<PAGE>
INVESTMENT CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JANUARY 31, 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, 8 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Investment Class Shares of the following portfolios (each a "Portfolio"
and collectively the "Portfolios"):
EQUITY PORTFOLIOS
-----------------
EQUITY
MID CAP VALUE
VALUE
FIXED INCOME PORTFOLIOS
-----------------------
DOMESTIC FIXED INCOME
FIXED INCOME
HIGH YIELD
BALANCED PORTFOLIOS
-------------------
BALANCED
MULTI-ASSET-CLASS
INVESTMENT ADVISER
MILLER ANDERSON & SHERRERD, LLP
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
MORGAN STANLEY DEAN WITTER
- --------------------------
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY.......................................................... 1
EQUITY PORTFOLIOS
EQUITY.................................................................... 2
MID CAP VALUE............................................................. 3
VALUE..................................................................... 4
FIXED INCOME PORTFOLIOS
DOMESTIC FIXED INCOME..................................................... 5
FIXED INCOME.............................................................. 6
HIGH YIELD................................................................ 8
BALANCED PORTFOLIOS
BALANCED.................................................................. 9
MULTI-ASSET-CLASS......................................................... 11
FEES AND EXPENSES OF THE PORTFOLIOS......................................... 13
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 14
PURCHASING SHARES........................................................... 18
REDEEMING SHARES............................................................ 18
VALUATION OF SHARES......................................................... 19
GENERAL SHAREHOLDER INFORMATION............................................. 20
FUND MANAGEMENT............................................................. 20
SERVICE PLAN................................................................ 23
FINANCIAL HIGHLIGHTS........................................................ 24
</TABLE>
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
. Investment Objective
. Principal Investment Strategy
. Principal Risks
INVESTOR SUITABILITY
. The Portfolios may be suitable for long-term investors who can accept the
risks of investing in the stock and bond markets.
. The Portfolios are designed principally for investment by fiduciary investors
who are entrusted with the responsibility of investing assets held for the
benefit of others.
. While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<PAGE>
EQUITY PORTFOLIO
OBJECTIVE
The Equity Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of large U.S. companies. The
Portfolio invests, to a limited extent, in stocks of small companies and foreign
equity securities.
PROCESS
The Adviser assigns each member of the portfolio management team to specific
"value" or "growth" sectors. The Portfolio's overall sector allocation is driven
by bottom-up stock selection. The Adviser seeks to diversify the Portfolio's
investments across market sectors, and to obtain the best values within each
sector. In determining whether securities should be sold, the Adviser considers
factors such as deteriorating fundamentals and relative valuation.
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN COMMON
STOCKS
- ----------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $5 BILLION
- ----------------------------------------
BENCHMARK: S&P 500 INDEX
- ----------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------
CUSIP NO.: 552-913-584
- ----------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------
ARDEN C. ARMSTRONG, STEVEN EPSTEIN,
JAMES J. JOLINGER, BRIAN KRAMP, CHRIS
LEAVY, ROBERT J. MARCIN, ERIC F.
SCHARPF AND GARY G. SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on APRIL 10, 1996
1997 1998 1999
------- ------- -------
25.58% 19.52% 28.57%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
21.29% -14.45%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
EQUITY PORTFOLIO S&P 500 INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 28.57 21.04
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
4/10/96 23.87 27.41
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
2
<PAGE>
MID CAP VALUE PORTFOLIO
OBJECTIVE
The Mid Cap Value Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the S&P MidCap 400 Index.
The Portfolio purchases stocks that typically do not pay dividends. The
Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser analyzes securities to identify stocks that are undervalued, and
measures the relative attractiveness of the Portfolio's current holdings against
potential purchases. Sector weightings normally are kept within 5% of those of
the S&P MidCap 400 Index. In determining whether securities should be sold, the
Adviser considers factors such as high valuations relative to other investment
opportunities, and deteriorating short or long-term earnings growth projections.
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN COMMON
STOCKS OF MID CAP COMPANIES
- ----------------------------------------
EQUITY CAPITALIZATION GENERALLY
MATCHING THE BENCHMARK (CURRENTLY $500
MILLION TO $6 BILLION)
- ----------------------------------------
FOCUS ON VALUE SECURITIES
- ----------------------------------------
BENCHMARK: S&P MIDCAP
400 INDEX
- ----------------------------------------
TICKER SYMBOL: MPMIX
- ----------------------------------------
CUSIP NO.: 552-913-477
- ----------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
VITALY V. KORCHEVSKY AND GARY G.
SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in mid cap companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some
market conditions may favor value stocks or stocks of mid-sized companies,
while other conditions may favor growth stocks or stocks of larger or smaller
companies.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on May 10, 1996
1997 1998 1999
------- ------- -------
39.28% 15.93% 19.61%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
22.48% -13.80%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MID CAP
VALUE S&P MIDCAP
PORTFOLIO 400 INDEX
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 19.61 14.72
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION
5/10/96 25.76 20.47
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
3
<PAGE>
VALUE PORTFOLIO
OBJECTIVE
The Value Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with equity
capitalizations greater than $2.5 billion. The Portfolio focuses on stocks that
are undervalued in comparison with the stock market as a whole, as measured by
the S&P 500 Index. The Portfolio may purchase stocks that do not pay dividends.
The Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser selects investments through a three part analysis. The Adviser
identifies stocks with low price/earnings ratios. The Adviser then applies
fundamental analysis and its investment judgment to determine which of those
securities are the most attractive. Finally, the Adviser may favor securities of
companies that are in undervalued industries. The Adviser employs a formal sell
discipline, under which the Portfolio sells securities when their price/earnings
ratios rise.
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN COMMON
STOCKS
- ----------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $2.5 BILLION
- ----------------------------------------
FOCUS ON VALUE SECURITIES
- ----------------------------------------
BENCHMARK: S&P 500 INDEX
- ----------------------------------------
TICKER SYMBOL: MPVIX
- ----------------------------------------
CUSIP NO.: 552-913-576
- ----------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------
RICHARD M. BEHLER, NICHOLAS J. KOVICH
AND ROBERT J. MARCIN
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some
market conditions may favor value stocks, while other conditions may favor
growth stocks.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on May 6, 1996
1997 1998 1999
------- ------- -------
23.18% -3.02% -2.25%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
QUARTER ENDED 6/30/99 QUARTER ENDED 9/30/98
15.31% -19.08%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
VALUE S&P 500
PORTFOLIO INDEX
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -2.25 21.04
- ----------------------------------------------------------------------------------------------------
SINCE INCEPTION
5/6/96 8.99 27.58
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
4
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO (Not currently open in the Investment Class)
OBJECTIVE
The Domestic Fixed Income Portfolio seeks above-average total return over a
market cycle of three to five years.
APPROACH
The Portfolio invests in a diversified mix of dollar denominated fixed income
securities, particularly U.S. Government, corporate and mortgage securities. The
Portfolio will ordinarily maintain an average weighted maturity in excess of
five years. Although there is no minimum or maximum maturity for any individual
security, the Adviser actively manages the interest rate risk of the Portfolio
within a range relative to the benchmark. The Portfolio invests exclusively in
securities issued by U.S.-based entities that carry an investment grade rating
at the time of purchase. The Adviser may use futures, swaps and other types of
derivatives in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities. The Adviser relies upon value measures
to guide its decisions regarding sector and security selection, such as the
relative attractiveness of the extra yield offered by securities other than
those issued by the U.S. Treasury. The Adviser also measures various types of
risk, focusing on the level of real interest rates, the shape of the yield
curve, credit risk and prepayment risk. The Adviser's management team builds an
investment portfolio designed to take advantage of its judgment on these
factors, while balancing the overall risk of the Portfolio. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
100% U.S. ISSUERS
- ----------------------------------------
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN FIXED
INCOME SECURITIES
- ----------------------------------------
AT LEAST 80% OF FIXED INCOME SECURITIES
RATED A OR HIGHER (OR EQUIVALENT) AT
TIME OF PURCHASE
- ----------------------------------------
UP TO 20% OF FIXED INCOME SECURITIES
RATED BBB (OR EQUIVALENT) AT TIME OF
PURCHASE
- ----------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY
GREATER THAN 5 YEARS
- ----------------------------------------
MAY INVEST OVER 50% IN MORTGAGE
SECURITIES
- ----------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------
TICKER SYMBOL: NOT
AVAILABLE
- ----------------------------------------
CUSIP NO.: 552-913-550
- ----------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------
THOMAS L. BENNETT, ANGELO G.
MANIOUDAKIS AND SCOTT F. RICHARD
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on September 29, 1987
1990 7.19%
1991 21.54%
1992 9.12%
1993 13.75%
1994 -3.89%
1995 18.85%
1996 3.89%
1997 9.62%
1998 7.23%
1999 -1.64%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 9/30/91 QUARTER ENDED 3/31/92
7.48% -2.28%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD
DOMESTIC FIXED INVESTMENT
INCOME PORTFOLIO GRADE INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -1.64 -0.85
- --------------------------------------------------------------------------------------------
FIVE YEARS 7.38 7.74
- --------------------------------------------------------------------------------------------
TEN YEARS 8.30 7.75
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
9/29/87 8.82 8.60
</TABLE>
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5 and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Investment Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
5
<PAGE>
FIXED INCOME PORTFOLIO
OBJECTIVE
The Fixed Income Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
investment grade fixed income securities, particularly U.S. Government,
corporate and mortgage securities. The Portfolio ordinarily will maintain an
average weighted maturity in excess of five years. Although there is no minimum
or maximum maturity for any individual security, the Adviser actively manages
the interest rate risk of the Portfolio within a range relative to the
benchmark. The Portfolio may invest opportunistically in non-dollar denominated
securities and in below investment grade securities. The Adviser may use
futures, swaps and other types of derivatives in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities, and also may consider the relative
attractiveness of non-dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regarding sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing on the level of real interest rates,
the shape of the yield curve, credit risk, prepayment risk, country risk and
currency valuations. The Adviser's management team builds an investment
portfolio designed to take advantage of its judgment on these factors, while
balancing the overall risk of the Portfolio. The Adviser may sell securities
when it believes that expected risk-adjusted return is low compared to other
investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN
FIXED INCOME SECURITIES
- ----------------------------------------
AVERAGE WEIGHTED MATURITY
GENERALLY GREATER THAN 5 YEARS
- ----------------------------------------
AT LEAST 80% INVESTMENT GRADE
SECURITIES AT TIME OF PURCHASE
- ----------------------------------------
UP TO 20% HIGH YIELD SECURITIES
AT TIME OF PURCHASE
- ----------------------------------------
MAY INVEST OVER 50%
IN MORTGAGE SECURITIES
- ----------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------
TICKER SYMBOL: MAFIX
- ----------------------------------------
CUSIP NO.: 552-913-568
- ----------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------
W. DAVID ARMSTRONG, THOMAS L. BENNETT,
KENNETH B. DUNN AND ROBERTO M. SELLA
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative
6
<PAGE>
FIXED INCOME PORTFOLIO (Continued)
instrument may be illiquid and changes in its value may not correlate to
changes in the value of its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on October 15, 1996
1997 1998 1999
------- ------- -------
9.52% 6.72% -0.73%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 6/30/97 QUARTER ENDED 6/30/99
3.98% -1.66%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD
FIXED INCOME INVESTMENT GRADE
PORTFOLIO INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -0.73 -0.85
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
10/15/96 5.60 6.02
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
7
<PAGE>
HIGH YIELD PORTFOLIO
OBJECTIVE
The High Yield Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in high yield securities (commonly referred to
as "junk bonds"). The Portfolio also may invest in investment grade fixed income
securities, including U.S. Government securities, corporate bonds and mortgage
securities. The Portfolio may invest to a limited extent in foreign fixed income
securities, including emerging market securities. The Adviser may use futures,
swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser uses equity and fixed income valuation techniques, together with
analyses of economic and industry trends, to determine the Portfolio's overall
structure, sector allocation and desired maturity. The Adviser emphasizes
securities of companies that have strong industry positions and favorable
outlooks for cash flow and asset values. The Adviser conducts a credit analysis
for each security considered for investment to evaluate its attractiveness
relative to the level of risk it presents. The Portfolio maintains a high level
of diversification to minimize its exposure to the risks associated with any
particular issuer. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN HIGH YIELD SECURITIES
- ------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY
GREATER THAN 5 YEARS
- ------------------------------------------
BENCHMARK: CS FIRST BOSTON
HIGH YIELD INDEX
- ------------------------------------------
TICKER SYMBOL: MPHIX
- ------------------------------------------
CUSIP NO.: 552-913-527
- ------------------------------------------
PORTFOLIO MANAGERS
- ------------------------------------------
ROBERT E. ANGEVINE, STEPHEN F. ESSER,
GORDON W. LOERY AND DEANNA L. LOUGHNANE
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. High yield securities
may experience reduced liquidity and sudden and substantial decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on May 21, 1996
1997 1998 1999
-------- -------- --------
15.73% 2.94% 7.73%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 6/30/97 QUARTER ENDED 9/30/98
6.90% -6.35%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
HIGH YIELD CS FIRST BOSTON SALOMON HIGH
PORTFOLIO HIGH YIELD INDEX YIELD INDEX
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 7.73 3.28 1.74
- ---------------------------------------------------------------------------------------
SINCE INCEPTION
5/21/96 9.98 6.98 7.46
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index, CS
First Boston High Yield Index. Previously, the Portfolio's returns had been
compared to the Salomon High Yield Index. The Adviser believes that the CS
First Boston High Yield Index has a more comprehensive coverage of geographic
regions and types of securities in which the Portfolio may invest. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
8
<PAGE>
BALANCED PORTFOLIO
OBJECTIVE
The Balanced Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests in a mix of equity and fixed income securities. The
Portfolio normally invests 45-75% of its assets in equity securities and 25-55%
of its assets in fixed income securities. The Portfolio may invest up to 25% of
its assets in foreign equity and foreign fixed income securities, including
emerging market securities. Equity securities generally will be issued by larger
corporations. The Portfolio's investments generally will include mortgage
securities and high yield securities (commonly called "junk bonds"). The Adviser
uses futures, swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser determines the Portfolio's equity and fixed income investment
strategies separately and then determines the mix of those strategies that will
maximize the return available from both the stock and bond markets, based on
proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities. The Adviser also measures various types of risk, focusing on
the level of real interest rates and credit risk. In determining whether
securities should be sold, the Adviser considers factors such as deteriorating
earnings, cash flow and other fundamentals, as well as high valuations relative
to the Portfolio's investment universe.
GENERALLY 45-75% OF PORTFOLIO ASSETS
INVESTED IN EQUITIES, 25-55% IN FIXED
INCOME SECURITIES
- ----------------------------------------
AT LEAST 25% OF PORTFOLIO ASSETS
INVESTED IN SENIOR FIXED INCOME
SECURITIES
- ----------------------------------------
UP TO 25% OF PORTFOLIO ASSETS INVESTED
IN FOREIGN EQUITY AND FOREIGN FIXED
INCOME SECURITIES
- ----------------------------------------
UP TO 10% OF PORTFOLIO ASSETS INVESTED
IN BRADY BONDS (A TYPE OF EMERGING
MARKET FIXED INCOME SECURITY)
- ----------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $1 BILLION
- ----------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED
INCOME SECURITIES GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------
BENCHMARK: WEIGHTED BLEND OF
QUARTERLY RETURNS OF
60% S&P 500 INDEX
40% SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------
CUSIP NO.: 552-913-493
PORTFOLIO MANAGERS
- ----------------------------------------
THOMAS L. BENNETT, GARY G. SCHLARBAUM
AND HORACIO A. VALEIRAS
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. A substantial portion of the
Portfolio's investments may be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These risks are greater in emerging market
countries.
9
<PAGE>
BALANCED PORTFOLIO (Continued)
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect the Portfolio's
overall performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on April 3, 1997
1998 1999
------- -------
15.09% 16.09%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
12.08% -6.73%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT GRADE BLENDED
PORTFOLIO INDEX INDEX INDEX*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 16.09 21.04 -0.85 12.21
- ---------------------------------------------------------------------------------------
SINCE INCEPTION
4/3/97 18.13 29.63 6.38 20.42
</TABLE>
*The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
10
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO
OBJECTIVE
The Multi-Asset-Class Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests in equity securities and fixed income securities of U.S.
and foreign issuers in accordance with the Adviser's target allocation among
certain classes. These securities may include, to a limited extent, emerging
market securities. The Portfolio's equity securities generally will be issued by
large corporations. The Portfolio's investments generally will include mortgage
securities and high yield securities (commonly called "junk bonds"). The
Portfolio seeks to invest in a combination of asset classes that do not move in
tandem with each other, in order to improve potential return and control the
Portfolio's overall risks. The Portfolio's neutral position is generally 50%
domestic equity securities, 24% domestic fixed income securities, 14% foreign
equity securities, 6% foreign fixed income securities and 6% high yield
securities. The Adviser uses futures, swaps and other derivatives in managing
the Portfolio.
