proxy hedges, cross hedges or a synthetic position, there is an additional risk
in that these transactions create residual foreign currency exposure. When the
Portfolio enters into a forward contract for purposes of creating a position
hedge, transaction hedge, cross hedge or a synthetic security, it will generally
be required to hold liquid securities or cash in a segregated account with a
daily value at least equal to its obligation under the forward contract.
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FUTURES: Futures contracts and options on futures contracts ("Futures") are
DERIVATIVES. The 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 CFTC.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. The 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 the
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolio 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, the 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 the Portfolio's ability to effectively hedge. The 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.
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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. The 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.
The 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 the 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 the 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.
INVERSE FLOATERS: Inverse floating rate obligations ("inverse floaters") are
FIXED INCOME SECURITIES which have coupon rates that vary inversely to another
specified floating rate, such as LIBOR (London Inter-Bank Offered Rate). If the
specified reference rate rises, the coupon rate of the inverse floater falls,
while a decrease in the reference rate causes an increase in the inverse
floater's coupon rate. Inverse floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality, redemption
provisions and maturity. Inverse floater CMOs exhibit greater price volatility
than the majority of mortgage pass-through securities or CMOs. Some inverse
floater CMOs are extremely sensitive to changes in prepayments. As a result, the
yield to maturity of an inverse floater CMO is sensitive not only to changes in
interest rates but also to changes in prepayment rates on the related underlying
mortgage assets.
INVESTMENT COMPANIES: Investment companies are equity securities and include
open-end or closed-end investment companies. The Investment Company Act of 1940
(the "1940 Act") generally prohibits the Portfolio from acquiring more than 3%
of the outstanding voting shares of an investment company and limits such
investments to no more than 5% of the Portfolio's total assets in any one
investment company and no more than 10% in any combination of investment
companies. The 1940 Act also prohibits the Portfolio from acquiring in the
aggregate more than 10% of the outstanding voting shares of any registered
closed-end investment company.
To the extent the Portfolio invests a portion of its assets in investment
companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the Portfolio itself. The Portfolio may
not purchase shares of any affiliated investment company except as permitted by
SEC rule or order.
INVESTMENT GRADE SECURITIES: 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 or Fitch or Aaa, Aa, A or Baa by 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
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obligations and those in which the speculative element begins to predominate.
Securities rated A or higher are considered to be "high grade." The Portfolio
is permitted to hold Investment Grade Securities or "high grade" securities, and
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. The 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").
The 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, the 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, the
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. The Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When the 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 the 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 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
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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 the 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 Adviser 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.
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 Portfolio. The
compounding effect from reinvestment of monthly payments received by the
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 Portfolio 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 Portfolio's 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
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the life of the mortgage. These different interest and principal payment
procedures should not impact the Portfolio's net asset value 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.
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 Portfolio 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 Portfolio will, consistent with its 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.
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Possible Risks: Due to the possibility that prepayments on home mortgages will
alter cash flow on Mortgage Securities, it is not possible to determine in
advance the actual final maturity date or average life. Like bonds in general,
mortgage-backed securities will generally decline in price when interest rates
rise. Rising interest rates also tend to discourage refinancings of home
mortgages, with the result that the average life of mortgage securities held by
the Portfolio may be lengthened. This extension of average life causes the
market price of the securities to decrease further than if their average lives
were fixed. However, when interest rates fall, mortgages may not enjoy as large
a gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to calculate
the effect that it will have on the price of the security. Prepayments at a time
when interest rates are falling generally means that the 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 come cases there may be prohibitions on
principal prepayments 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.
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 United
States.
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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 Portfolio will meet the quality
criteria set out in the prospectus for the Portfolio.
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 Portfolio.
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 Portfolio to achieve
its investment objectives. In that event, the Fund's Trustees and officers would
reevaluate investment objectives and policies and consider recommending to
shareholders changes in such objectives and policies.
Similarly, from time to time proposals have been introduced before state and
local legislatures to restrict or eliminate the state and local income tax
exemption for interest on municipal bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of the 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 Portfolio 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
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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.
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.
The Portfolio may purchase over-the-counter options ("OTC Options") from, or
sell them to, securities dealers, financial institutions or other parties
("Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC Option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Portfolio expects 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 the 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 Portfolio or sold by them (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities.
The Portfolio 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 Portfolio 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 the Portfolio holding an option that will
expire worthless. For example, if the 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 the 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. The Portfolio may purchase and write options on foreign
currencies in a manner similar to that in which it would use futures contracts
on foreign currencies, or forward contracts. For example, a decline in
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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, the Portfolio may purchase put options on the
foreign currency. If the value of the currency falls, the 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, the 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 the 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
Portfolio loses money on transactions in foreign currency options, which could
reduce the gain the Portfolio might have achieved from advantageous changes in
the exchange rates.