PROCESS
The Adviser makes strategic judgments based on proprietary measures used to
compare the relative risks and returns of stock and bond markets around the
world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment. The Adviser also measures various
types of risk, focusing on the level of real interest rates and credit risk. In
determining whether securities should be sold, the Adviser considers factors
such as deteriorating earnings, cash flows and other fundamentals, as well as
high valuations relative to the Portfolio's investment opportunities.
GENERALLY AT LEAST 65% OF PORTFOLIO ASSETS
INVESTED IN ISSUERS LOCATED IN AT LEAST 3
COUNTRIES, INCLUDING THE U.S.
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN
$1 BILLION
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME
SECURITIES GENERALLY GREATER THAN 5 YEARS
- ----------------------------------------------
BENCHMARK:A WEIGHTED BLEND OF QUARTERLY
RETURNS OF
50% S&P 500 INDEX
24% SALOMON BROAD INVESTMENT GRADE
INDEX
14% MSCI EAFE INDEX
6% SALOMON WORLD GOVERNMENT BOND
EX-U.S. INDEX
6% CS FIRST BOSTON HIGH YIELD INDEX
- ----------------------------------------------
TICKER SYMBOL:
NOT AVAILABLE
- ----------------------------------------------
CUSIP NO.: 552-913-485
PORTFOLIO MANAGERS
THOMAS L. BENNETT, BARTON M. BIGGS,
J DAVID GERMANY, GARY G. SCHLARBAUM
AND HORACIO A. VALERIAS
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those
11
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Continued)
markets and their issuers, but may not affect the U.S. market or similar U.S.
issuers. A substantial portion of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's
investments. These risks are greater in emerging market countries.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect the Portfolio's overall
performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on June 10, 1996
1997 1998 1999
------- ------- -------
17.21% 13.80% 16.55%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 12/31/98 QUARTER ENDED 9/30/98
12.83% -8.71%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON
MULTI- BROAD
ASSET- S&P INVESTMENT MSCI
CLASS 500 GRADE EAFE BLENDED
PORTFOLIO INDEX INDEX INDEX INDEX*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 16.55 21.04 -0.85 26.96 13.91
- ---------------------------------------------------------------------------------------
SINCE INCEPTION
6/10/96 15.69 26.60 6.74 14.16 18.17
</TABLE>
* The Blended Index is an unmanaged index comprised of 50% S&P 500 Index, 24%
Salomon Broad Investment Grade Index, 14% MSCI EAFE Index, 6% Salomon World
Government Bond Ex-U.S. Index and 6% CS First Boston High Yield Index.
Previously, the Blended Index included the Salomon High Yield Index as its high
yield component. The Adviser believes that the CS First Boston High Yield Index
has a more comprehensive coverage of geographic regions and types of securities
in which the Portfolio may invest. If the Blended Index were to include the
Salomon High Yield Index, its performance would have been 13.81% for the 1 year
period and 18.21% since inception.
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and
average annual total return for the past 1 year period and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The variability of performance over time provides an indication of the
risks of investing in the Portfolio. How the Portfolio has performed in the
past does not necessarily indicate how the Portfolio will perform in the
future.
12
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right the fees and expenses that you may pay if
you buy and hold shares of the Portfolios. The Portfolios do not charge any
sales loads or other fees when you purchase or redeem shares.
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES* EXPENSES
<S> <C> <C> <C> <C>
EQUITY PORTFOLIO .500% NONE .270% .770%
- ----------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750% NONE .270% 1.020%
- ----------------------------------------------------------------------------------
VALUE PORTFOLIO .500% NONE .280% .780%
- ----------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO .375% NONE .285%** .660%***
- ----------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375% NONE .255% .630%
- ----------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .450% NONE .265% .715%
- ----------------------------------------------------------------------------------
BALANCED PORTFOLIO .450% NONE .290% .740%
- ----------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .650% NONE .300% .950%***
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements and/or voluntary waivers.
* Other Expenses include a shareholder servicing fee of 0.15%.
** Other Expenses are based on estimated amounts for the current year.
*** The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown in the table below. Fee waivers and/or expense reimbursements are
voluntary and the Adviser reserves the right to terminate any waiver and/or
reimbursement at any time and without notice.
<TABLE>
<CAPTION>
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
--------------------------------------------------------------------------
<S> <C>
DOMESTIC FIXED INCOME PORTFOLIO .650%
--------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .930%
</TABLE>
EXAMPLE
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be
equal to the amounts reflected in the table to the right.
This example is
intended to help
you compare the
cost of
investing in
each Portfolio
with the cost of
investing in
other mutual
funds.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO $ 79 $246 $428 $ 954
- --------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO $104 $325 $563 $1,248
- --------------------------------------------------------------------------
VALUE PORTFOLIO $ 80 $249 $433 $ 966
- --------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO $ 67 $211 $368 $ 822
- --------------------------------------------------------------------------
FIXED INCOME PORTFOLIO $ 64 $202 $351 $ 786
- --------------------------------------------------------------------------
HIGH YIELD PORTFOLIO $ 73 $229 $398 $ 889
- --------------------------------------------------------------------------
BALANCED PORTFOLIO $ 76 $237 $411 $ 918
- --------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO $ 97 $303 $525 $1,166
</TABLE>
13
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible
securities, ADRs, rights, warrants and shares of investment companies. The
Portfolios may invest in equity securities that are publicly traded on
securities exchanges or over-the-counter or in equity securities that are not
publicly traded. Securities that are not publicly traded may be more difficult
to sell and their value may fluctuate more dramatically than other securities.
Each Portfolio may purchase shares of other investment companies subject to
limits imposed by the Investment Company Act of 1940 ("1940 Act") and any other
applicable law.
Smaller companies carry greater risk than larger companies. The securities
issued by smaller companies may be less liquid. In addition, smaller companies
may have more limited markets, financial resources and product lines, and may
lack the depth of management of larger companies.
ADRs are U.S.-dollar denominated securities that represent claims to shares of
foreign stocks. The Portfolios treat ADRs as U.S. securities for purposes of
foreign investment limitations.
Growth stocks generally have higher growth rates, betas, and price/earnings
ratios, and lower yields than the stock market in general as measured by an
appropriate stock market index. Value stocks are stocks that are deemed by the
Adviser to be undervalued relative to the stock market in general. The Adviser
makes value decisions guided by the appropriate market index, based on value
characteristics such as price/earnings and price/book ratios. Value stocks
generally are dividend paying common stocks. However, non-dividend paying
stocks also may be selected for their value characteristics.
IPOS
Equity Portfolios of the Fund may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquisition. A Portfolio's purchase
of shares issued in IPOs exposes it to the risks associated with companies that
have little operating history as public companies, as well as to the risks
inherent in those sectors of the market where these new issuers operate. The
market for IPO issuers has been volatile, and share prices of newly-public
companies have fluctuated in significant amounts over short periods of time.
FIXED INCOME SECURITIES
Fixed income securities are securities that pay a fixed rate of interest until
a stated maturity date. Fixed income securities include U.S. Government
securities, securities issued by federal or federally sponsored agencies
("agencies"), corporate bonds and notes, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds,
Yankee Bonds, repurchase agreements, commercial paper and cash equivalents.
These securities are subject to risks related to changes in interest rates and
in the financial health or credit rating of the issuers. 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.
Adjustable rate 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. 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. Fixed income
securities include inverse floaters, which are designed to respond in a
targeted fashion to changes in interest rates.
Fixed income securities may be called (redeemed by the issuer) prior to final
maturity. If a callable security is called, a Portfolio may have to reinvest
the proceeds at a lower rate of interest.
DURATION
The average duration of a portfolio of fixed income securities represents its
exposure to changing interest rates. A portfolio with a lower average duration
generally will experience
14
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
less price volatility in response to changes in interest rates than a portfolio
with a higher average duration.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as junk bonds or high yield, high risk securities. These securities offer a
higher yield than other, higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high
yield securities are influenced more by changes in the financial and business
position of the issuing company than by changes in interest rates when compared
to investment grade securities.
MORTGAGE SECURITIES
These are fixed income securities that derive their value from or represent
interests in a pool of mortgages or mortgage securities. Mortgage securities
are subject to prepayment risk--the risk that, as interest rates fall,
borrowers will refinance their mortgages and "prepay" principal. A portfolio
holding mortgage securities that are experiencing prepayments will have to
reinvest these 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. It can be difficult
to measure precisely the remaining life of a mortgage security or the average
life of a portfolio of such securities.
EUROBONDS
Eurobonds 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.
BRADY BONDS
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).
YANKEE BONDS
Yankee bonds are U.S.-dollar denominated debt obligations issued by foreign
governments and corporations and sold in the United States. They are considered
U.S. securities for purposes of Portfolio investments, except for the Domestic
Fixed Income Portfolio.
FOREIGN SECURITIES
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. 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 an investing portfolio's
investment. There also can be difficulty obtaining and enforcing judgments
against issuers in foreign countries. 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.
FOREIGN CURRENCY
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since investing
portfolios must convert the value of foreign securities into dollars, changes
in currency exchange rates can increase or decrease the U.S. dollar value of
the portfolios' assets. The Adviser may use derivatives to offset this risk.
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. In addition, 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, the
15
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
market may be dominated by a few issuers or sectors. 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 by foreign investors.
DERIVATIVES AND OTHER INVESTMENTS
Derivatives are financial instruments whose value and performance are based on
the value and performance of another security or financial instrument.
Derivatives sometimes offer the most economical way of pursuing an investment
strategy, limiting risks or enhancing returns, although there is no guarantee
of success. Hedging strategies or instruments may not be available or practical
in all circumstances. Derivative instruments may be publicly traded or
privately negotiated. Derivatives used by the Adviser include futures
contracts, options contracts, forward contracts, swaps, collateralized mortgage
obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), and
structured notes.
A forward 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. Forward contracts are used to protect against uncertainty in the
level of future foreign currency exchange rates. A futures contract provides
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. The Portfolios may use futures contracts to gain exposure to an entire
market (e.g., stock index futures) or to control their exposure to changing
foreign currency exchange rates. Portfolios investing in fixed income
securities will use futures to control their exposure to changes in interest
rates and to manage the overall maturity and duration of their securities
holdings.
If a Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an agreed-
upon price. If a Portfolio "writes" an option, it sells to another person the
right to buy from or sell to the Portfolio a specific amount of a security or
futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices or commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
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").
A 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. A Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. A Portfolio will not use derivatives as an indirect way
of investing in assets that it cannot, as a matter of policy, invest in
directly.
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio may enter into futures contracts and options on
futures contracts for bona fide hedging purposes to an unlimited extent. It
also can enter into futures contracts and options thereon for other purposes,
provided that no more than 5% of the Portfolio's total
16
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
assets at the time of the transaction are required as margin and option
premiums to secure the Portfolio's obligations under such contracts.
RISKS OF DERIVATIVES
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as margin and option premiums to secure the Portfolio's obligations under
futures contracts and options thereon entered into for purposes other than bona
fide hedging.
Each Portfolio may invest in certain derivatives, such as forwards, futures,
options and mortgage derivatives as well as when-issued securities that require
a Portfolio to segregate some or all of its cash or liquid securities to cover
its obligations under those instruments. This can cause a Portfolio to lose
flexibility in managing its investments properly, responding to shareholder
redemption requests, or meeting other obligations. A Portfolio in that position
could be forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by a Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
Hedging the Portfolio's currency risks involves the risks of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
Mortgage derivatives are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMO or SMBS that a Portfolio holds, these price
movements may be significantly greater than those experienced by mortgage
securities generally, depending on whether the payments are predominantly based
on the principal or interest paid on the underlying mortgages. In addition, the
yield to maturity of IOs and POs is extremely sensitive to prepayment levels.
As a result, a high rate of prepayments can have a material effect on a
Portfolio's yield to maturity and could cause a Portfolio to suffer losses.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in fixed income
securities for temporary defensive purposes, as described in the Statement of
Additional Information. If the Adviser incorrectly predicts the effects of
these changes, the defensive investments may adversely affect the Portfolio's
performance.
PORTFOLIO TURNOVER
Consistent with their investment policies, the Portfolios 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. Nonetheless, short-term trading activities that result
in high turnover rates are not incompatible with a stated objective of long-
term capital growth or other long-term goals, and can lead to gains that may
increase share value.
17
<PAGE>
PURCHASING SHARES
Investment Class Shares are available to clients of the Adviser with combined
investments of $1,000,000 and corporations or other institutions, such as
trusts, foundations or broker-dealers, who have a contractual arrangement with
the Fund or its Distributor and who purchase shares for the accounts of others
(Shareholder Organizations).
Investment Class Shares of each Portfolio may be purchased at the net asset
value per share (NAV) next determined after we receive your purchase order.
INITIAL PURCHASE BY MAIL
You may open an account, subject to acceptance by MAS Funds, by completing and
signing an Account Registration Form provided by MAS Funds' Client Services
Group ("Client Services") and mailing it to MAS Funds c/o Miller Anderson &
Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 together with
a check payable to MAS Funds.
Please note that payments to investors who redeem shares purchased by check
will not be made until payment of the purchase has been collected, which may
take up to eight business days after purchase. You can avoid this delay by
purchasing shares by wire.
INITIAL PURCHASE BY WIRE
You may purchase Investment Class Shares of each Portfolio by wiring Federal
Funds to the Fund's Custodian Bank, The Chase Manhattan Bank ("Chase"). You
should forward a completed Account Registration Form to Client Services in
advance of the wire. For all Portfolios, notification must be given to Client
Services at 1-800-354-8185 prior to the determination of NAV. See the section
below entitled "Valuation of Shares." (Prior notification must also be received
from investors with existing accounts.) Instruct your bank to send a Federal
Funds wire in a specified amount to Chase using the following wire
instructions:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
ADDITIONAL INVESTMENTS
You may make additional investments in Investment Class Shares (minimum
additional investment $1,000) at the NAV next determined after the request is
received in good order, by mailing a check (payable to MAS Funds) to Client
Services at the address noted under Initial Purchase by Mail or by wiring
Federal Funds to Chase as outlined above. For all Portfolios, notification must
be given to Client Services at 1-800-354-8185 prior to the determination of
NAV.
OTHER PURCHASE INFORMATION
We may suspend the offering of shares, or any class of shares, of any Portfolio
or reject any purchase orders when we think it is in the best interest of the
Fund. We may waive the minimum initial and additional investment amounts in
certain cases.
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued unless you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each Portfolio by mail, or, if authorized, by
telephone at no charge. The value of shares redeemed may be more or less than
the purchase price, depending on the NAV at the time of redemption. Shares of
each Portfolio will be redeemed at the net asset value (NAV) next determined
after we receive your redemption request in good order.
BY MAIL
Requests should be addressed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP,
One Tower Bridge, West Conshohocken, PA 19428-0868.
18
<PAGE>
REDEEMING SHARES (Continued)
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(c) Any required signature guarantees. Signature guarantees are required for
(1) redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s) and the registered address, and (2) share transfer
requests. Please contact Client Services for further details; and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE
If you have authorized the Telephone Redemption Option on the Account
Registration Form, you may request a redemption of shares by calling Client
Services at 1-800-354-8185 and requesting that the redemption proceeds be
mailed or wired to you. You cannot redeem shares by telephone if you hold share
certificates for those shares.
BY FACSIMILE
Written requests in good order for redemptions, exchanges and transfers may be
forwarded to the Fund via facsimile at (610) 940-5284. If you make a request
via facsimile, you must call Client Services to ensure that the Fund properly
received your instructions. The original request must be promptly mailed to MAS
Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We may suspend the right of redemption or postpone the
payment of redemption proceeds at times when the New York Stock Exchange
("NYSE") is closed, the Fund is closed, or under other circumstances in
accordance with interpretations or orders of the U.S. Securities and Exchange
Commission.
If we determine that it is in the best interest of other shareholders not to
pay redemption proceeds in cash, we may pay you partly or entirely by
distributing to you readily marketable securities held by the Portfolio from
which you are redeeming. You may incur brokerage charges when you sell those
securities.
VALUATION OF SHARES
We determine the NAV of the following Portfolios at the following times on each
day the Portfolios are open for business:
[_] Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
[_] Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
[_] Balanced and Multi-Asset-Class Portfolios as of the later of the close of
the NYSE or one hour after the close of the bond markets (normally 4:00 p.m.
Eastern Time).
Each Portfolio values its securities at market value. When no quotations are
readily available for securities or when the value of securities has been
materially affected by events occurring after the close of the market, we will
determine the value for those securities in good faith at fair value using
methods approved by the Board of Trustees.