The Portfolio may write options on foreign currencies for the same purposes. For
example, where the 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, the 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, the 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 Portfolio may only write covered call options on foreign currencies. A call
option written on a foreign currency by the 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 the 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 Portfolio 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 the 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.
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Combined Transactions. The Portfolio 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, if the Portfolio writes options, it could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the 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 the 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 United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
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 Portfolio may purchase
preferred stocks.
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REPURCHASE AGREEMENTS: Repurchase agreements are FIXED INCOME SECURITIES in the
form of an agreement backed by collateral. The Portfolio may invest in
repurchase agreements collateralized by U.S. Government securities, certificates
of deposit and certain bankers' acceptances. Repurchase agreements are
transactions by which the Portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. In these transactions, the securities
purchased by the 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 the 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 Portfolio may pool its daily uninvested cash
balances with those of the other portfolios of the Fund in order to invest in
repurchase agreements on a joint basis. By entering into repurchase agreements
on a joint basis, it is expected that the Portfolio will incur lower transaction
costs and potentially obtain higher rates of interest on such repurchase
agreements. The Portfolio's participation in the income from jointly purchased
repurchase agreements will be based on its respective 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, the
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the 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, the
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.
The 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.
SECURITIES LENDING: The 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, the 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. The 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
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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 the 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.
The 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. The 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 the 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 the
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 the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
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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 the 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. The Portfolio may 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 the Portfolio to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.
SWAPS: The Portfolio may enter into swap contracts ("Swaps"). A swap is a
DERIVATIVE in the form of an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, the Portfolio may agree to swap the
return generated by a fixed income index for the return generated by a second
fixed income index. The currency swaps in which the Portfolio may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon national amount.
The swaps in which the Portfolio 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 the Portfolio is
contractually obligated to make. If the other party to a swap defaults, the
Portfolio's risk of loss consists of the net amount of payments that the
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 Portfolio 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 the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
Counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities to avoid any potential leveraging of the
Portfolio. To the extent that these swaps, caps, floors, and collars
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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 the Portfolio's borrowing restrictions. The
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 the Portfolio is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps may involve the delivery of the entire principal value
of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap may be subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
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.
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 the Portfolio receives no income from the above
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market price
of the securities at the time of delivery may be higher or lower than the
purchase price. The Portfolio will maintain with the custodian a segregated
account consisting of cash or liquid securities in an amount at least equal to
these commitments.
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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").
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The Portfolio 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, the 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) 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);
(5) 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
(6) 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.
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Government, its agencies or instrumentalities; (ii) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iv) asset- backed
securities will be classified according to the underlying assets securing such
securities.
NON-FUNDAMENTAL LIMITATIONS. The Portfolio is also subject to the following
restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, the Portfolio will not:
(1) 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;
(2) 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 the
Portfolio may make margin deposits in connection with transactions in
options, futures, and options on futures;
(3) 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);
(4) borrow money other than from banks or other Portfolios of MAS Funds,
provided that the 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;
(5) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that the 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;
(6) 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;
(7) invest for the purpose of exercising control over management of any
company; and
(8) 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 portfolio requested should be designated on the Account Registration Form.
The 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.
Investors purchasing and redeeming shares of the Portfolio 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
The 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 the 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 the Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, accepts the order. In
other words, orders will be priced at the net asset value next computed after
such orders are accepted by an authorized broker or the broker's authorized
designee.
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VALUATION OF SHARES
Net asset value per share ("NAV") is determined by dividing the total market
value of the Portfolio's investments and other assets, less any liabilities, by
the total outstanding shares of the Portfolio.
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
are 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.
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.; Member of the Morgan Stanley Dean
Witter Investment Mangement Executive Committee; Portfolio Manager and Head of
the Fixed Income Investment Team, Miller Anderson & Sherrerd, LLP.
THOMAS P. GERRITY, 7/13/41, Trustee; Professor of Management, Director of the
Electronic Commerce Forum, and formerly Dean, Wharton School of Business,
University of Pennsylvania; Director, Sunoco; Fannie Mae; Reliance Group
Holdings; CVS Corporation; IKON Office Solutions, Inc.; Knight-Ridder, Inc.;
Fiserv; Internet Capital Group; formerly Director, Digital Equipment Corporation
and 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.
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JOSEPH J. KEARNS, 8/2/42, Trustee; Investment Consultant; Director, Electro
Rent Corporation; Trustee, Southern California Edison Nuclear Decommissioning
Trust; Director, The Ford Family Foundation; formerly CFO of The J. Paul Getty
Trust.
VINCENT R. MCLEAN, 6/1/31, Trustee; Director, Legal and General America, Inc.;
Director, Banner Life Insurance Co.; 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, CitiFunds, CitiSelect Folios and related portfolios;
formerly Senior Vice President and Investment Manager for CREF, TIAA-CREF
Investment Management, Inc.; Director, The Indonesia Fund and the Landmark
Funds; Director, Ministers and Missionaries Benefit Board of American Baptist
Churches.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act.
______________________________________________________________________________
LORRAINE TRUTEN, 5/11/61, CFA, President, MAS Funds; Principal, Morgan Stanley
Dean Witter & Co.; Head of Mutual Fund Services, Miller Anderson & Sherrerd,
LLP; President, MAS Fund Distribution, Inc.
JAMES A. GALLO, 6/18/64, Vice President and Treasurer, MAS Funds; Head of Fund
Administration, Miller Anderson & Sherrerd, LLP; Vice President, Morgan Stanley
Dean Witter & Co.; formerly Vice President and Director of Investment
Accounting, PFPC, Inc.
RICHARD J. SHOCH, 10/28/66, Secretary, MAS Funds; Fund Administration Manager,
Miller Anderson & Sherrerd, LLP; Vice President, Morgan Stanley Dean Witter &
Co.; formerly Counsel, Vice President and Assistant Secretary, SEI Corporation.
JOHN H. GRADY, JR., 6/1/60, Assistant Secretary, MAS Funds; Partner, Morgan,
Lewis & Bockius LLP.
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
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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 Total
Compensation from Accrued as Part of 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.
# 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 September _____, 1999
Morgan Stanley Dean Witter Investment Management had in excess of $_______
billion in assets under management.
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board and in conformance
with the stated investment objectives and policies of the Portfolio, manages the
investment and reinvestment of the assets of the Portfolio. In this regard, it
is the responsibility of the Adviser to make investment decisions for the
Portfolio and to place the Portfolio's purchase and sales orders 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 Portfolio and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of such
securities), the Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on an annual percentage rate of 0.375%, to the
Portfolio's average daily net assets for the quarter.
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 Portfolio from
exceeding .150% of its average daily net assets.
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<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 Portfolio; in such event, continuance shall be effected only if approved by
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio. If the holders of the Portfolio fail to approve the Agreement, the
Adviser may continue to serve as investment adviser to the Portfolio until new
arrangements have been made. The Agreement is automatically terminated if
assigned, and may be terminated by the 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. The 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.
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.
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.
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<PAGE>
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 the Portfolio.
FUND COUNSEL. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
LITIGATION
The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolio and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolio. In 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, the 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, the 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 Portfolio or who act as agents in the purchase of
shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients 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
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<PAGE>
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
the Portfolio and one or more of these other clients serviced by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and reasonable
by the Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees.
As an indirect subsidiary of Morgan Stanley Dean Witter & Co., the Adviser is
affiliated with certain U.S.-registered broker-dealers and foreign broker-
dealers (collectively, the AAffiliated Brokers@). The Adviser may, in the
exercise of its discretion under its investment management agreement, effect
transactions in securities or other instruments for the Fund through the
Affiliated Brokers. THE FUND DID NOT PAY ANY BROKERAGE COMMISSIONS TO ANY
AFFILIATES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
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
twenty-eight 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:
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<PAGE>
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 the Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed income
and capital gains (see discussion under "Dividends, Distributions and Taxes" in
the prospectus). The amounts of any income dividends or capital gains
distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of the
Portfolio by an investor may have the effect of reducing the per share net asset
value of the Portfolio by the per share amount of the dividend or distribution.
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 the Portfolio 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.
The Portfolio is treated as a separate entity (and hence, as a separate
"regulated investment company") for federal tax purposes. Any net capital gains
recognized by the 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.
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
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<PAGE>
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.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Fund's
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only to
the rights of creditors of the Fund) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act shareholders of any additional series
or class of shares would normally have to approve the adoption of any advisory
contract relating to such series or class and of any changes in the investment
policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
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
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<PAGE>
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
The Portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the federal excise tax. To do so,
the Portfolio expects to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income 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 the 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) the 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 the 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 the 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.
The Portfolio 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.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolio may be "Section 1256 contracts." Section 1256
contracts held by the 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 the 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 the Portfolio. In addition,
losses realized by the 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 the Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
the Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
The Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If the 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
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<PAGE>
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 the 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.
The Portfolio 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, the 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. The 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 the 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 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.