The NAV of Investment Class Shares may differ from that of other classes
because of class-specific expenses that each class may pay, the distribution
fees charged to Adviser Class Shares and the shareholder servicing fees charged
to Investment Class Shares.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The value
of portfolio securities may change on a day when you cannot purchase or redeem
shares if a Portfolio invests in foreign securities that trade on days when the
Fund is closed.
19
<PAGE>
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE
You may exchange each Portfolio's Investment Class Shares for Investment Class
Shares of the Fund's other Portfolios based on their respective NAVs. The
exchange privilege is only available with respect to Portfolios offering
Investment Class Shares that are qualified for sale in your state of residence.
We charge no fee for exchanges. You should send exchange requests to MAS Funds,
c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA
19428-0868, or by facsimile with a follow-up phone call. Exchange requests can
also be made by telephone, provided the telephone redemption option has been
authorized. We reserve the right to change the terms or conditions of the
exchange privilege upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and
raise its expenses. Therefore, we may not accept any request for an exchange
when we think the exchange privilege is being used as a tool for market timing,
and we may bar a shareholder who trades excessively from making further
purchases for an indefinite period.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. Corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such Portfolios from
U.S. corporations. Capital gains distributions may be taxable at different
rates depending on the length of time the Fund holds its assets.
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign
income taxes that they paid.
Distributions paid in January but declared by a Portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
PORTFOLIO QUARTERLY ANNUALLY
<S> <C> <C>
EQUITY X
- ----------------------------------------------------------------------------------------------
MID CAP VALUE X
- ----------------------------------------------------------------------------------------------
VALUE X
- ----------------------------------------------------------------------------------------------
DOMESTIC FIXED INCOME X
- ----------------------------------------------------------------------------------------------
FIXED INCOME X
- ----------------------------------------------------------------------------------------------
HIGH YIELD X
- ----------------------------------------------------------------------------------------------
BALANCED X
- ----------------------------------------------------------------------------------------------
MULTI-ASSET-CLASS X
</TABLE>
If any net gains are realized from the sale of underlying securities, the
Portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
FUND MANAGEMENT
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in
1969. The Adviser is wholly-owned by indirect subsidiaries of Morgan Stanley
Dean Witter & Co., and is a division of Morgan Stanley Dean Witter Investment
Management ("MSDW"). 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 November 30, 1999, Morgan Stanley Dean Witter Investment
Management had in excess of $177 billion in assets under management.
20
<PAGE>
FUND MANAGEMENT (Continued)
The Adviser makes investment decisions for the Fund's Portfolios and places
each Portfolio's purchase and sales orders. Each Portfolio, in turn, pays the
Adviser an annual advisory fee calculated by applying a quarterly rate. The
following table shows the Adviser's annual contractual and actual rates of
compensation for the Fund's 1999 fiscal year.
<TABLE>
<CAPTION>
CONTRACTUAL FY 1999
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- ----------------------------------------------------------------
<S> <C> <C>
EQUITY PORTFOLIO .500 .500
- ----------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750 .750
- ----------------------------------------------------------------
VALUE PORTFOLIO .500 .500
- ----------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO* .375 .375
- ----------------------------------------------------------------
FIXED INCOME PORTFOLIO .375 .375
- ----------------------------------------------------------------
HIGH YIELD PORTFOLIO+ .450 .375
- ----------------------------------------------------------------
BALANCED PORTFOLIO .450 .450
- ----------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO* .650 .627
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Domestic Fixed Income Portfolio and Multi-Asset-
Class Portfolio to keep Total Operating Expenses from exceeding 0.650% and
0.930%, respectively.
+ Effective October 1, 1999, the Management Fee for the High Yield Portfolio
increased from .375% to .450%.
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios is as follows:
ROBERT E. ANGEVINE, Principal, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
ARDEN C. ARMSTRONG, Managing Director, MSDW, joined MAS in 1986. She joined the
management team for the Mid Cap Growth Portfolio in 1990, the Equity Portfolio
in 1994 and the Small Cap Value Portfolio in 1998.
W. DAVID ARMSTRONG, Managing Director, MSDW, joined MSDW Investment Management
as a Portfolio Manager in 1998. He served as a Senior Vice President and
Manager of U.S. proprietary trading at Lehman Brothers from 1995-1997. He
joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
RICHARD M. BEHLER, Principal, MSDW, joined MAS in 1995. He served as a
Portfolio Manager from 1992 through 1995 for Moore Capital Management. He
joined the management team for the Value Portfolio in 1996.
THOMAS L. BENNETT, Managing Director, MSDW, joined MAS in 1984. He joined the
management team for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio in 1987, the Fixed Income II Portfolio in 1990, the Special
Purpose Fixed Income and Balanced Portfolios in 1992, the Multi-Asset-Class
Portfolio in 1994 and the Multi-Market Fixed Income Portfolio in 1997.
BARTON M. BIGGS, Managing Director, MSDW since 1975, Chairman of Morgan Stanley
Dean Witter Investment Management Inc. since 1980 and director of Morgan
Stanley Group, Inc. He is also a director and chairman of various registered
investment companies to which Morgan Stanley Dean Witter Investment Management
Inc. and certain of its affiliates provide investment advisory services. He
joined the management team for the Multi-Asset-Class Portfolio in 1999.
BRADLEY S. DANIELS, Vice President, MSDW, joined MAS in 1985. He joined the
management team for the Small Cap Value Portfolio in 1986 and the Mid Cap Value
Portfolio in 1994.
KENNETH B. DUNN, Managing Director, MSDW, joined MAS in 1987. He joined the
management team for the Fixed Income Portfolio in 1987, the Special Purpose
Fixed Income Portfolio in 1992 and the Multi-Market Fixed Income Portfolio in
1997.
21
<PAGE>
FUND MANAGEMENT (Continued)
STEVEN EPSTEIN, Vice President, MSDW, joined MAS as a Financial Analyst in
1996. He attended the Wharton School, University of Pennsylvania, from 1994-
1996, receiving an MBA. He joined the management team for the Equity Portfolio
in 2000.
STEPHEN F. ESSER, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the High Yield Portfolio in 1989 and the Multi-Market Fixed
Income Portfolio in 1997.
WILLIAM B. GERLACH, Principal, MSDW, joined MAS in 1991. He served as a
Research Associate from 1991 to 1996 and has served as an Equity Portfolio
Manager since 1996. He joined the management team for the Small Cap Value and
Mid Cap Value Portfolios in 1996.
J. DAVID GERMANY, Managing Director, MSDW, joined MAS in 1991. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the Multi-
Market Fixed Income Portfolio in 1997.
JAMES J. JOLINGER, Principal, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
VITALY V. KORCHEVSKY, Vice President, MSDW, joined MAS as a Portfolio Manager
in 1999. He served as an Analyst/Portfolio Manager for Gardner Lewis Asset
Management from 1998-1999, and as a Portfolio Manager for Crestar Asset
Management Co. from 1995-1998. He joined the management team for the Mid Cap
Value and Small Cap Value Portfolios in 2000.
NICHOLAS J. KOVICH, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the Value Portfolio in 1997.
BRIAN KRAMP, Principal, MSDW, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
CoreStates Investment Advisors, from 1985 to 1997. He joined the management
team for the Equity Portfolio in 1998.
CHRIS LEAVY, Vice President, MSDW, joined MAS as a Portfolio Manager in 1997.
He served as a Portfolio Manager for Capitoline Investment Services from 1995-
1997; a Portfolio Manager for Premier Trust Company from 1994 to 1995; and as a
Research Analyst for Leavy Investment Management from 1993-1994. He joined the
management team for the Equity Portfolio in 2000.
GORDON W. LOERY, Principal, MSDW, joined MAS in 1996. He served as a Fixed
Income Analyst at Morgan Stanley Asset Management Inc. from 1990 to 1996. He
joined the management team for the High Yield Portfolio in 1999.
DEANNA L. LOUGHNANE, Principal, MSDW, joined MAS as a Financial Analyst in
1997. She served as a Vice President and Senior Corporate Bond Analyst for
Putnam Investments from 1993-1997. She joined the management team for the High
Yield Portfolio in 2000.
ANGELO G. MANIOUDAKIS, Principal, MSDW, joined MAS in 1993. He served as a
Fixed Income Analyst from 1993 to 1995. From 1995 to 1998, he served as a Fixed
Income Portfolio manager. He joined the management team for the Intermediate
Duration Portfolio in 1998, and the Domestic Fixed Income and Fixed Income II
Portfolios in 2000.
ROBERT J. MARCIN, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the Value Portfolio in 1990 and the Equity Portfolio in
1994.
SCOTT F. RICHARD, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Limited Duration, Intermediate Duration and Advisory
Mortgage Portfolios in 1995, the Targeted Duration Portfolio in 1998 and the
Domestic Fixed Income and Fixed Income II Portfolios in 2000.
22
<PAGE>
FUND MANAGEMENT (Continued)
ERIC F. SCHARPF, Vice President, MSDW, joined MAS as a Financial Analyst in
1997. He attended the Wharton School, University of Pennsylvania, from 1995-
1997, receiving an MBA, and served as a Financial Analyst for Salomon Brothers
from 1993-1995. He joined the management team for the Equity Portfolio in 2000.
GARY G. SCHLARBAUM, Managing Director, MSDW; Director, MAS Fund Distribution,
Inc., joined MAS in 1987. He joined the management team for the Equity and
Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992 and the
Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
ROBERTO M. SELLA, Managing Director, MSDW, joined MAS in 1992. He served as a
Financial Analyst from 1992-1998, and as a Portfolio Manager beginning in 1998.
He joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
HORACIO A. VALEIRAS, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Multi-Asset-Class Portfolio in 1994 and the Balanced
Portfolio in 1996.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
SERVICE PLAN
The Fund has adopted a Service Plan (the "Service Plan") for each Portfolio's
Investment Class Shares. Under the Service Plan, each Portfolio pays the
Distributor a monthly shareholder servicing fee at an annual rate of 0.15% of
the Portfolio's average daily net assets attributable to Investment Class
Shares. The Distributor may compensate other parties for providing shareholder
support services to investors who purchase Investment Class Shares. Shareholder
servicing fees are separate fees of the Investment Class Shares of each
Portfolio and will reduce the net investment income and total return of the
Investment Class Shares of these Portfolios.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been extracted from the Fund's financial
statements which were audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are incorporated by reference into the
Fund's Statement of Additional Information and are included in the Fund's
September 30, 1999 Annual Report to Shareholders.
The Investment Class Shares of the Domestic Fixed Income Portfolio had not
commenced operations as of September 30, 1999, therefore Institutional Class
Share financial information is provided to investors for informational purposes
only and should be referred to as an historical guide to the Portfolio's
operations and expenses. Past performance does not indicate future results.
<TABLE>
<CAPTION>
NET GAINS
OR LOSSES
ON DIVIDEND CAPITAL GAIN
NET ASSET SECURITIES DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE- NET (REALIZED TOTAL FROM (NET (REALIZED NET VALUE-
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL OTHER TOTAL END OF TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD RETURN**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 04/10/96)
1999 $20.42 $0.07 $ 5.27 $ 5.34 ($0.13) ($5.83) -- ($5.96) $19.80 29.92%
1998 29.42 0.20 (1.03) (0.83) (0.24) (7.93) -- (8.17) 20.42 (2.78)
1997 25.66 0.34 8.17 8.51 (0.35) (4.40) -- (4.75) 29.42 38.12
1996 24.31 0.22 1.24 1.46 (0.11) -- -- (0.11) 25.66 6.02
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/10/96)
1999+++ $18.05 $0.09 $ 5.00 $ 5.09 ($0.03) ($1.31) -- ($1.34) $21.80 29.30%
1998+++ 21.75 0.05 (1.53) (1.48) (0.03) (2.19) -- (2.22) 18.05 (7.08)
1997+++ 14.48 0.01 8.36 8.37 (0.09) (1.01) -- (1.10) 21.75 61.05
1996 13.77 0.04 0.67 0.71 -- -- -- -- 14.48 5.16
VALUE PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/06/96)
1999+++ $15.15 $0.19 $ 1.12 $ 1.31 ($0.27) ($2.61) -- ($2.88) $13.58 8.20%
1998 20.36 0.31 (3.38) (3.07) (0.33) (1.81) -- (2.14) 15.15 (16.55)
1997+++ 15.60 0.31 5.75 6.06 (0.27) (1.03) -- (1.30) 20.36 41.01
1996 14.97 0.12 0.59 0.71 (0.08) -- -- (0.08) 15.60 4.78
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 09/29/87)
1999 $11.40 $0.71 ($0.83) ($0.12) ($0.52) -- ($0.21)# ($0.73) $10.55 (1.12%)
1998 11.27 0.73 0.32 1.05 (0.79) (0.13) -- (0.92) 11.40 9.83
1997 10.89 0.74 0.33 1.07 (0.67) (0.02) -- (0.69) 11.27 10.20
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61) 10.89 4.41
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23) 11.03 14.33
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 10/15/96)
1999+++ $12.22 $0.76 ($0.72) $ 0.04 ($0.69) -- ($0.30)# ($0.99) $11.27 0.24%
1998+++ 12.22 0.76 0.14 0.90 (0.73) (0.17) -- (0.90) 12.22 7.72
1997+++ 11.80 0.75 0.40 1.15 (0.60) (0.13) -- (0.73) 12.22 10.07
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/21/96)
1999+++ $ 9.00 $0.85 ($0.10) $ 0.75 ($0.78) ($0.04) ($0.15)# ($0.97) $ 8.78 8.67%
1998+++ 10.16 0.83 (0.93) (0.10) (0.80) (0.26) -- (1.06) 9.00 (1.37)
1997+++ 9.31 0.84 0.88 1.72 (0.84) (0.03) -- (0.87) 10.16 19.77
1996 9.06 0.31 0.16 0.47 (0.22) -- -- (0.22) 9.31 5.34
<CAPTION>
RATIO OF
EXPENSES
NET ASSETS- TO RATIO OF
END OF AVERAGE NET INCOME PORTFOLIO
PERIOD NET TO AVERAGE TURNOVER
(THOUSANDS) ASSETS+ NET ASSETS RATE
<S> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 04/10/96)
1999 $ 986 0.77% 0.52% 103%
1998 2,029 0.76 0.78 77
1997 2,354 0.80++ 1.12 85
1996 113 0.75* 1.83* 67
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/10/96)
1999+++ $ 25,197 1.02% 0.42% 244%
1998+++ 18,861 1.05 0.25 213
1997+++ 1,238 1.09++ 0.04 184
1996 127 1.03*++ 0.86* 377
VALUE PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/06/96)
1999+++ $ 9,673 0.78% 1.25% 53%
1998 24,527 0.75 1.62 56
1997+++ 29,847 0.80++ 1.75 46
1996 9,244 0.76* 2.05* 53
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 09/29/87)
1999 $189,860 0.51% 6.09% 115%
1998 76,042 0.51++ 6.32 145
1997 96,954 0.51++ 6.48 217
1996 95,362 0.52++ 5.73 168
1995 36,147 0.51++ 6.80 313
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 10/15/96)
1999+++ $ 39,165 0.63% 6.50% 103%
1998+++ 48,944 0.63 6.31 121
1997+++ 9,527 0.66*++ 6.57* 179
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 05/21/96)
1999+++ $ 7,041 0.64% 9.50% 45%
1998+++ 11,262 0.65 8.58 75
1997+++ 10,916 0.70%++ 8.84% 96
1996 5,139 0.62* 11.06* 115
</TABLE>
24
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NET GAINS
OR LOSSES
ON DIVIDEND CAPITAL GAIN
NET ASSET SECURITIES DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE- NET (REALIZED TOTAL FROM (NET (REALIZED NET VALUE-
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL OTHER TOTAL END OF TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD RETURN**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCED PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 04/03/97)
1999+++ $13.45 $0.42 $ 1.72 $2.14 ($0.41) ($1.36) -- ($1.77) $13.82 16.84%
1998+++ 15.30 0.46 (0.13) 0.33 (0.46) (1.72) -- (2.18) 13.45 2.56
1997 13.11 0.30 2.09 2.39 (0.20) -- -- (0.20) 15.30 18.40
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 6/10/96)
1999 $11.74 $0.35 $ 1.62 $1.97 ($0.34) ($0.96) -- ($1.30) $12.41 17.53%
1998+++ 13.63 0.36 (0.45) (0.09) (0.31) (1.49) -- (1.80) 11.74 (0.61)
1997+++ 12.27 0.36 2.57 2.93 (0.49) (1.08) -- (1.57) 13.63 26.32
1996 12.17 0.13 0.08 0.21 (0.11) -- -- (0.11) 12.27 1.75
<CAPTION>
RATIO OF
EXPENSES
NET ASSETS- TO RATIO OF
END OF AVERAGE NET INCOME PORTFOLIO
PERIOD NET TO AVERAGE TURNOVER
(THOUSANDS) ASSETS+ NET ASSETS RATE
<S> <C> <C> <C> <C>
BALANCED PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 04/03/97)
1999+++ $ 208 0.74% 3.03% 111%
1998+++ 445 0.74 3.24 100
1997 3,943 0.73* 3.32* 145
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INVESTMENT CLASS OPERATIONS 6/10/96)
1999 $7,246 0.93%++ 2.72% 101%
1998+++ 6,233 0.93++ 2.86 107
1997+++ 5,075 0.96++ 2.85 141
1996 3,074 0.73*++ 3.68* 122
</TABLE>
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
# Represents distribution in excess of net realized gains.
+ For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following Portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Equity 0.75%* 0.80% 0.74% 0.75%
Mid Cap Value 1.03* 1.07 1.03 1.01
Value 0.75* 0.79 0.74 0.77
Domestic Fixed Income 0.50% 0.50 0.50 0.50 0.49
Fixed Income -- 0.65* 0.62 0.62
High Yield 0.61* 0.69 0.63 0.63
Balanced 0.70* 0.72 0.72
Multi-Asset-Class 0.73* 0.96 0.93 0.93
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
<TABLE>
<CAPTION>
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
PORTFOLIO 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Equity -- 1.28% -- --
Mid Cap Value 0.14%* 4.60 -- --
Value -- 0.09 -- --
Domestic Fixed
Income 0.09% 0.01 0.01 0.01% --
Fixed Income -- 0.12* -- --
High Yield -- 0.22 -- --
Multi-Asset-
Class 0.08* 0.55 0.04 0.02%
</TABLE>
+++Per share amounts for the year are based on average shares outstanding.