FOREIGN INCOME TAXES: Investment income received by the Portfolio from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Portfolio to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolio's assets to be
invested within various countries is not known. The Portfolio intends to
operate so as to qualify for treaty-reduced rates of tax where applicable.
If at the end of the Portfolio's year, more than 50% of the Portfolio's assets
are represented by foreign securities, then the Portfolio may file an election
with the Internal Revenue Service to pass through to shareholders the amount of
foreign income taxes paid by the Portfolio. The Portfolio will make such an
election only if it is deemed to be in the best interests of its shareholders.
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If the 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 Portfolio's
shareholders 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 the 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 the Portfolio will be notified within 60 days after the
close of each taxable (fiscal) year of the Fund if the foreign taxes paid by the
Portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the Portfolio's gross income from foreign sources. The notice from the
Portfolio to shareholders will also include the amount of foreign taxes paid by
the Portfolio which are not allowable as a foreign tax credit because the
Portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because, and to the extent that, the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
STATE AND LOCAL INCOME TAXES: The Fund is not liable for any corporate income
or franchise tax in the Commonwealth of Pennsylvania. Shareholders should
consult their tax advisors for the state and local income tax consequences of
distributions from the Portfolio.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of the Portfolio. 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
The 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 the 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
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Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the stated period
The Portfolio may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
Aggregate total returns may be shown by means of schedules, charts or graphs and
may include subtotals of the various components of total return (e.g., income
dividends or returns for specific types of securities such as industry or
country types). The formula for calculating aggregate total return can be
expressed as follows:
Aggregate Total Return = [ ( ERV ) - 1 ]
--------------------------------
P
The Portfolio 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.
YIELD
In addition to total return, the 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
Portfolio's reports to shareholders. The Portfolio may also advertise or quote
a yield which is gross of expenses.
The yield figures provided will be calculated according to a formula prescribed
by the SEC and can be expressed as follows:
Yield = 2 [ ( (a-b/cd) + 1) /6/ - 1 ]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the 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.
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OTHER PERFORMANCE INFORMATION
The 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 the 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.
From time to time, the Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, the 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 Portfolio to other funds in an appropriate category over specific periods of
time may also be quoted in advertising. The performance of the Portfolio 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 its ranking in an 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 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 Portfolio 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 Portfolio. The Portfolio may also compare its performance to
that of other compilations or indices that may be developed and made available
in the future.
The Portfolio may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investments in various investment
vehicles, including but not limited to, foreign securities, bonds, treasury
bills and shares of the Portfolio. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in
the 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 Portfolio may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
Portfolio dividends or other distributions are reinvested by being paid in
additional Portfolio shares, any future income or capital appreciation of the
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 Portfolio 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
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techniques, policies or investment suitability of the 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 the 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 Portfolio's advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
United States, a foreign or the global economy and the United States, a foreign
or the global economy as a whole and the effects of inflation. The Portfolio
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
Portfolio's shareholder reports (including the investment composition of the
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 the Portfolio.
The Portfolio may quote various measures of volatility and benchmark correlation
in advertising. The Portfolio 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.
The 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 the 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 INDEX
The Portfolio may from time to time use the following unmanaged index for
performance comparison purposes:
Salomon Broad Index
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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.
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APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings Excerpts from Moody's Investors Service, Inc.'s
Corporate Bond Ratings:
Aaa: judged to be the best quality; carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; Ba: B: protection of interest and
principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection as to
principal and interest; AA: also qualify as high grade obligations, and in the
majority of instances differs from AAA issues only in small degree; A: regarded
as upper medium grade; have considerable investment strength but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe; BBB: regarded as borderline between
definitely sound obligations and those where the speculative element begins to
predominate; this group is the lowest which qualifies for commercial bank
investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
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AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
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BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
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AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA. A: An
issue rated A is backed by a sound capacity to pay the preferred stock
obligations , although it is somewhat more susceptible to the adverse effect of
the changes in circumstances and economic conditions. BBB: An issue rated BBB is
regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameter, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. Bb indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
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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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MAS FUNDS
PART C: OTHER INFORMATION
POST-EFFECTIVE AMENDMENT NO. 53
Item 23. Exhibits:
(a) (1) Amended and Restated Declaration of Trust filed as Exhibit 1 of
the Initial Registration Statement, filed on March 1, 1984.
(2) Amendment No. 1 to Amended and Restated Declaration of Trust,
dated May 20, 1992 as filed as Exhibit 2 of Post-Effective
Amendment No. 25, as filed on January 28, 1993.
(3) Amended and Restated Declaration of Trust, dated November 18,
1993 as filed as Exhibit 1 of Post-Effective Amendment No. 29,
as filed on December 27, 1993.
(4) Amended and Restated Agreement and Declaration of Trust dated
November 18, 1993, is incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 42, as filed on July 15, 1996.
(b) (1) By-Laws as filed as Exhibit 2 of the initial Registration
Statement, as filed on March 1, 1984.
(2) By-Laws as filed as to Exhibit 2 of Post-Effective Amendment No.
29, as filed on December 27, 1993.
(3) Amended and Restated By-Laws dated November 21, 1996 are
incorporated by reference to Exhibit (2)(b) of Post-Effective
Amendment No. 43, as filed on January 29, 1997.
(c) Not Applicable.
(d) (1) Investment Advisory Agreement with Miller Anderson & Sherrerd,
LLP dated July 1, 1988 as filed as Exhibit 5 of Post-Effective
Amendment No. 8, as filed on February 18, 1987.
(2) Investment Advisory Agreement with Miller Anderson & Sherrerd,
LLP dated January 3, 1996 is incorporated by reference to
Exhibit (5)(a) of Post-Effective Amendment No. 43, as filed
January 29, 1997.
(3) Investment Advisory Agreement with Miller Anderson & Sherrerd,
LLP dated May 31, 1997 is incorporated by reference to Exhibit
5(b) of Post-Effective Amendment No. 44, as filed on June 13,
1997.
(4) Amended Schedule A, dated August 4, 1998, to Investment Advisory
Agreement with Miller Anderson & Sherrerd, LLP dated May 31,
1997 is incorporated by reference to Exhibit (d)(4) of Post-
Effective Amendment No. 51, as filed on November 30, 1998.
(e) (1) Distribution Agreement with MAS Fund Distribution, Inc. dated
April 13, 1993 as filed as Exhibit (6) of Post-Effective
Amendment No. 26, as filed on June 28, 1993.
(2) Distribution Agreement with MAS Fund Distribution, Inc. dated
January 3, 1996 is incorporated by reference to Exhibit (6)(a)
of Post-Effective Amendment No. 43, as filed January 29, 1997.
(3) Distribution Agreement with MAS Fund Distribution, Inc. dated
May 31, 1997, is incorporated by reference to Exhibit 6(b) of
post-Effective Amendment No. 50, as filed on July 10, 1998.
(f)Not Applicable.
(g) (1) Custodian Agreement with State Street Bank & Trust Company as
filed as Exhibit (8) of the initial Registration Statement, as
filed on March 1, 1984.
(2) Custodian Agreement with Morgan Stanley Trust Company dated
September 1, 1993 is incorporated by reference to Exhibit 8(a)
of Post-Effective Amendment No. 41 filed on January 30, 1996.
(3) Custodian Agreement with United States Trust Company of New York
dated July 22, 1994 is incorporated by reference to Exhibit 8(b)
of Post-Effective Amendment No. 41, as filed on January 30,
1996.
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(4) Amendment dated January 3, 1996 between Morgan Stanley Trust
Company and MAS Funds is incorporated by reference to Exhibit
8(c) of Post-Effective Amendment No. 41, as filed on January 30,
1996.
(5) Deferred Compensation Plan for MAS Funds Board of Trustees, as
amended, is incorporated by reference to Exhibit (8)(c) of Post-
Effective Amendment No. 44, as filed on June 13, 1997.
(6) Amendment dated July 22, 1994 to the Custody Agreement between
MAS Funds and United States Trust Company of New York is
incorporated by reference to Exhibit (8)(e) of Post-Effective
Amendment No. 46, as filed on January 29, 1998.
(h) (1) Administration Agreement with The Vanguard Group dated
September, 1984 as filed as Exhibit 9 of Pre-Effective Amendment
No. 3, as filed on August 27, 1984.
(2) Administration Agreement with Miller Anderson & Sherrerd, LLP
dated November 18, 1993 as filed as Exhibit 9 of Post-Effective
Amendment No. 29, as filed on December 27, 1993.
(3) Sub-Administration Agreement with United States Trust Company of
New York dated November 18, 1993 is incorporated by reference to
Exhibit (9)(b) of Post-Effective Amendment No. 46, as filed on
January 29, 1998.
(4) Transfer Agency Agreement with United States Trust Company of
New York dated November 18, 1993, as amended February 9, 1995
and November 18, 1996, is incorporated by reference to Exhibit
(9)(c) of Post-Effective Amendment No. 46, as filed on January
29, 1998.
(5) Administration Agreement with Miller Anderson & Sherrerd, LLP
dated January 3, 1996 is incorporated by reference to Post-
Effective Amendment No. 43, as filed on January 29, 1997.
(6) Investment Class Shareholder Service Agreement is incorporated
by reference to Exhibit 15(a) of Post-Effective Amendment No.