25
<PAGE>
INVESTMENT CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JANUARY 31, 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.
James H. Scott
OFFICERS OF THE FUND
--------------------
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, Vice President & John H. Grady, Jr.,
Treasurer Assistant Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January 31, 2000, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by
contacting your financial intermediary.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (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. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address:
[email protected]. 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.
0005-537-prosmasinvt-0100
MORGAN STANLEY DEAN WITTER
- --------------------------
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
<PAGE>
INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JANUARY 31, 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, 21 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Institutional Class Shares of the following portfolios (each a
"Portfolio" and collectively the "Portfolios"):
EQUITY PORTFOLIOS
-----------------
EQUITY
MID CAP GROWTH
MID CAP VALUE
SMALL CAP GROWTH
SMALL CAP VALUE
VALUE
FIXED INCOME PORTFOLIOS
-----------------------
CASH RESERVES
DOMESTIC FIXED INCOME
FIXED INCOME
FIXED INCOME II
GLOBAL FIXED INCOME
HIGH YIELD
INTERMEDIATE DURATION
INTERNATIONAL FIXED INCOME
LIMITED DURATION
MULTI-MARKET FIXED INCOME
MUNICIPAL
SPECIAL PURPOSE FIXED INCOME
TARGETED DURATION
BALANCED PORTFOLIOS
-------------------
BALANCED
MULTI-ASSET-CLASS
INVESTMENT ADVISER
MILLER ANDERSON & SHERRERD, LLP
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY.......................................................... 1
EQUITY PORTFOLIOS
EQUITY.................................................................... 2
MID CAP GROWTH............................................................ 3
MID CAP VALUE............................................................. 4
SMALL CAP GROWTH.......................................................... 5
SMALL CAP VALUE........................................................... 6
VALUE..................................................................... 7
FIXED INCOME PORTFOLIOS
CASH RESERVES............................................................. 8
DOMESTIC FIXED INCOME..................................................... 9
FIXED INCOME.............................................................. 10
FIXED INCOME II........................................................... 12
GLOBAL FIXED INCOME....................................................... 13
HIGH YIELD................................................................ 15
INTERMEDIATE DURATION..................................................... 17
INTERNATIONAL FIXED INCOME................................................ 18
LIMITED DURATION.......................................................... 20
MULTI-MARKET FIXED INCOME................................................. 21
MUNICIPAL................................................................. 23
SPECIAL PURPOSE FIXED INCOME.............................................. 25
TARGETED DURATION......................................................... 27
BALANCED PORTFOLIOS
BALANCED.................................................................. 29
MULTI-ASSET-CLASS......................................................... 31
FEES AND EXPENSES OF THE PORTFOLIOS......................................... 33
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 34
PURCHASING SHARES........................................................... 38
REDEEMING SHARES............................................................ 39
VALUATION OF SHARES......................................................... 40
GENERAL SHAREHOLDER INFORMATION............................................. 40
FUND MANAGEMENT............................................................. 42
FINANCIAL HIGHLIGHTS........................................................ 46
</TABLE>
<PAGE>
INVESTOR SUITABILITY
This section explains each Portfolio's:
[_] Investment Objective
[_] Principal Investment Strategy
[_] Principal Risks
INVESTMENT SUMMARY
[_] The Portfolios may be suitable for long-term investors who can accept the
risks of investing in the stock and bond markets.
[_] The Portfolios are designed principally for investment by fiduciary
investors who are entrusted with the responsibility of investing assets
held for the benefit of others.
[_] While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy. The Municipal
Portfolio may be a suitable investment for persons who would benefit from
tax-exempt income.
1
<PAGE>
EQUITY PORTFOLIO
OBJECTIVE
The Equity Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of large U.S. companies. The
Portfolio invests, to a limited extent, in stocks of small companies and
foreign equity securities.
PROCESS
The Adviser assigns each member of the portfolio management team to specific
"value" or "growth" sectors. The Portfolio's overall sector allocation is
driven by bottom-up stock selection. The Adviser seeks to diversify the
Portfolio's investments across market sectors, and to obtain the best values
within each sector. In determining whether securities should be sold, the
Adviser considers factors such as deteriorating fundamentals and relative
valuation.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS
- ---------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN
$5 BILLION
- ---------------------------------------------
BENCHMARK: S&P 500 INDEX
- ---------------------------------------------
TICKER SYMBOL: MPEQX
- ---------------------------------------------
CUSIP NO.: 552-913-105
- ---------------------------------------------
PORTFOLIO MANAGERS
- ---------------------------------------------
ARDEN C. ARMSTRONG, STEVEN EPSTEIN,
JAMES J. JOLINGER, BRIAN KRAMP, CHRIS LEAVY,
ROBERT J. MARCIN, ERIC F. SCHARPF AND
GARY G. SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
EQUITY PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 14, 1984
1990 -0.09%
1991 39.96%
1992 7.78%
1993 6.66%
1994 0.50%
1995 33.02%
1996 20.59%
1997 25.84%
1998 19.67%
1999 28.80%
- -------------------------------------------------------------------------------
High (Quarter) Low (Quarter)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/90
21.34% -15.00%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
EQUITY PORTFOLIO S&P 500 INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 28.80 21.04
- --------------------------------------------------------------------------------------------
FIVE YEARS 25.49 28.55
- --------------------------------------------------------------------------------------------
TEN YEARS 17.52 18.21
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
11/14/84 17.99 18.85
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
2
<PAGE>
MID CAP GROWTH PORTFOLIO
OBJECTIVE
The Mid Cap Growth Portfolio seeks long-term capital growth.
GENERALLY 65% OF TOTAL PORTFOLIO ASSETS
INVESTED IN COMMON STOCKS OF MID CAP
COMPANIES
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE
BENCHMARK (CURRENTLY $500 MILLION TO $6
BILLION)
- ----------------------------------------------
FOCUS ON GROWTH SECURITIES
- ----------------------------------------------
BENCHMARK: S&P MIDCAP 400 INDEX
- ----------------------------------------------
TICKER SYMBOL: MPEGX
- ----------------------------------------------
CUSIP NO.: 552-913-782
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG, DAVID P. CHU AND STEVEN
B. CHULIK
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the S&P MidCap 400 Index.
The Adviser focuses on companies that demonstrate one or more of the following
characteristics: high earnings growth rates, growth stability, rising
profitability and the ability to produce earnings that consistently beat market
expectations. The Portfolio may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquistion. The Portfolio may
invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser uses a quantitative screen to sort stocks based on proprietary
revisions to analysts' earnings predictions. The Adviser then researches those
companies with the most attractive earnings revisions, and evaluates their
market valuations to eliminate the most overvalued stocks. The Portfolio's
overall sector allocation is driven by bottom-up stock selection. The Adviser
follows a strict sell discipline, selling stocks when their earnings revision
scores fall to unacceptable levels, when research reveals unfavorable trends or
when their market valuations exceed levels that are reasonable in relation to
their growth prospects.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and events that affect a particular
issuer. Investments in mid cap companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some market
conditions may favor growth stocks or stocks of mid-sized companies, while other
conditions may favor value stocks or stocks of larger or smaller companies.
The Portfolio's purchase of shares issued in IPOs exposes it to the risks
associated with companies that have little operating history as public
companies, as well as to the risks inherent in those sectors of the market where
these new issuers operate. The market for IPO issuers has been volatile, and
share prices of newly-public companies in the technology sector have fluctuated
in significant amounts over short periods of time. In addition, the Adviser
cannot guarantee continued access to IPOs.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on March 30, 1990
1991 59.39%
1992 2.91%
1993 18.23%
1994 -5.39%
1995 36.25%
1996 18.79%
1997 33.13%
1998 37.36%
1999 68.18%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/99 Quarter Ended 9/30/98
39.27% -19.18%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MID CAP S&P MIDCAP
GROWTH PORTFOLIO 400 INDEX
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 68.18 14.72
- -----------------------------------------------------------------------------------------------
FIVE YEARS 37.85 23.05
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
3/30/90 26.65 18.17
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
3
<PAGE>
MID CAP VALUE PORTFOLIO
OBJECTIVE
The Mid Cap Value Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the S&P MidCap 400 Index.
The Portfolio purchases stocks that typically do not pay dividends. The
Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser analyzes securities to identify stocks that are undervalued, and
measures the relative attractiveness of the Portfolio's current holdings
against potential purchases. Sector weightings normally are kept within 5% of
those of the S&P MidCap 400 Index. In determining whether securities should be
sold, the Adviser considers factors such as high valuations relative to other
investment opportunities, and deteriorating short or long-term earnings growth
projections.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS OF MID CAP
COMPANIES
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE
BENCHMARK (CURRENTLY $500 MILLION TO $6
BILLION)
- ----------------------------------------------
FOCUS ON VALUE SECURITIES
- ----------------------------------------------
BENCHMARK: S&P MIDCAP 400 INDEX
- ----------------------------------------------
TICKER SYMBOL: MPMVX
- ----------------------------------------------
CUSIP NO.: 552-913-618
- ----------------------------------------------
PORTFOLIO MANAGERS
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
VITALY V. KORCHEVSKY AND GARY G. SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in mid cap companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some
market conditions may favor value stocks or stocks of mid-sized companies,
while other conditions may favor growth stocks or stocks of larger or smaller
companies.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on December 30, 1994
1995 32.71%
1996 40.77%
1997 39.58%
1998 16.05%
1999 19.82%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
22.46% -13.80%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MID CAP S&P MIDCAP
VALUE PORTFOLIO 400 INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 19.82 14.72
- ----------------------------------------------------------------------------------------------
FIVE YEARS 29.39 23.05
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
12/30/94 29.37 23.03
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
4
<PAGE>
SMALL CAP GROWTH PORTFOLIO
OBJECTIVE
The Small Cap Growth Portfolio seeks long-term capital growth.
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the Russell 2000 Index.
The Adviser focuses on companies that demonstrate one or more of the following
characteristics: high earnings growth rates, growth stability, rising
profitability and the ability to produce earnings that consistently beat market
expectations. The Portfolio may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquisition. The Portfolio may
invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser uses a quantitative screen to sort stocks based on proprietary
revisions to analysts' earnings predictions. The Adviser then researches those
companies with the most attractive earnings revisions, and evaluates their
market valuations to eliminate the most overvalued stocks. The Portfolio's
overall sector allocation is driven by bottom-up stock selection. The Adviser
follows a strict sell discipline, selling stocks when their earnings revision
scores fall to unacceptable levels, when research reveals unfavorable trends or
when their market valuations exceed levels that are reasonable in relation to
their growth prospects.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS OF SMALL CAP
COMPANIES
- ----------------------------------------------
EQUITY CAPITALIZATION RANGE: $250 MILLION TO
$2.5 BILLION
- ----------------------------------------------
FOCUS ON GROWTH SECURITIES
- ----------------------------------------------
BENCHMARK: RUSSELL 2000 INDEX
- ----------------------------------------------
TICKER SYMBOL: MSCGX
- ----------------------------------------------
CUSIP NO.: 552-913-253
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG, DAVID P. CHU AND STEVEN
B. CHULIK
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in small companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some
market conditions may favor growth stocks or stocks of small companies, while
other conditions may favor value stocks or stocks of larger companies.
The Portfolio's purchase of shares issued in IPOs exposes it to the risks
associated with companies that have little operating history as public
companies, as well as to the risks inherent in those sectors of the market
where these new issuers operate. The market for IPO issuers has been volatile,
and share prices of newly-public companies in the technology sector have
fluctuated in significant amounts over short periods of time. Recent market
conditions have allowed the Portfolio to profit from the purchase and sale of
shares issued as part of, or a short period after, companies' IPOs. A
significant portion of the Portfolio's performance to date is related to its
investment in IPOs. However, the Adviser cannot guarantee continued access to
IPOs, or the Portfolio's ability to profit from them.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on June 30, 1998
1999 313.91%
- -------------------------------------------------------------------------------
High (Quarter) Low (Quarter)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/99 Quarter Ended 9/30/90*
69.51% -14.30%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SMALL CAP RUSSELL 2000
GROWTH PORTFOLIO INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 313.91 21.26
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
6/30/98 209.56 8.22
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
* In light of the relatively short life of the Portfolio and its performance
during the last calendar year, the low quarter disclosed is from a prior
period.
5
<PAGE>
SMALL CAP VALUE PORTFOLIO (Not currently being offered to new investors)
OBJECTIVE
The Small Cap Value Portfolio seeks above-average total return over a market
cycle of three to five years.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS OF SMALL CAP
COMPANIES
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING THE
BENCHMARK (CURRENTLY $100 MILLION TO $2
BILLION)
- ----------------------------------------------
FOCUS ON VALUE SECURITIES
- ----------------------------------------------
BENCHMARK: RUSSELL 2000 INDEX
- ----------------------------------------------
TICKER SYMBOL: MPSCX
- ----------------------------------------------
CUSIP NO.: 552-913-501
PORTFOLIO MANAGERS
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
VITALY V. KORCHEVSKY AND GARY G. SCHLARBAUM
APPROACH
The Portfolio invests primarily in common stocks of companies with equity
capitalizations in the range of companies included in the Russell 2000 Index.
The Portfolio purchases stocks that typically do not pay dividends. The
Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser analyzes securities to identify stocks that are undervalued, and
measures the relative attractiveness of the Portfolio's current holdings against
potential purchases. Sector weightings normally are kept within 5% of those of
the Russell 2000 Index. In determining whether securities should be sold, the
Adviser considers factors such as high valuations relative to other investment
opportunities, and deteriorating short or long-term earnings growth projections.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some market
conditions may favor value stocks or stocks of small companies, while other
conditions may favor growth stocks or stocks of larger companies.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on July 1, 1986
1990 -16.55%
1991 63.78%
1992 22.77%
1993 21.16%
1994 2.18%
1995 21.04%
1996 35.15%
1997 30.63%
1998 -1.42%
1999 26.02%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 9/30/90
31.89% -27.20%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SMALL CAP RUSSELL 2000
VALUE PORTFOLIO INDEX
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 26.02 21.26
- ---------------------------------------------------------------------------------------------
FIVE YEARS 21.56 16.69
- ---------------------------------------------------------------------------------------------
TEN YEARS 18.62 13.40
- ---------------------------------------------------------------------------------------------
SINCE INCEPTION
7/1/86 14.15 11.01
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
6
<PAGE>
VALUE PORTFOLIO
OBJECTIVE
The Value Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with equity
capitalizations greater than $2.5 billion. The Portfolio focuses on stocks that
are undervalued in comparison with the stock market as a whole, as measured by
the S&P 500 Index. The Portfolio may purchase stocks that do not pay dividends.
The Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser selects investments through a three part analysis. The Adviser
identifies stocks with low price/earnings ratios. The Adviser then applies
fundamental analysis and its investment judgment to determine which of those
securities are the most attractive. Finally, the Adviser may favor securities
of companies that are in undervalued industries. The Adviser employs a formal
sell discipline, under which the Portfolio sells securities when their
price/earnings ratios rise.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN
$2.5 BILLION
- ----------------------------------------------
FOCUS ON VALUE SECURITIES
- ----------------------------------------------
BENCHMARK: S&P 500 INDEX
- ----------------------------------------------
TICKER SYMBOL: MPVLX
- ----------------------------------------------
CUSIP NO.: 552-913-204
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
RICHARD M. BEHLER, NICHOLAS J. KOVICH AND
ROBERT J. MARCIN
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some
market conditions may favor value stocks, while other conditions may favor
growth stocks.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
VALUE PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 5, 1984
1990 -6.16%
1991 37.65%
1992 14.61%
1993 14.34%
1994 3.48%
1995 38.75%
1996 27.63%
1997 23.38%
1998 -2.88%
1999 -2.07%
- -------------------------------------------------------------------------------
High (Quarter) Low (Quarter)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 9/30/98
17.05% -19.02%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
VALUE S&P 500
PORTFOLIO INDEX
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -2.07 21.04
- ----------------------------------------------------------------------------------------------------
FIVE YEARS 15.75 28.55
- ----------------------------------------------------------------------------------------------------
TEN YEARS 13.79 18.21
- ----------------------------------------------------------------------------------------------------
SINCE INCEPTION
11/5/84 15.07 18.71
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
7
<PAGE>
CASH RESERVES PORTFOLIO
OBJECTIVE
The Cash Reserves Portfolio seeks to realize maximum current income, consistent
with the preservation of capital and liquidity.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing exclusively in liquid, high quality money market instruments of
private financial and non-financial corporations, as well as obligations of the
U.S. Government and its agencies and instrumentalities. The Portfolio's average
weighted maturity will not exceed 90 days, and no individual security will have
a remaining maturity in excess of 397 days.
PROCESS
The Portfolio's Sub-Adviser, Morgan Stanley Dean Witter Advisors Inc.,
determines the appropriate average maturity for the Portfolio based on the shape
of the money market yield curve and its view of the direction of short term
interest rates over the next one to six months. Securities are selected on the
basis of their value, adjusted for risk. The Sub-Adviser invests in a variety of
securities in order to diversify credit risk and interest rate risk. The Sub-
Adviser may sell securities when it believes that expected risk-adjusted return
is low compared to other investment opportunities, when a security is
downgraded, or for liquidity needs.
DOLLAR WEIGHTED AVERAGE MATURITY LESS THAN 90
DAYS
- ----------------------------------------------
100% OF NON-U.S. GOVERNMENT SECURITIES RATED
A-1/P-1 OR BETTER BY MOODY'S OR STANDARD &
POOR'S AT TIME OF PURCHASE
- ----------------------------------------------
INDIVIDUAL MATURITIES 397 DAYS OR LESS
- ----------------------------------------------
BENCHMARK: SALOMON 1-MONTH
TREASURY BILL INDEX;
LIPPER MONEY
MARKET AVERAGE
- ----------------------------------------------
TICKER SYMBOL: MPCXX
- ----------------------------------------------
CUSIP NO.: 552-913-758
PORTFOLIO MANAGERS
DALE R. ALBRIGHT AND JONATHAN R. PAGE
PRINCIPLE RISKS
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, the Portfolio is subject to various risks that could adversely affect
its net asset value, yield and total return. It is possible for an investor to
lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating. Repurchase agreements are subject to additional
risks associated with the possibility of default by the seller at a time when
the collateral has declined in value, or insolvency of the seller, which may
affect the Portfolio's right to control the collateral.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on August 29, 1990
1991 5.81%
1992 3.46%
1993 2.80%
1994 3.93%
1995 5.75%
1996 5.24%
1997 5.39%
1998 5.36%
1999 5.00%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 3/31/93
1.64% 0.66%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
CASH SALOMON LIPPER MONEY
RESERVES 1-MONTH TREASURY MARKET
PORTFOLIO BILL INDEX AVERAGE
- --------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 5.00 4.44 4.46
- --------------------------------------------------------
FIVE YEARS 5.35 4.84 4.87
- --------------------------------------------------------
SINCE INCEPTION
8/29/90 4.87 4.43 4.52
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index and the Lipper Money
Market Average, an index that shows the performance of other money market
funds. The variability of performance over time provides an indication of the
risks of investing in the Portfolio. How the Portfolio has performed in the
past does not necessarily indicate how the Portfolio will perform in the
future. You may obtain the Portfolio's SEC 7-day current yield by calling 1-
800-522-1525.
8
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO
OBJECTIVE
The Domestic Fixed Income Portfolio seeks above-average total return over a
market cycle of three to five years.
APPROACH
The Portfolio invests in a diversified mix of dollar denominated fixed income
securities, particularly U.S. Government, corporate and mortgage securities.
The Portfolio will ordinarily maintain an average weighted maturity in excess
of five years. Although there is no minimum or maximum maturity for any
individual security, the Adviser actively manages the interest rate risk of the
Portfolio within a range relative to the benchmark. The Portfolio invests
exclusively in securities issued by U.S.-based entities that carry an
investment grade rating at the time of purchase. The Adviser may use futures,
swaps and other types of derivatives in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities. The Adviser relies upon value measures
to guide its decisions regarding sector and security selection, such as the
relative attractiveness of the extra yield offered by securities other than
those issued by the U.S. Treasury. The Adviser also measures various types of
risk, focusing on the level of real interest rates, the shape of the yield
curve, credit risk and prepayment risk. The Adviser's management team builds an
investment portfolio designed to take advantage of its judgment on these
factors, while balancing the overall risk of the Portfolio. The Adviser may
sell securities when it believes that expected risk-adjusted return is low
compared to other investment opportunities.
100% U.S. ISSUERS
- ----------------------------------------------
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
AT LEAST 80% OF FIXED INCOME SECURITIES RATED
A OR HIGHER (OR EQUIVALENT) AT TIME OF
PURCHASE
- ----------------------------------------------
UP TO 20% OF FIXED INCOME SECURITIES RATED
BBB (OR EQUIVALENT) AT TIME OF PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: MPSFX
- ----------------------------------------------
CUSIP NO.: 552-913-881
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
THOMAS L. BENNETT, ANGELO G. MANIOUDAKIS AND
SCOTT F. RICHARD
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on September 29, 1987
1990 7.19%
1991 21.54%
1992 9.12%
1993 13.75%
1994 -3.89%
1995 18.85%
1996 3.89%
1997 9.62%
1998 7.23%
1999 -1.64%
- -------------------------------------------------------------------------------
High (Quarter) Low (Quarter)
- -------------------------------------------------------------------------------
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.48% -2.28%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
DOMESTIC SALOMON BROAD
FIXED INCOME INVESTMENT GRADE
PORTFOLIO INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -1.64 -0.85
- ----------------------------------------------------------------------------------------------
FIVE YEARS 7.38 7.74
- ----------------------------------------------------------------------------------------------
TEN YEARS 8.30 7.75
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
9/29/87 8.82 8.60
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
9
<PAGE>
FIXED INCOME PORTFOLIO
OBJECTIVE
The Fixed Income Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
investment grade fixed income securities, particularly U.S. Government,
corporate and mortgage securities. The Portfolio ordinarily will maintain an
average weighted maturity in excess of five years. Although there is no minimum
or maximum maturity for any individual security, the Adviser actively manages
the interest rate risk of the Portfolio within a range relative to the
benchmark. The Portfolio may invest opportunistically in non-dollar denominated
securities and in below investment grade securities. The Adviser may use
futures, swaps and other types of derivatives in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
AT LEAST 80% INVESTMENT GRADE SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
UP TO 20% HIGH YIELD SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: MPFIX
- ----------------------------------------------
CUSIP NO.: 552-913-303
PORTFOLIO MANAGERS
W. DAVID ARMSTRONG, THOMAS L. BENNETT,
KENNETH B. DUNN AND ROBERTO M. SELLA
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities, and also may consider the relative
attractiveness of non-dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regarding sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing on the level of real interest rates,
the shape of the yield curve, credit risk, prepayment risk, country risk and
currency valuations. The Adviser's management team builds an investment
portfolio designed to take advantage of its judgment on these factors, while
balancing the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
10
<PAGE>
FIXED INCOME PORTFOLIO (Continued)
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 14, 1984
1990 7.16%
1991 21.49%
1992 8.46%
1993 13.90%
1994 -5.51%
1995 19.03%
1996 7.36%
1997 9.61%
1998 6.91%
1999 -0.61%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 9/30/91 Quarter Ended 3/31/94
7.56% -3.13%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD
FIXED INCOME INVESTMENT
PORTFOLIO GRADE INDEX
- ----------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -0.61 -0.85
- ----------------------------------------------------------------------------
FIVE YEARS 8.28 7.74
- ----------------------------------------------------------------------------
TEN YEARS 8.51 7.75
- ----------------------------------------------------------------------------
SINCE INCEPTION
11/14/84 9.85 9.35
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
11
<PAGE>
FIXED INCOME II PORTFOLIO
OBJECTIVE
The Fixed Income II Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
fixed income securities, particularly U.S. Government, corporate and mortgage
securities. The Portfolio will ordinarily maintain an average weighted maturity
in excess of five years. Although there is no minimum or maximum maturity for
any individual security, the Adviser actively manages the interest rate risk of
the Portfolio within a range relative to the benchmark. The Portfolio invests
exclusively in securities that carry an investment grade rating at the time of
purchase, and may invest opportunistically in non-dollar denominated
securities. The Adviser may use futures, swaps and other types of derivatives
in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities, and also may consider the relative
attractiveness of non-dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regarding sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing the level of real interest rates, the
shape of the yield curve, credit risk, prepayment risk, country risk and
currency valuations. The Adviser's management team builds an investment
portfolio designed to take advantage of its judgment on these factors, while
balancing the overall risk of the Portfolio. The Adviser may sell securities
when it believes that expected risk-adjusted return is low compared to other
investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
100% INVESTMENT GRADE SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: MPFDX
- ----------------------------------------------
CUSIP NO.: 552-913-741
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
THOMAS L. BENNETT, ANGELO G. MANIOUDAKIS,
KENNETH B. DUNN AND SCOTT F. RICHARD
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on August 31, 1990
1991 19.29%
1992 7.03%
1993 12.62%
1994 -5.15%
1995 18.67%
1996 5.53%
1997 9.29%
1998 7.54%
1999 -1.20%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.64% -2.78%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD
FIXED INCOME II INVESTMENT
PORTFOLIO GRADE INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -1.20 -0.85
- ----------------------------------------------------------------------------------------------
FIVE YEARS 7.78 7.74
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
8/31/90 8.53 7.99
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
12
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
OBJECTIVE
The Global Fixed Income Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests primarily in investment grade fixed income securities
issued by U.S. and foreign issuers, including those located in emerging markets.
The Portfolio will invest in a combination of government, corporate and mortgage
securities offering attractive values. The Portfolio generally maintains an
average weighted maturity in excess of five years, although there is no minimum
or maximum maturity for any individual security. The Portfolio may invest in
high yield securities (commonly referred to as "junk bonds"). The Adviser may
use futures, forwards, swaps and other derivatives in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES OF
ISSUERS IN AT LEAST 3 COUNTRIES, INCLUDING
THE U.S.
- ----------------------------------------------
AT LEAST 95% INVESTMENT GRADE SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
UP TO 5% INVESTED IN HIGH YIELD SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON WORLD
GOVERNMENT BOND INDEX
- ----------------------------------------------
TICKER SYMBOL: MAGFX
- ----------------------------------------------
CUSIP NO.: 552-913-683
PORTFOLIO MANAGERS
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F.
O'BRIEN AND CHRISTIAN G. ROTH
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams evaluate the relative attractiveness of U.S. and
foreign issuers, and of corporate, mortgage and government securities. The
Adviser relies upon value measures such as the level of real interest rates,
yield curve slopes and credit-adjusted spreads to guide its decisions regarding
interest rate, country, sector and security exposure. The Adviser also measures
various types of risk, focusing on interest rate risk, country risk currency
risk, credit risk and exposure to changes in the shape of the yield curve. The
Adviser's management team builds an investment portfolio designed to take
advantage of its judgment on these factors, while balancing the overall risk of
the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decrease in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S.
13
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO (Continued)
issuers. A substantial portion of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's
investments. These risks are greater in emerging market countries.
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. The Portfolio therefore may be more
susceptible to an adverse event affecting a portfolio investment than a
diversified portfolio.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on April 30, 1993
1994 -1.57%
1995 20.02%
1996 6.03%
1997 -0.02%
1998 14.10%
1999 -4.80%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 3/31/97
8.03% -4.11%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
GLOBAL FIXED SALOMON WORLD
INCOME GOVERNMENT
PORTFOLIO BOND INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -4.80 -4.26
- ----------------------------------------------------------------------------------------------
FIVE YEARS 6.69 6.42
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
4/30/93 6.08 5.95
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
14
<PAGE>
HIGH YIELD PORTFOLIO
OBJECTIVE
The High Yield Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in high yield securities (commonly referred to
as "junk bonds"). The Portfolio also may invest in investment grade fixed
income securities, including U.S. Government securities, corporate bonds and
mortgage securities. The Portfolio may invest to a limited extent in foreign
fixed income securities, including emerging market securities. The Adviser may
use futures, swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser uses equity and fixed income valuation techniques, together with
analyses of economic and industry trends, to determine the Portfolio's overall
structure, sector allocation and desired maturity. The Adviser emphasizes
securities of companies that have strong industry positions and favorable
outlooks for cash flow and asset values. The Adviser conducts a credit analysis
for each security considered for investment to evaluate its attractiveness
relative to the level of risk it presents. The Portfolio maintains a high level
of diversification to minimize its exposure to the risks associated with any
particular issuer. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment
opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN HIGH YIELD SECURITIES
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: CS FIRST BOSTON
HIGH YIELD INDEX
- ----------------------------------------------
TICKER SYMBOL: MPHYX
- ----------------------------------------------
CUSIP NO.: 552-913-790
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
ROBERT E. ANGEVINE, STEPHEN F. ESSER, GORDON
W. LOERY AND DEANNA L. LOUGHNANE
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health,
although changes in market interest rates also will affect prices. High yield
securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
[GRAPH]
- -------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on February 28, 1989
1990 -10.94%
1991 44.17%
1992 18.51%
1993 24.57%
1994 -7.06%
1995 23.94%
1996 15.29%
1997 15.98%
1998 3.16%
1999 7.79%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 9/30/90
24.81% -12.74%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
CS FIRST BOSTON SALOMON
HIGH YIELD HIGH YIELD HIGH YIELD
PORTFOLIO INDEX INDEX
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 7.79 3.28 1.74
- -----------------------------------------------------------------------------------------
FIVE YEARS 13.00 9.07 9.71
- -----------------------------------------------------------------------------------------
TEN YEARS 12.50 11.06 10.94
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
2/28/89 10.87 9.95 10.11
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1, 5 and 10 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index, the CS First Boston
High Yield Index. Previously, the Portfolio's returns had been compared to the
Salomon High Yield Index. The Adviser believes that the CS First Boston High
Yield Index has a more comprehensive coverage of geographic regions and types
of securities in which the Portfolio may invest. The variability of performance
over time provides an indication of the risks of investing in the Portfolio.
How the Portfolio has performed in the past does not necessarily indicate how
the Portfolio will perform in the future.
15
<PAGE>
HIGH YIELD PORTFOLIO (Continued)
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
16
<PAGE>
INTERMEDIATE DURATION PORTFOLIO
OBJECTIVE
The Intermediate Duration Portfolio seeks above-average total return over a
market cycle of three to five years.
APPROACH
The Portfolio seeks value in the fixed income market with only a moderate
sensitivity to changes in interest rates. The Portfolio invests primarily in a
diversified mix of U.S. Government securities, investment grade corporate bonds
and mortgage securities. The Portfolio also may invest, to a limited extent, in
non-dollar denominated securities. The Portfolio generally maintains an average
duration between two and five years. The Adviser uses futures, swaps and other
derivatives to manage the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
100% INVESTMENT GRADE SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
AVERAGE DURATION 2-5 YEARS
- ----------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- ----------------------------------------------
BENCHMARK: LEHMAN BROTHERS
INTERMEDIATE
GOVERNMENT/
CORPORATE INDEX
- ----------------------------------------------
TICKER SYMBOL: MAIDX
- ----------------------------------------------
CUSIP NO.: 552-913-642
PORTFOLIO MANAGERS
ANGELO G. MANIOUDAKIS AND SCOTT F. RICHARD
PROCESS
The Adviser employs a value approach toward fixed income investing. The Adviser
makes securities and sector decisions based on the anticipated tradeoff between
long-run expected return and risk. The Adviser relies upon value measures,
including the attractiveness of the extra yield offered by non-Treasury
securities, the level of real interest rates, and the steepness of the yield
curve, to guide its decision regarding duration management, and country, sector
and security selection. Teams of portfolio managers implement strategies based
on these types of value measures. Sector teams seek specific bonds within each
sector, while a portfolio team seeks to ensure that the aggregate risk
exposures to changes in the level of interest rates and yield spreads match the
Portfolio's objective. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income
securities.The prices of fixed income securities respond to economic
developments, particularly interest rate changes and changes in the actual or
perceived creditworthiness of the issuer of the fixed income security.