41, as filed on January 30, 1996.
(7) Investment Class Service Provider Agreement is incorporated by
reference to Exhibit 15(b) of Post-Effective Amendment No. 40,
as filed on December 1, 1995.
(8) Amendment dated August, 1995 to the Transfer Agency and Fund
Sub-Administration Agreement between MAS Funds and United States
Trust Company, is incorporated by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 46, as filed on January 29, 1998.
(i) Opinion and Consent of Counsel dated August 23, 1984 is incorporated by
reference to Exhibit (10) of Post-Effective Amendment No. 46, as filed
on January 29, 1998.
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Distribution Plan relating to Adviser Class Shares is incorporated by
reference to Exhibit 15 of Post-Effective Amendment No. 41, as filed on
January 30, 1996.
(n) Not Applicable.
(o) Rule 18f-3 Multiple Class Plan is incorporated by reference to Exhibit
18 of Post-Effective Amendment No. 41, as filed on January 30, 1996.
(p) Powers of Attorney for Joseph P. Healey, Joseph J. Kearns, John H.
Grady, Jr., Lorraine Truten, C. Oscar Morong, Jr., Thomas L. Bennett,
Vincent R. McLean, Thomas P. Gerrity, and James A. Gallo are
incorporated by reference to Exhibit (p) of Post-Effective Amendment No.
51, as filed on November 30, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any person.
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Item 25. Indemnification.
Reference is made to Article V of Registrant's By-Laws dated November
21, 1996, which is incorporated by reference. Registrant hereby also makes the
undertaking consistent with rule 484 under the Securities Act of 1933, as
amended.
The Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as
a shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgements, in compromise
or as fines and penalties, and counsel fees reasonably incurred by any
Covered Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, or whether
by or in the right of the Trust, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or may
have been threatened, while in office or thereafter, by reason of any
alleged act or omission as a Trustee or officer, except with respect to
any matter as to which such Covered Person shall have been finally
adjudicated in any such action, suit or other proceeding not to have
acted in good faith in the reasonable belief that such Covered Person's
action was in the best interest of the Trust and except that no Covered
Person shall be indemnified against any liability to the Trust or its
Shareholders to which such Covered Person would otherwise be subject by
reason of self-dealing, willful misconduct or recklessness. Expenses,
including counsel fees so incurred by any such Covered Person, may be
paid from time to time by the Trust in advance of the final disposition
of any such action, suit or proceeding on the condition that the amounts
so paid shall be repaid to the Trust if it is ultimately determined that
indemnification of such expenses is not authorized under this Article.
Item 26. Business and Other Connections of Investment Adviser:
Miller Anderson & Sherrerd, LLP (the "Adviser") is a Pennsylvania
limited liability partnership founded in 1969. The Adviser provides
investment services to employee benefit plans, endowment funds,
foundations and other institutional investors.
<TABLE>
<CAPTION>
Name and Position with Name of Other Company Connection with Other
- ---------------------- --------------------- ---------------------
Investment Adviser Company
------------------ -------
<S> <C> <C>
Richard Brown Worley Morgan Stanley Dean Witter & Co. Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment President
Executive Committee Member Management
MAS Fund Distribution, Inc. Registered Representative
Thomas Leonard Bennett Morgan Stanley Dean Witter & Co. Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management
MAS Funds Chairman
MAS Fund Distribution, Inc. Director
Gary G. Schlarbaum Morgan Stanley Dean Witter & Co. Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management
MAS Fund Distribution, Inc. Director
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name of Other Company Connection with Other
- ---------------------- --------------------- ---------------------
Investment Adviser Company
------------------ -------
<S> <C> <C>
Robert J. Marcin Morgan Stanley Dean Witter Investment Portfolio Manager
Portfolio Manager Management
Executive Committee Member Morgan Stanley Dean Witter & Co. Managing Director
MAS Fund Distribution, Inc. Registered Representative
Marna C. Whittington Morgan Stanley Dean Witter & Co. Managing Director
Executive Committee Member MAS Fund Distribution, Inc. CEO
Rohm Haas Director
</TABLE>
Item 27. Principal Underwriter:
(a) MAS Fund Distribution, Inc. acts as sole distributor of the
Registrant's shares.
(b) The principal address for MAS Fund Distribution, Inc. and each
partner and officer listed below is One Tower Bridge, West
Conshohocken, PA 19428.
<TABLE>
<CAPTION>
Name and Principal Positions and Positions and
Business Address Offices with Underwriter Offices with Registrant
------------------------- ------------------------ -----------------------
<S> <C> <C>
Marna Whittington Chief Executive Officer N/A
Lorraine Truten President President
Ronald R. Reese Secretary & Treasurer N/A
Paul A. Frick Compliance Officer N/A
Gary G. Schlarbaum Director N/A
Thomas L. Bennett Director Trustee
Marion Mitchell Client Account Manager Assistant Secretary
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records:
Books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940, and the rules promulgated
thereunder, are maintained as follows:
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, N.Y. 10081
and
1 Pierrepont Plaza
Brooklyn, New York 11201
(records relating to its function as custodian)
Chase Global Funds Services
73 Tremont Street
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<PAGE>
Boston, MA 02108-3913
(records relating to its functions as sub-administrator,
transfer agent and dividend disbursing agent)
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
(records relating to its function as investment adviser)
Item 29. Management Services
Not Applicable
Item 30. Undertakings:
(a) Not Applicable
-vi-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment No. 53 to Registration Statement No. 2-89729 to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Philadelphia on the 3rd day of November 1999.
MAS FUNDS
By: *
--------------------------------
Lorraine Truten, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacity on the dates indicated.
* Trustee November 3, 1999
- --------------------------
Thomas L. Bennett
* Trustee November 3, 1999
- --------------------------
Thomas P. Gerrity
* Trustee November 3, 1999
- --------------------------
Joseph P. Healey
* Trustee November 3, 1999
- --------------------------
Joseph J. Kearns
* Trustee November 3, 1999
- --------------------------
Vincent R. McLean
* Trustee November 3, 1999
- --------------------------
C. Oscar Morong, Jr.
* President November 3, 1999
- --------------------------
Lorraine Truten
* Treasurer November 3, 1999
- --------------------------
James A. Gallo
*By: /s/ John H. Grady, Jr.
-------------------------
John H. Grady, Jr.
Attorney-in-Fact
-vii-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Name Exhibit
<S> <C> <C>
Amended and Restated Declaration of Trust as filed as Exhibit 1 of the initial a(1) Ex-99.A1
Registration Statement, as filed on March 1, 1984.
Amendment No. 1 to Amended and Restated Declaration of Trust, dated a(2) Ex-99.A2
May 20, 1992 as filed as Exhibit 2 of Post-Effective Amendment No. 25,
as filed on January 28, 1993.
Amended and Restated Declaration of Trust, dated November 18, 1993 as filed a(3) Ex-99.A3
as Exhibit 1 of Post-Effective Amendment No. 29, as filed on December 27, 1993.
Amended and Restated Agreement and Declaration of Trust dated November 18, 1993, a(4) Ex-99.A4
as corrected by the Trustees on February 29, 1996, is incorporated by reference to
Exhibit 1 of Post-Effective Amendment No. 42, as filed on July 15, 1996.
By-Laws as filed as Exhibit 2 of the initial Registration Statement, as filed on b(1) Ex-99.B1
March 1, 1984.
By-Laws as filed as Exhibit 2 of Post-Effective Amendment No. 29, as filed on b(2) Ex-99.B2
December 27, 1993.
Amended and Restated By-Laws dated November 21, 1996, are incorporated by b(3) Ex-99.B3
reference to Exhibit (2)(b) of Post-Effective Amendment No. 43, as filed on
January 29, 1997.
Not Applicable. c Ex-99.C
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(1) Ex-99.D1
July 1, 1988 as filed as Exhibit 5 of Post-Effective Amendment No. 8, on February
18, 1987.
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(2) Ex-99.D2
January 3, 1996 is incorporated by reference to Exhibit (5)(a) of Post-Effective
Amendment No. 43, as filed on January 29, 1997.
Investment Advisory Agreement with Miller Anderson & Sherrerd, LLP dated d(3) Ex-99.D3
May 31, 1997 is incorporated by reference to Exhibit 5(b) of Post-Effective
Amendment No. 44, as filed on June 13, 1997.
Amended Schedule A, dated August 4, 1998, to Investment Advisory Agreement d(4) Ex-99.D4
with Miller Anderson & Sherrerd, LLP dated May 31, 1997, is incorporated by
reference to Exhibit (d)(4) of Post-Effective Amendment No. 51, as filed on November
30, 1998.
Distribution Agreement with MAS Fund Distribution, Inc. dated April 13, 1993 as e(1) Ex-99.E1
filed as Exhibit 6 of Post-Effective Amendment No. 26, as filed on June 28, 1993.
</TABLE>
-viii-
<PAGE>
<TABLE>
<CAPTION>
Name Exhibit
<S> <C> <C>
Distribution Agreement with MAS Fund Distribution, Inc. dated January 3, 1996 is e(2) Ex-99.E2
incorporated by reference to Exhibit (6)(a) of Post-Effective Amendment No. 43, as
filed on January 29, 1997.