Securities with longer durations are likely to be more sensitive to changes in
interest rates, generally making them more volatile than securities with
shorter durations. Lower rated fixed income securities have greater volatility
because there is less certainty that principal and interest payments will be
made as scheduled. Prices of fixed income securities generally will move in
correlation to changes in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on October 3, 1994
1995 15.38%
1996 5.94%
1997 8.07%
1998 7.03%
1999 0.86%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 6/30/99
4.80% -1.10%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
LEHMAN BROTHERS
INTERMEDIATE INTERMEDIATE
DURATION GOVERNMENT/CORPORATE
PORTFOLIO INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 0.86 0.39
- --------------------------------------------------------------------------------------------
FIVE YEARS 7.36 7.10
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
10/3/94 6.90 6.73
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
17
<PAGE>
INTERNATIONAL FIXED INCOME PORTFOLIO
OBJECTIVE
The International Fixed Income Portfolio seeks above-average total return over
a market cycle of three to five years.
APPROACH
The Portfolio invests primarily in investment grade fixed income securities of
government and corporate issuers in countries other than the U.S., including,
to a limited degree, high yield securities (commonly referred to as "junk
bonds") and securities of issuers located in emerging markets. The securities
held by the Portfolio ordinarily will be denominated in foreign currencies,
including the Euro. The Portfolio ordinarily will maintain an average weighted
maturity in excess of five years, although there is no minimum or maximum
maturity for any individual security. The Adviser uses futures, swaps and other
types of derivatives in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams determine the relative attractiveness of foreign
government, corporate and mortgage securities. The Adviser relies upon value
measures, particularly the relative attractiveness of securities issued by
foreign governments, against those of corporations and other private entities.
The Adviser also measures various types of risk, focusing on interest rate
risk, country risk, currency risk, credit risk and exposure to changes in the
shape of the yield curve. The Adviser's management team builds an investment
portfolio designed to take advantage of the firm's judgment on these factors,
while balancing the overall risk of the Portfolio. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
GENERALLY AT LEAST 80% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES OF
ISSUERS IN AT LEAST 3 COUNTRIES OTHER THAN
THE U.S.
- ----------------------------------------------
AT LEAST 95% INVESTMENT GRADE SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
UP TO 5% INVESTED IN HIGH YIELD SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON WORLD
GOVERNMENT BOND
EX-U.S. INDEX
- ----------------------------------------------
TICKER SYMBOL: MPIFX
- ----------------------------------------------
CUSIP NO.: 552-913-816
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F.
O'BRIEN AND CHRISTIAN G. ROTH
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decreases in price.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Substantially all 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 risks are greater in emerging
market countries.
The Portfolio is a non-diversified portfolio that may invest in a relatively
limited number of issuers. The Portfolio therefore may be more susceptible to
an adverse event affecting a portfolio investment than a diversified portfolio.
18
<PAGE>
INTERNATIONAL FIXED INCOME PORTFOLIO (Continued)
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 14, 1984
1995 19.64%
1996 6.20%
1997 -3.97%
1998 17.74%
1999 -7.39%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 3/31/97
10.86% -5.74%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON WORLD
INTERNATIONAL GOVERNMENT
FIXED INCOME BOND EX-U.S.
PORTFOLIO INDEX
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -7.39 -5.09
- -----------------------------------------------------------------------------------------------
FIVE YEARS 5.87 5.90
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
4/29/94 5.38 5.78
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
19
<PAGE>
LIMITED DURATION PORTFOLIO
OBJECTIVE
The Limited Duration Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio seeks value in the fixed income market with only a limited
sensitivity to changes in interest rates. The Portfolio invests primarily in
U.S. Government securities, investment grade corporate bonds and mortgage
securities. The Portfolio maintains an average duration similar to that of the
Merrill Lynch 1-3 Year Treasury Index, which generally ranges between zero and 3
years. The Adviser uses futures, swaps and other derivatives to manage the
Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The Adviser
makes securities and sector decisions based on the anticipated tradeoff between
long-run expected return and risk. The Adviser relies upon value measures,
including the attractiveness of the extra yield offered by non-Treasury
securities, the level of real interest rates, and the steepness of the yield
curve, to guide its decision regarding duration management, and country, sector
and security selection. Teams of portfolio managers implement strategies based
on these types of value measures. Sector teams seek specific bonds within each
sector, while a portfolio team seeks to ensure that the aggregate risk exposures
to changes in the level of interest rates and yield spreads match the
Portfolio's objective. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
100% INVESTMENT GRADE SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
MAY INVEST IN BRADY BONDS (A TYPE OF EMERGING
MARKET FIXED INCOME SECURITY)
- ----------------------------------------------
AVERAGE DURATION 1-3 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON 1-3 YEAR
TREASURY/GOVERNMENT
SPONSORED INDEX
- ----------------------------------------------
TICKER SYMBOL: MPLDX
- ----------------------------------------------
CUSIP NO.: 552-913-733
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
MICHELE A. KREISLER AND SCOTT F. RICHARD
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in
correlation to changes in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- ----------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO
- ----------------------------------------------------------------------------
Commenced operations on March 31, 1992
1993 5.97%
1994 -0.07%
1995 10.37%
1996 5.27%
1997 6.25%
1998 5.63%
1999 3.77%
- ----------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- ----------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 3/31/94
3.23% -0.95%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON 1-3
LIMITED YEAR TREASURY/
DURATION GOVERNMENT SPONSORED
PORTFOLIO INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 3.77 3.11
- --------------------------------------------------------------------------------------------
FIVE YEARS 6.23 6.48
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
3/31/92 5.64 5.72
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
20
<PAGE>
OBJECTIVE
MULTI-MARKET FIXED INCOME PORTFOLIO
The Multi-Market Fixed Income Portfolio seeks above-average total return over a
market cycle of three to five years.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: WEIGHTED BLEND OF QUARTERLY
RETURNS OF 60% SALOMON BROAD
INVESTMENT GRADE INDEX
20% SALOMON WORLD GOVERNMENT
BOND EX-U.S. INDEX (HALF HEDGED
INTO U.S. DOLLARS)
12% CS FIRST BOSTON HIGH YIELD
INDEX
8% J.P. MORGAN EMERGING MARKETS
BOND INDEX GLOBAL
- ----------------------------------------------
TICKER SYMBOL: MPMMX
- ----------------------------------------------
CUSIP NO.: 552-913-352
PORTFOLIO MANAGERS
THOMAS L. BENNETT, KENNETH B. DUNN, STEPHEN
F. ESSER AND J. DAVID GERMANY
APPROACH
The Portfolio invests in a diversified portfolio of U.S. and foreign fixed
income securities, including mortgage securities, high yield securities
(commonly referred to as "junk bonds") and emerging market securities. The
Adviser uses futures, swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser determines the Portfolio's overall maturity and duration targets and
sector allocations. The portfolio managers then select particular securities for
the Portfolio in various sectors within those overall guidelines. The Adviser
will increase or decrease the Portfolio's exposure to interest rate changes
based on its outlook for the economy, interest rates and inflation. The
Portfolio invests varying amounts in U.S. and foreign securities (including
emerging market securities), and investment grade and high yield securities,
based on the Adviser's perception of their relative values. The Adviser may sell
securities when it believes that expected risk-adjusted return is low compared
to other investment opportunities.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
21
<PAGE>
MULTI-MARKET FIXED INCOME PORTFOLIO (Continued)
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -----------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO
- -----------------------------------------------------------------------------
Commenced operations on October 1, 1997
1998 5.28%
1999 1.03%
- -----------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -----------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 6/30/99
3.02% -1.25%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON
MULTI-MARKET BROAD SALOMON WORLD
FIXED INCOME INVESTMENT GOVERNMENT BOND BLENDED
PORTFOLIO GRADE INDEX EX-U.S. INDEX INDEX*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 1.03 -0.85 -5.09 1.49
- ------------------------------------------------------------------------------
SINCE INCEPTION
10/1/97 3.01 4.56 4.49 4.60
</TABLE>
* The Blended Index is an unmanaged index comprised of 60% Salomon Broad
Investment Grade Index, 20% Salomon World Government Bond Ex-U.S. Index (half
hedged into U.S. dollars), 12% CS First Boston High Yield Index and 8% J. P.
Morgan Emerging Markets Bond Index Global. Previously, the Blended Index
included the Salomon High Yield Index as its high yield component, but the
Adviser believes that the CS First Boston High Yield Index has a more
comprehensive coverage of geographic regions and types of securities in which
the Portfolio may invest. In addition, the Adviser changed the J. P. Morgan
Emerging Markets Bond Index to the J. P. Morgan Emerging Markets Bond Index
Global as the emerging market component of the Blended Index because the
Adviser feels that the J. P. Morgan Emerging Markets Bond Index Global is
more appropriate to its investment style due to its broader country and
security coverage. If the Blended Index were to include the Salomon High
Yield and the J.P. Morgan Emerging Markets Bond Indices, its performance
would have been 1.14% for the 1 year period and 4.68% since inception.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
22
<PAGE>
MUNICIPAL PORTFOLIO
OBJECTIVE
The Municipal Portfolio seeks to realize above-average total return over a
market cycle of three to five years, consistent with the conservation of capital
and the realization of current income that is exempt from federal income tax.
APPROACH
The Portfolio invests primarily in fixed income securities issued by local,
state and regional governments that provide income that is exempt from federal
income taxes (municipal securities). The Portfolio may purchase municipal
securities that pay interest that is subject to the federal alternative minimum
tax, and securities on which the interest payments are taxable. The Portfolio
may invest in high yield municipal securities (commonly called "junk bonds").
The Portfolio ordinarily will maintain an average weighted maturity of between
five and ten years, although there is no minimum or maximum maturity for any
individual security. The Adviser may use futures, swaps and other derivatives in
managing the Portfolio.
GENERALLY AT LEAST 80% OF TOTAL PORTFOLIO
ASSETS OF INCOME WILL BE EXEMPT FROM REGULAR
FEDERAL INCOME TAX
- ----------------------------------------------
AT LEAST 80% INVESTMENT GRADE SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
UP TO 20% IN HIGH YIELD SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY 5-10
YEARS
- ----------------------------------------------
BENCHMARK: A WEIGHTED BLEND OF QUARTERLY
RETURNS OF 50% LEHMAN 5-YEAR
MUNICIPAL INDEX
50% LEHMAN 10-YEAR
MUNICIPAL INDEX
- ----------------------------------------------
TICKER SYMBOL: MPMFX
- ----------------------------------------------
CUSIP NO.: 552-913-691
PORTFOLIO MANAGERS
STEVEN K. KREIDER AND NEIL STONE
PROCESS
The Adviser employs a value approach toward fixed income investing. The Adviser
will vary the Portfolio's average duration and maturity and the amount invested
in particular types of securities based on its outlook for the economy and
interest rates and its analysis of the risks and rewards offered by different
investments. The Adviser analyzes the credit risk, prepayment risk and call risk
posed by specific securities considered for investment. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Municipal securities involve the risk that an issuer may call securities for
redemption, which could force the Portfolio to reinvest the proceeds at a lower
rate of interest.
[CHART]
- -----------------------------------------------------------------------------
MUNICIPAL PORTFOLIO
- -----------------------------------------------------------------------------
Commenced operations on October 1, 1992
1993 14.31%
1994 -6.30%
1995 19.98%
1996 5.60%
1997 8.68%
1998 5.82%
1999 -1.00%
- -----------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -----------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 3/31/94
8.94% -7.34%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MUNICIPAL LEHMAN 5-YEAR LEHMAN 10-YEAR BLENDED MUNICIPAL
PORTFOLIO MUNICIPAL INDEX MUNICIPAL INDEX INDEX*
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR -1.00 0.73 -1.25 -0.26
- ----------------------------------------------------------------------------
FIVE YEARS 7.60 5.71 7.12 7.52
- ----------------------------------------------------------------------------
SINCE INCEPTION
10/1/92 6.42 5.13 6.18 6.09
</TABLE>
* The Blended Municipal Index is an unmanaged index comprised of the Lehman
Long Municipal Index from 10/1/92 to 3/31/96 and 50% Lehman 10-Year Municipal
Index and 50% Lehman 5-Year Municipal Index thereafter.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
23
<PAGE>
MUNICIPAL PORTFOLIO (Continued)
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
24
<PAGE>
SPECIAL PURPOSE FIXED INCOME PORTFOLIO
OBJECTIVE
The Special Purpose Fixed Income Portfolio seeks above-average total return
over a market cycle of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
fixed income securities, particularly U.S. Government, corporate and mortgage
securities. The Portfolio ordinarily will maintain an average weighted maturity
in excess of five years. Although there is no minimum or maximum maturity for
any individual security, the Adviser actively manages the interest rate risk of
the Portfolio within a range relative to the benchmark. The Portfolio will
invest opportunistically in non-dollar denominated securities and high yield
securities (commonly called "junk bonds"). The Adviser may use futures, swaps
and other types of derivatives in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
MAY INVEST OVER 50% OF ASSETS IN MORTGAGE
SECURITIES
- ----------------------------------------------
BENCHMARK: SALOMON BROAD INVESTMENT GRADE
INDEX
- ----------------------------------------------
TICKER SYMBOL:
MPSPX
- ----------------------------------------------
CUSIP NO.: 552-913-725
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
W. DAVID ARMSTRONG, THOMAS L. BENNETT,
KENNETH B. DUNN AND ROBERTO M. SELLA
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities, and also may consider the relative
attractiveness of non-dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regarding sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing on the level of real interest rates,
the shape of the yield curve, credit risk, prepayment risk and currency
valuations. The Adviser's management team builds an investment portfolio
designed to take advantage of its judgment on these factors, while balancing
the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
[CHART]
- -------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on March 31, 1992
1993 14.85%
1994 -5.02%
1995 19.70%
1996 7.41%
1997 10.04%
1998 6.33%
1999 -0.21%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 6/30/95 Quarter Ended 3/31/94
5.83% -2.74%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SPECIAL PURPOSE SALOMON BROAD
FIXED INCOME INVESTMENT GRADE
PORTFOLIO INDEX
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -0.21 -0.85
- -------------------------------------------------------------------------------------------
FIVE YEARS 8.47 7.74
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
3/31/92 8.01 6.98
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
25
<PAGE>
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (Continued)
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
26
<PAGE>
TARGETED DURATION PORTFOLIO (Not currently open)
OBJECTIVE
The Targeted Duration Portfolio seeks above-average total return consistent with
reasonable risk.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES
- ----------------------------------------------
AVERAGE DURATION WILL APPROXIMATE THE
BENCHMARK (CURRENTLY 1.7 YEARS)
- ----------------------------------------------
AT LEAST 80% INVESTMENT GRADE SECURITIES AT
TIME OF PURCHASE
- ----------------------------------------------
UP TO 20% HIGH YIELD SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE SECURITIES
- ----------------------------------------------
BENCHMARK: MERRILL LYNCH 1-3 YEAR
GOVERNMENT BOND INDEX
- ----------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------------
CUSIP NO.: 552-913-238
PORTFOLIO MANAGERS
MICHELE A. KREISLER AND SCOTT F. RICHARD
APPROACH
The Portfolio seeks value in the fixed income market without significant
sensitivity to changes in interest rates. The Portfolio invests primarily in
U.S. Government securities, investment grade and below investment grade
corporate bonds and mortgage securities, and, to a limited extent, non-dollar
denominated securities, regardless of maturity. The average duration of the
Portfolio is similar to that of the Merrill Lynch 1-3 Year Treasury Index, which
generally ranges between zero and 3 years. The Adviser uses futures, swaps and
other derivatives to manage the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The Adviser
makes securities and sector decisions based on the anticipated tradeoff between
long-run expected return and risk. The Adviser relies upon value measures,
including the attractiveness of the extra yield offered by non-Treasury
securities, the level of real interest rates, and the steepness of the yield
curve, to guide its decision regarding duration management, and country, sector
and security selection. Teams of portfolio managers implement strategies based
on these types of value measures. Sector teams seek specific bonds within each
sector, while a portfolio team seeks to ensure that the aggregate risk exposures
to changes in the level of interest rates and yield spreads match the
Portfolio's objective. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
27
<PAGE>
TARGETED DURATION PORTFOLIO (Not currently open) (Continued)
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
PERFORMANCE INFORMATION
No performance information is provided because the Targeted Duration Portfolio
had not commenced operations as of 12/31/99.
28
<PAGE>
BALANCED PORTFOLIO
OBJECTIVE
The Balanced Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests in a mix of equity and fixed income securities. The
Portfolio normally invests 45-75% of its assets in equity securities and 25-55%
of its assets in fixed income securities. The Portfolio may invest up to 25% of
its assets in foreign equity and foreign fixed income securities, including
emerging market securities. Equity securities generally will be issued by
larger corporations. The Portfolio's investments generally will include
mortgage securities and high yield securities (commonly called "junk bonds").
The Adviser uses futures, swaps and other derivatives in managing the
Portfolio.
GENERALLY 45-75% OF PORTFOLIO ASSETS INVESTED
IN EQUITIES, 25-55% IN FIXED INCOME
SECURITIES
- ----------------------------------------------
AT LEAST 25% OF PORTFOLIO ASSETS INVESTED IN
SENIOR FIXED INCOME SECURITIES
- ----------------------------------------------
UP TO 25% OF PORTFOLIO ASSETS INVESTED IN
FOREIGN EQUITY AND FOREIGN FIXED INCOME
SECURITIES
- ----------------------------------------------
UP TO 10% OF PORTFOLIO ASSETS INVESTED IN
BRADY BONDS (A TYPE OF EMERGING MARKET FIXED
INCOME SECURITY)
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN
$1 BILLION
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME
SECURITIES GENERALLY GREATER THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: WEIGHTED BLEND OF
QUARTERLY RETURNS OF
60% S&P 500 INDEX
40% SALOMON BROAD
INVESTMENT GRADE
INDEX
- ----------------------------------------------
TICKER SYMBOL: MPBAX
- ----------------------------------------------
CUSIP NO.: 552-913-675
PORTFOLIO MANAGERS
THOMAS L. BENNETT, GARY G. SCHLARBAUM AND
HORACIO A. VALEIRAS
PROCESS
The Adviser determines the Portfolio's equity and fixed income investment
strategies separately and then determines the mix of those strategies that will
maximize the return available from both the stock and bond markets, based on
proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities. The Adviser also measures various types of risk, focusing
on the level of real interest rates and credit risk. In determining whether
securities should be sold, the Adviser considers factors such as deteriorating
earnings, cash flow and other fundamentals, as well as high valuations relative
to the Portfolio's investment universe.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
29
<PAGE>
BALANCED PORTFOLIO (Continued)
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. A substantial portion of the
Portfolio's investments may be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These risks are greater in emerging market
countries.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect the Portfolio's
overall performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- ------------------------------------------------------------------------------
BALANCED PORTFOLIO
- ------------------------------------------------------------------------------
Commenced operations on December 31, 1992
1993 10.37%
1994 -1.93%
1995 27.34%
1996 15.37%
1997 19.61%
1998 15.40%
1999 16.29%
- ------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- ------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.06% -6.73%
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 16.29 21.04 -0.85 12.21
- -------------------------------------------------------------------------------------------
FIVE YEARS 18.72 28.55 7.74 20.18
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
12/31/92 14.32 21.53 6.46 15.54
</TABLE>
* The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
30
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO
OBJECTIVE
The Multi-Asset-Class Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests in equity securities and fixed income securities of U.S.
and foreign issuers in accordance with the Adviser's target allocation among
certain classes. These securities may include, to a limited extent, emerging
market securities. The Portfolio's equity securities generally will be issued
by large corporations. The Portfolio's investments generally will include
mortgage securities and high yield securities (commonly called "junk bonds").
The Portfolio seeks to invest in a combination of asset classes that do not
move in tandem with each other, in order to improve potential return and
control the Portfolio's overall risks. The Portfolio's neutral position is
generally 50% domestic equity securities, 24% domestic fixed income securities,
14% foreign equity securities, 6% foreign fixed income securities and 6% high
yield securities. The Adviser uses futures, swaps and other derivatives in
managing the Portfolio.
PROCESS
The Adviser makes strategic judgments based on proprietary measures used to
compare the relative risks and returns of stock and bond markets around the
world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment. The Adviser also measures various
types of risk, focusing on the level of real interest rates and credit risk. In
determining whether securities should be sold, the Adviser considers factors
such as deteriorating earnings, cash flows and other fundamentals, as well as
high valuations relative to the Portfolio's investment opportunities.
GENERALLY AT LEAST 65% OF PORTFOLIO ASSETS
INVESTED IN ISSUERS LOCATED IN AT LEAST 3
COUNTRIES, INCLUDING THE U.S.
- ----------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER THAN
$1 BILLION
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED INCOME
SECURITIES GENERALLY GREATER THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: A WEIGHTED BLEND OF QUARTERLY
RETURNS OF
50% S&P 50 INDEX
24% SALOMON BROAD INVESTMENT GRADE
INDEX
14% MSCI EAFE INDEX
6% SALOMON WORLD GOVERNMENT BOND
EX-U.S. INDEX
6% CS FIRST BOSTON HIGH YIELD
INDEX
- ----------------------------------------------
TICKER SYMBOL: MPGBX
- ----------------------------------------------
CUSIP NO.: 552-913-634
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
THOMAS L. BENNETT, BARTON M. BIGGS, J. DAVID
GERMANY, GARY G. SCHLARBAUM AND HORACIO A.
VALEIRAS
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
31
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Continued)
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. A substantial portion of the
Portfolio's investments may be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These risks are greater in emerging market
countries.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect the Portfolio's overall
performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- ----------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- ----------------------------------------------------------------------------
Commenced operations on July 29, 1994
1995 24.62%
1996 15.93%
1997 17.48%
1998 13.87%
1999 16.84%
- ----------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- ----------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.82% -8.64%
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON
BROAD
MULTI-ASSET- INVESTMENT
CLASS S&P 500 GRADE MSCI EAFE
PORTFOLIO INDEX INDEX INDEX BLENDED INDEX *
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 16.84 21.04 -0.85 26.96 13.91
- ----------------------------------------------------------------------------
FIVE YEARS 17.69 28.55 7.74 12.83 19.20
- ----------------------------------------------------------------------------
SINCE INCEPTION 15.90 26.40 6.92 11.38 17.65
7/29/94
</TABLE>
* The Blended Index is an unmanaged index comprised of 50% S&P 500 Index, 24%
Salomon Broad Investment Grade Index, 14% MSCI EAFE Index, 6% Salomon World
Government Bond Ex-U.S. Index and 6% CS First Boston High Yield Index.
Previously, the Blended Index included the Salomon High Yield Index as its
high yield component. The Adviser believes that the CS First Boston High
Yield Index has a more comprehensive coverage of geographic regions and types
of securities in which the Portfolio may invest. If the Blended Index were to
include the Salomon High Yield Index, its performance would have been 13.81%
for the 1 year period, 19.24% for the 5 year period and 17.68% since
inception.
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
32
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds
to disclose in the table to the right the fees and expenses that you may pay
if you buy and hold shares of the Portfolios. The Portfolios do not charge any
sales loads or other fees when you purchase or redeem shares.
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
EQUITY PORTFOLIO .500% NONE .120% .620%
- -----------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO .500% NONE .120% .620%
- -----------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750% NONE .120% .870%
- -----------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO 1.000% NONE .330% 1.330%***
- -----------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO .750% NONE .110% .860%
- -----------------------------------------------------------------------------
VALUE PORTFOLIO .500% NONE .130% .630%
- -----------------------------------------------------------------------------
CASH RESERVES PORTFOLIO .250% NONE .120% .370%***
- -----------------------------------------------------------------------------
DOMESTIC FIXED INCOME
PORTFOLIO .375% NONE .135% .510%***
- -----------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375% NONE .105% .480%
- -----------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO .375% NONE .105% .480%
- -----------------------------------------------------------------------------
GLOBAL FIXED INCOME
PORTFOLIO .375% NONE .165% .540%
- -----------------------------------------------------------------------------
HIGH YIELD PORTFOLIO .450% NONE .115% .565%
- -----------------------------------------------------------------------------
INTERMEDIATE DURATION
PORTFOLIO .375% NONE .115% .490%
- -----------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME
PORTFOLIO .375% NONE .145% .520%
- -----------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO .300% NONE .110% .410%
- -----------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME
PORTFOLIO .450% NONE .130% .580%***
- -----------------------------------------------------------------------------
MUNICIPAL PORTFOLIO .375% NONE .175%* .550%***
- -----------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME
PORTFOLIO .375% NONE .115% .490%
- -----------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO .375% NONE .195%** .570%***
- -----------------------------------------------------------------------------
BALANCED PORTFOLIO .450% NONE .130% .580%
- -----------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .650% NONE .150% .800%***
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements and/or voluntary waivers.
* Other Expenses are restated to exclude extraordinary expenses incurred as a
result of the Municipal Portfolio's reorganization. Had these expenses been
included, Other Expenses would have been .225%.
** Other Expenses are based on estimated amounts for the current year.
*** The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown in the table below. Fee waivers and/or expense reimbursements are
voluntary and the Adviser reserves the right to terminate any waiver and/or
reimbursement at any time and without notice.
<TABLE>
<CAPTION>
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
-------------------------------------------------------------------------------
<S> <C>
SMALL CAP GROWTH PORTFOLIO 1.150%
-------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO .320%
-------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO .500%
-------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO .580%
-------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO .500%
-------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO .450%
-------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO .780%
-------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
EXAMPLE
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. For Portfolios that
have been in operation for 6 months or less, the example is limited to 3 years.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be equal to the amounts reflected in the table to the right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
EQUITY PORTFOLIO $ 63 $199 $346 $ 774
- ----------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO $ 63 $199 $346 $ 774
- ----------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO $ 89 $278 $482 $1,073
- ----------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO $135 $421 $729 $1,601
- ----------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO $ 88 $274 $477 $1,061
- ----------------------------------------------------------------------------------
VALUE PORTFOLIO $ 64 $202 $351 $ 786
- ----------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO $ 38 $119 $208 $ 468
- ----------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO $ 52 $164 $285 $ 641
- ----------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO $ 49 $154 $269 $ 604
- ----------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO $ 49 $154 $269 $ 604
- ----------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO $ 55 $173 $302 $ 677
- ----------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO $ 58 $181 $316 $ 708
- ----------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO $ 50 $157 $274 $ 616
- ----------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO $ 53 $167 $291 $ 653
- ----------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO $ 42 $132 $230 $ 518
- ----------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO $ 59 $186 $324 $ 726
- ----------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO $ 56 $176 $307 $ 689
- ----------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO $ 50 $157 $274 $ 616
- ----------------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO $ 58 $183 $ -- $ --
- ----------------------------------------------------------------------------------
BALANCED PORTFOLIO $ 59 $186 $324 $ 726
- ----------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO $ 82 $255 $444 $ 990
</TABLE>
INVESTMENT STRATEGIES AND RELATED RISKS
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
ADRs, rights, warrants and shares of investment companies. The Portfolios may
invest in equity securities that are publicly traded on securities exchanges or
over-the-counter or in equity securities that are not publicly traded.
Securities that are not publicly traded may be more difficult to sell and their
value may fluctuate more dramatically than other securities. Each Portfolio may
purchase shares of other investment companies subject to limits imposed by the
Investment Company Act of 1940 ("1940 Act") and any other applicable law.
Smaller companies carry greater risk than larger companies. The securities
issued by smaller companies may be less liquid. In addition, smaller companies
may have more limited markets, financial resources and product lines, and may
lack the depth of management of larger companies.
ADRs are U.S.-dollar denominated securities that represent claims to shares of
foreign stocks. The Portfolios treat ADRs as U.S. securities for purposes of
foreign investment limitations.
Growth stocks generally have higher growth rates, betas, and price/earnings
ratios, and lower yields than the stock market in general as measured by an
appropriate stock market index. Value stocks are stocks that are deemed by the
Adviser to be undervalued relative to the stock market in general. The Adviser
makes value decisions guided by the appropriate market index, based on value
characteristics such as price/earnings and price/book ratios. Value stocks
generally are dividend paying common stocks. However, non-dividend paying
stocks also may be selected for their value characteristics.
IPOS
Equity Portfolios of the Fund may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquisition. A Portfolio's purchase
of shares issued in IPOs exposes it to the risks associated with companies that
have little operating history as public companies, as well as to the risks
inherent in those sectors of the market where these new issuers operate. The
market for IPO issuers has been volatile, and share prices of newly-public
companies have fluctuated in significant amounts over short periods of time.
34
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
FIXED INCOME SECURITIES
Fixed income securities are securities that pay a fixed rate of interest until
a stated maturity date. Fixed income securities include U.S. Government
securities, securities issued by federal or federally sponsored agencies
("agencies"), corporate bonds and notes, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds,
Yankee Bonds, repurchase agreements, commercial paper and cash equivalents.
These securities are subject to risks related to changes in interest rates and
in the financial health or credit rating of the issuers. 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.
Adjustable rate 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. 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. Fixed income
securities include inverse floaters, which are designed to respond in a
targeted fashion to changes in interest rates.
Fixed income securities may be called (redeemed by the issuer) prior to final
maturity. If a callable security is called, a Portfolio may have to reinvest
the proceeds at a lower rate of interest.
DURATION
The average duration of a portfolio of fixed income securities represents its
exposure to changing interest rates. A portfolio with a lower average duration
generally will experience less price volatility in response to changes in
interest rates than a portfolio with a higher average duration.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as junk bonds or high yield, high risk securities. These securities offer a
higher yield than other higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high
yield securities are influenced more by changes in the financial and business
position of the issuing company than by changes in interest rates when compared
to investment grade securities.
MORTGAGE SECURITIES
These are fixed income securities that derive their value from or represent
interests in a pool of mortgages or mortgage securities. Mortgage securities
are subject to prepayment risk--the risk that, as interest rates fall,
borrowers will refinance their mortgages and "prepay" principal. A portfolio
holding mortgage securities that are experiencing prepayments will have to
reinvest these 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. It can be difficult
to measure precisely the remaining life of a mortgage security or the average
life of a portfolio of such securities.
EUROBONDS
Eurobonds 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.
BRADY BONDS
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).
YANKEE BONDS
Yankee bonds are U.S.-dollar denominated debt obligations issued by foreign
governments and corporations and sold in the United States. They are considered
U.S. securities for purposes of Portfolio investments, except for the Domestic
Fixed Income Portfolio.
35
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
FOREIGN SECURITIES
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. 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 an investing portfolio's
investment. There also can be difficulty obtaining and enforcing judgments
against issuers in foreign countries. 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.
FOREIGN CURRENCY
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since investing
portfolios must convert the value of foreign securities into dollars, changes
in currency exchange rates can increase or decrease the U.S. dollar value of
the portfolios' assets. The Adviser may use derivatives to offset this risk.
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. In addition, 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, the market may be dominated by
a few issuers or sectors. 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 by foreign investors.
DERIVATIVES AND OTHER INVESTMENTS
Derivatives are financial instruments whose value and performance are based on
the value and performance of another security or financial instrument.
Derivatives sometimes offer the most economical way of pursuing an investment
strategy, limiting risks or enhancing returns, although there is no guarantee
of success. Hedging strategies or instruments may not be available or practical
in all circumstances. Derivative instruments may be publicly traded or
privately negotiated. Derivatives used by the Adviser include futures
contracts, options contracts, forward contracts, swaps, collateralized mortgage
obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), and
structured notes.
A forward 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. Forward contracts are used to protect against uncertainty in the
level of future foreign currency exchange rates. A futures contract provides
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. The Portfolios may use futures contracts to gain exposure to an entire
market (e.g., stock index futures) or to control their exposure to changing
foreign currency exchange rates.
If a Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an agreed-
upon price. If a Portfolio "writes" an option, it sells to another person the
right to buy from or sell to the Portfolio a specific amount of a security or
futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument.
Payments may be based on currencies, interest rates, securities indices or
commodity indices. Swaps may be used to manage the maturity and duration of a
fixed income portfolio, or to gain exposure to a market without directly
investing in securities traded in that market. Structured investments are units
representing an interest in assets held in a trust that is not an investment
company as defined in the 1940 Act. The trust may pay a return based on the
income it receives from those assets, or it may pay a return based on a
specified index.
36
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
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").
A 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. A Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. A Portfolio will not use derivatives as an indirect way
of investing in assets that it cannot, as a matter of policy, invest in
directly.
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio (except the Cash Reserves Portfolio) may enter into
futures contracts and options on futures contracts for bona fide hedging
purposes to an unlimited extent. It also can enter into futures contracts and
options thereon for other purposes, provided that no more than 5% of the
Portfolio's total assets at the time of the transaction are required as margin
and option premiums to secure the Portfolio's obligations under such contracts.
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as margin and option premiums to secure the Portfolio's obligations under
future contracts and options thereon entered into for purposes other than bona
fide hedging.