Distribution Agreement with MAS Fund Distribution, Inc. dated May 31,1997, is e(3) Ex-99.E3
incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 50, as
filed on July 10, 1998.
Not Applicable. f Ex-99.F
Custodian Agreement with State Street Bank & Trust Company as filed as Exhibit 8 g(1) Ex-99.G1
of the initial Registration Statement, as filed on March 1, 1984.
Custodian Agreement with Morgan Stanley Trust Company dated September 1, 1993 g(2) Ex-99.G2
is incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 41
filed on January 30, 1996.
Custodian Agreement with United States Trust Company of New York dated g(3) Ex-99.G3
July 22, 1994 is incorporated by reference to Exhibit 8(b) of Post-Effective
Amendment No. 41, as filed on January 30, 1996.
Amendment dated January 3, 1996 between Morgan Stanley Trust Company and g(4) Ex-99.G4
MAS Funds is incorporated by reference to Exhibit 8(c) of Post-Effective
Amendment No. 41, as filed on January 30, 1996.
Deferred Compensation Plan for MAS Funds Board of Trustees, as amended, is g(5) Ex-99.G5
incorporated by reference to Exhibit 8(c) of Post-Effective Amendment No. 44,
as filed on June 13, 1997.
Amendment dated July 22, 1994 to the Custody Agreement between MAS Funds g(6) Ex-99.G6
and United States Trust Company of New York is incorporated by reference to
Exhibit (8)(e) of Post-Effective Amendment No. 46, as filed on January 29, 1998.
Administration Agreement with The Vanguard Group dated September, 1984 as h(1) Ex-99.H1
filed as Exhibit 9 of Pre-Effective Amendment No. 3, as filed on August 27, 1984.
Administration Agreement with Miller Anderson & Sherrerd, LLP dated h(2) Ex-99.H2
November 18, 1993 as filed as Exhibit 9 of Post-Effective Amendment No. 29,
as filed on December 27, 1993.
Sub-Administration Agreement with United States Trust Company of New York h(3) Ex-99.H3
dated November 18, 1993 is incorporated by reference to Exhibit (9)(b) of
Post-Effective Amendment No. 46, as filed on January 29, 1998.
Transfer Agency Agreement with United States Trust Company of New York h(4) Ex-99.H4
dated November 18, 1993 and amended February 9, 1995 and November 18, 1996
is incorporated by reference to Exhibit (9)(c) of Post-Effective Amendment No. 46,
as filed on January 29, 1998.
Administration Agreement with Miller Anderson & Sherrerd, LLP is dated h(5) Ex-99.H5
January 3, 1996 is incorporated by reference to Post-Effective Amendment No. 43,
as filed on January 29, 1997.
</TABLE>
-ix-
<PAGE>
<TABLE>
<CAPTION>
Name Exhibit
<S> <C> <C>
Investment Class Shareholder Service Agreement is incorporated by reference to h(6) Ex-99.H6
Exhibit 15(a) of Post-Effective Amendment No. 41, as filed on January 30, 1996.
Investment Class Service Provider Agreement is incorporated by reference to h(7) Ex-99.H7
Exhibit 15(b) of Post-Effective Amendment No. 40, as filed on December 1, 1995.
Amendment dated August, 1995 to the Transfer Agency and Fund Sub- h(8) Ex-99.H8
Administration Agreements between MAS Funds and United States Trust Company
is incorporated by reference to Exhibit (9)(g) of Post-Effective Amendment No. 46,
as filed on January 29, 1998.
Opinion and Consent of Counsel dated August 23, 1984 is incorporated by reference i Ex-99.I
to Exhibit 10 of Post-Effective Amendment No. 46, as filed on January 29, 1998.
Not Applicable. j Ex-99.J
Not Applicable. k Ex-99.K
Not Applicable. l Ex-99.L
Distribution Plan relating to Adviser Class Shares is incorporated by reference to m Ex-99.M
Exhibit 15 of Post-Effective Amendment No. 41, as filed on January 30, 1996.
Not Applicable n
Rule 18f-3 Multiple Class Plan is incorporated by reference to Exhibit 18 of o Ex-99.O
Post-Effective Amendment No. 41, as filed on January 30, 1996.
Powers of Attorney for Joseph P. Healey, Joseph J. Kearns, John H. Grady, Jr., p Ex-99.P
Lorraine Truten, C. Oscar Morong, Jr., Thomas L. Bennett, Vincent R. McLean,
Thomas P. Gerrity, and James A. Gallo are incorporated by reference to
Exhibit (p) of Post-Effective Amendment No. 51, as filed on November 30, 1998.
</TABLE>
-x-