Each Portfolio (except the Cash Reserves Portfolio) may invest in certain
derivatives, such as forwards, futures, options and mortgage derivatives as
well as when-issued securities that require a Portfolio to segregate some or
all of its cash or liquid securities to cover its obligations under those
instruments. This can cause a Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. A Portfolio in that position could be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
RISKS OF DERIVATIVES
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by a Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
Hedging the Portfolio's currency risks involves the risks of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
Mortgage derivatives are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMO or SMBS that a Portfolio holds, these price
movements may be significantly greater than those experienced by mortgage
securities generally, depending on whether the payments are predominantly based
on the principal or interest paid on the underlying mortgages. In addition, the
yield to maturity of IOs and POs is extremely sensitive to prepayment levels.
As a result, a high rate of prepayments can have a material effect on a
Portfolio's yield to maturity and could cause a Portfolio to suffer losses.
37
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in fixed income
securities for temporary defensive purposes, as described in the Statement of
Additional Information. If the Adviser incorrectly predicts the effects of
these changes, the defensive investments may adversely affect the Portfolio's
performance.
PORTFOLIO TURNOVER
Consistent with their investment policies, the Portfolios 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. Nonetheless, short-term trading activities that result
in high turnover rates are not incompatible with a stated objective of long-
term capital growth or other long-term goals, and can lead to gains that may
increase share value.
NON-DIVERSIFICATION OF INVESTMENTS
A Portfolio of investments in a small number of issuers or industries or in
securities denominated in only a few foreign currencies increases risk. A non-
diversified Portfolio may invest a greater percentage of its assets in the
securities of a single issuer than a diversified Portfolio. Portfolios that
invest in a relatively small number of issuers are more susceptible to risks
associated with a single economic, political or regulatory occurrence than a
more diversified portfolio might be. Some of those issuers also may present
substantial credit, currency or other risks.
PURCHASING SHARES
Institutional Class Shares are available to clients of the Adviser with
combined investments of $5,000,000 and corporations or other institutions such
as trusts, foundations or broker-dealers purchasing for the accounts of others
(Shareholder Organizations).
Institutional Class Shares of each Portfolio, except for the Cash Reserves
Portfolio, may be purchased at the net asset value per share (NAV) next
determined after we receive your purchase order. Institutional Class Shares of
the Cash Reserves Portfolio may be purchased at the NAV next determined after
we receive your purchase order and the Fund's Custodian Bank, The Chase
Manhattan Bank ("Chase") receives monies credited by a Federal Reserve Bank
("Federal Funds").
INITIAL PURCHASE BY MAIL
You may open an account, subject to acceptance by MAS Funds, by completing and
signing an Account Registration Form provided by MAS Funds' Client Services
Group ("Client Services") and mailing it to MAS Funds c/o Miller Anderson &
Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 together with
a check payable to MAS Funds.
Please note that payments to investors who redeem shares purchased by check
will not be made until payment of the purchase has been collected, which may
take up to eight business days after purchase. You can avoid this delay by
purchasing shares by wire.
INITIAL PURCHASE BY WIRE
You may purchase Institutional Class Shares of each Portfolio by wiring Federal
Funds to Chase. You should forward a completed Account Registration Form to
Client Services in advance of the wire. For all Portfolios, except the Cash
Reserves Portfolio, notification must be given to Client Services at 1-800-354-
8185 prior to the determination of NAV. See the section below entitled
"Valuation of Shares." (Prior notification must also be received from investors
with existing accounts.) Instruct your bank to send a Federal Funds wire in a
specified amount to Chase using the following wire instructions:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
38
<PAGE>
PURCHASING SHARES (Continued)
You can also make purchases in the Cash Reserves Portfolio by Federal Funds
wire to Chase. If we receive notification of your order prior to 12:00 noon
(Eastern Time) and Chase receives the funds the same day, then your purchase
will become effective and begin to earn income on that day. If we receive
notification of your order after 12:00 noon (Eastern Time), then your purchase
will be effective on the next business day.
ADDITIONAL INVESTMENTS
You may make additional investments of Institutional Class Shares (minimum
additional investment $1,000) at the NAV next determined after the request is
received in good order, by mailing a check (payable to MAS Funds) to Client
Services at the address noted under Initial Purchase by Mail or by wiring
Federal Funds to Chase as outlined above. For all Portfolios, except the Cash
Reserves Portfolio, notification must be given to Client Services at 1-800-354-
8185 prior to the determination of NAV. For the Cash Reserves Portfolio, Client
Services must receive notification of your Federal Funds wire by 12:00 noon
(Eastern Time). We normally credit purchases made by check in the Cash Reserves
Portfolio at the NAV determined two business days after we receive the check.
OTHER PURCHASE INFORMATION
We may suspend the offering of shares, or any class of shares, of any Portfolio
or reject any purchase orders when we think it is in the best interest of the
Fund. We may waive the minimum initial and additional investment amounts in
certain cases.
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued unless you request them in writing. Certificates for fractional
shares, however, will not be issued.
REDEEMING SHARES
You may redeem shares of each Portfolio by mail, or, if authorized, by
telephone at no charge. The value of shares redeemed may be more or less than
the purchase price, depending on the NAV at the time of redemption. Each
Portfolio will redeem shares at the NAV next determined after the request is
received in good order.
BY MAIL
Requests should be addressed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP,
One Tower Bridge, West Conshohocken, PA 19428-0868.
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(c) Any required signature guarantees. Signature guarantees are required for
(1) redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s) and the registered address, and (2) share transfer
requests. Please contact Client Services for further details; and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE
If you have authorized the Telephone Redemption Option on the Account
Registration Form, you may request a redemption of shares by calling Client
Services at 1-800-354-8185 and requesting that the redemption proceeds be
mailed or wired to you. You cannot redeem shares by telephone if you hold share
certificates for those shares.
BY FACSIMILE
Written requests in good order for redemptions, exchanges and transfers may be
forwarded to the Fund via facsimile at (610) 940-5284. If you make a request
via facsimile, you must call Client Services to ensure that the Fund properly
received your instructions. The original request must be promptly mailed to MAS
Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We may suspend the right of redemption or postpone the
payment of redemption proceeds at times when the New York Stock Exchange
("NYSE") is closed, the Fund is closed or under other
39
<PAGE>
REDEEMING SHARES (Continued)
circumstances in accordance with interpretations or orders of the U.S.
Securities and Exchange Commission.
If we determine that it is in the best interest of other shareholders not to
pay redemption proceeds in cash, we may pay you partly or entirely by
distributing to you readily marketable securities held by the Portfolio from
which you are redeeming. You may incur brokerage charges when you sell those
securities.
VALUATION OF SHARES
We determine the NAV of the following Portfolios at the following times on each
day the Portfolio(s) is open for business:
. Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
. Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
. Balanced and Multi-Asset-Class Portfolios as of the later of the close of the
NYSE or one hour after the close of the bond markets (normally 4:00 p.m.
Eastern Time).
. Cash Reserves Portfolio as of 12:00 noon (Eastern Time).
Each Portfolio values its securities at market value, except the Cash Reserves
Portfolio which values its securities using amortized cost valuation. When no
quotations are readily available for securities or when the value of securities
has been materially affected by events occurring after the close of the market,
we will determine the value for those securities in good faith at fair value
using methods approved by the Board of Trustees.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In
addition, the Cash Reserves Portfolio is closed on Columbus Day and Veterans
Day. The value of portfolio securities may change on a day when you cannot
purchase or redeem shares if a Portfolio invests in foreign securities that
trade on days when the Fund is closed.
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE
You may exchange each Portfolio's Institutional Class Shares for Institutional
Class Shares of the Fund's other Portfolios based on their respective NAVs. The
exchange privilege is only available with respect to Portfolios offering
Institutional Class Shares that are qualified for sale in your state of
residence. We charge no fee for exchanges. You should send exchange requests to
MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868, or by facsimile with a follow-up phone call.
Exchange requests can also be made by telephone, provided the telephone
redemption option has been authorized. We reserve the right to change the terms
or conditions of the exchange privilege upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and
raise its expenses. Therefore, we may not accept any request for an exchange
when we think the exchange privilege is being used as a tool for market timing,
and we may bar a shareholder who trades excessively from making further
purchases for an indefinite period.
TAXES
Income dividends you receive (except from the Municipal Portfolio) will be
taxable as ordinary income, whether you receive them in cash or in additional
shares. Corporate shareholders may be entitled to a dividends-received
deduction for the portion of dividends they receive which are attributable to
dividends received by such Portfolios from U.S. corporations. Capital gain
distributions may be taxable at different rates depending on the length of time
the Fund holds its assets.
The Municipal Portfolio intends to pay "exempt-interest" dividends which are
excluded from your gross income for federal income tax purposes. When you
receive exempt-interest dividends they may be subject to state and local taxes,
although some states allow you to exclude that portion of a portfolio's tax-
exempt income which is accountable to municipal securities issued within your
state of residence.
40
<PAGE>
GENERAL SHAREHOLDER INFORMATION (Continued)
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign
income taxes that they paid.
Distributions paid in January but declared by a Portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
PORTFOLIO MONTHLY QUARTERLY ANNUALLY
<S> <C> <C> <C>
EQUITY X
- ----------------------------------------------------------------------------------------
MID CAP GROWTH X
- ----------------------------------------------------------------------------------------
MID CAP VALUE X
- ----------------------------------------------------------------------------------------
SMALL CAP GROWTH X
- ----------------------------------------------------------------------------------------
SMALL CAP VALUE X
- ----------------------------------------------------------------------------------------
VALUE X
- ----------------------------------------------------------------------------------------
CASH RESERVES X
- ----------------------------------------------------------------------------------------
DOMESTIC FIXED INCOME X
- ----------------------------------------------------------------------------------------
FIXED INCOME X
- ----------------------------------------------------------------------------------------
FIXED INCOME II X
- ----------------------------------------------------------------------------------------
GLOBAL FIXED INCOME X
- ----------------------------------------------------------------------------------------
HIGH YIELD X
- ----------------------------------------------------------------------------------------
INTERMEDIATE DURATION X
- ----------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME X
- ----------------------------------------------------------------------------------------
LIMITED DURATION X
- ----------------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME X
- ----------------------------------------------------------------------------------------
MUNICIPAL X
- ----------------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME X
- ----------------------------------------------------------------------------------------
TARGETED DURATION X
- ----------------------------------------------------------------------------------------
BALANCED X
- ----------------------------------------------------------------------------------------
MULTI-ASSET-CLASS X
</TABLE>
If any net gains are realized from the sale of underlying securities, the
Portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
41
<PAGE>
FUND MANAGEMENT
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in
1969. The Adviser is wholly-owned by indirect subsidiaries of Morgan Stanley
Dean Witter & Co., and is a division of Morgan Stanley Dean Witter Investment
Management ("MSDW"). 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 November 30, 1999, Morgan Stanley Dean Witter Investment
Management had in excess of $177 billion in assets under management.
The Adviser makes investment decisions for the Fund's Portfolios and places
each Portfolio's purchase and sales orders. Each Portfolio, in turn, pays the
Adviser an annual advisory fee calculated by applying a quarterly rate. The
table below shows the Adviser's annual contractual and actual rates of
compensation for the Fund's 1999 fiscal year.
SUB ADVISER
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors") serves as Sub-
Adviser to the Cash Reserves Portfolio. As Sub-Adviser, MSDW Advisors makes
day-to-day investment decisions for the Cash Reserves Portfolio and places the
Portfolio's purchase and sales orders. The Adviser pays MSDW Advisors 40% of
the fee the Adviser receives from the Cash Reserves Portfolio as compensation
for its sub-advisory services. MSDW Advisors, located at Two World Trade
Center, New York, New York 10048, is a wholly-owned subsidiary of MSDW. MSDW
Advisors develops, markets and manages a broad spectrum of proprietary mutual
funds that are sold by MSDW financial advisors and offers professional money
management services on a customized basis to individuals, institutional
investors and retirement plan sponsors. MSDW Advisors and its wholly-owned
subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various
investment advisory and administrative capacities to 100 investment companies
and other portfolios with net assets under management of approximately $145
billion as of December 31, 1999.
<TABLE>
<CAPTION>
CONTRACTUAL FY 1999
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- ------------------------------------------------------------------------
<S> <C> <C>
EQUITY PORTFOLIO .500 .500
- ------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO .500 .500
- ------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO .750 .750
- ------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO* 1.000 .850
- ------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO .750 .750
- ------------------------------------------------------------------------
VALUE PORTFOLIO .500 .500
- ------------------------------------------------------------------------
CASH RESERVES PORTFOLIO* .250 .212
- ------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO* .375 .375
- ------------------------------------------------------------------------
FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO .375 .375
- ------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------
HIGH YIELD PORTFOLIO+ .450 .375
- ------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO .375 .375
- ------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO .300 .300
- ------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME PORTFOLIO* .450 .450
- ------------------------------------------------------------------------
MUNICIPAL PORTFOLIO* .375 .288
- ------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO .375 .375
- ------------------------------------------------------------------------
TARGETED DURATION PORTFOLIO* .375 --
- ------------------------------------------------------------------------
BALANCED PORTFOLIO .450 .450
- ------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO* .650 .627
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Small Cap Growth Portfolio, the Cash Reserves
Portfolio, the Domestic Fixed Income Portfolio, the Multi-Market Fixed Income
Portfolio, the Municipal Portfolio, the Targeted Duration Portfolio and the
Multi-Asset-Class Portfolio to keep Total Operating Expenses from exceeding
1.150%, .320%, .500%, .580%, .500%, .450%, and .780% respectively.
+ Effective October 1, 1999, the Management Fee for the High Yield Portfolio
increased from .375% to .450%.
42
<PAGE>
FUND MANAGEMENT (Continued)
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios is as follows:
DALE R. ALBRIGHT, Vice President, MSDW Advisors, has served as Portfolio
Manager/Analyst at MSDW Advisors since 1990. He serves as a Portfolio Manager
for MSDW Advisors' taxable money market funds. He joined the management team
for the Cash Reserves Portfolio in 1999.
ROBERT E. ANGEVINE, Principal, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
ARDEN C. ARMSTRONG, Managing Director, MSDW, joined MAS in 1986. She joined the
management team for the Mid Cap Growth Portfolio in 1990, the Equity Portfolio
in 1994 and the Small Cap Growth Portfolio in 1998.
W. DAVID ARMSTRONG, Managing Director, MSDW, joined MSDW Investment Management
as a Portfolio Manager in 1998. He served as a Senior Vice President and
Manager of U.S. proprietary trading at Lehman Brothers from 1995-1997. He
joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
RICHARD M. BEHLER, Principal, MSDW, joined MAS in 1995. He served as a
Portfolio Manager from 1992 through 1995 for Moore Capital Management. He
joined the management team for the Value Portfolio in 1996.
THOMAS L. BENNETT, Managing Director, MSDW, joined MAS in 1984. He joined the
management team for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio in 1987, the Fixed Income II Portfolio in 1990, the Special
Purpose Fixed Income and Balanced Portfolios in 1992, the Multi-Asset-Class
Portfolio in 1994 and the Multi-Market Fixed Income Portfolio in 1997.
BARTON M. BIGGS, Managing Director, MSDW since 1975, Chairman of Morgan Stanley
Dean Witter Investment Management Inc. since 1980 and a director of Morgan
Stanley Group, Inc. He is also a director and chairman of various registered
investment companies to which Morgan Stanley Dean Witter Investment Management
Inc. and certain of its affiliates provide investment advisory services. He
joined the management team for the Multi-Asset-Class Portfolio in 1999.
DAVID P. CHU, Principal, MSDW, joined MAS in 1998. He served as Senior Equity
Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997 for NationsBank
and its subsidiary, TradeStreet Investment Associates. He joined the management
team for the Mid Cap Growth and Small Cap Growth Portfolios in 1998.
STEVEN B. CHULIK, Vice President, MSDW, joined MAS in 1997. He served as a
Quantitative Hedge Fund Analyst at IBJ Schroder Bank and Trust from 1994 to
1995. He attended the Wharton School of the University of Pennsylvania from
1995 to 1997 and received his MBA in 1997. He served as an Equity Analyst at
MAS from 1997 to 1999. He joined the management team for the Mid Cap Growth and
Small Cap Growth Portfolios in 1999.
BRADLEY S. DANIELS, Principal, MSDW, joined MAS in 1985. He joined the
management team for the Small Cap Value Portfolio in 1986 and the Mid Cap Value
Portfolio in 1994.
KENNETH B. DUNN, Managing Director, MSDW, joined MAS in 1987. He joined the
management team for the Fixed Income Portfolio in 1987, the Special Purpose
Fixed Income Portfolio in 1992 and the Multi-Market Fixed Income Portfolio in
1997.
STEVEN EPSTEIN, Vice President, MSDW, joined MAS as a Financial Analyst in
1996. He attended the Wharton School, University of Pennsylvania, from 1994-
1996, receiving an MBA. He joined the management team for the Equity Portfolio
in 2000.
STEPHEN F. ESSER, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the High Yield Portfolio in 1989 and the Multi-Market Fixed
Income Portfolio in 1997.
43
<PAGE>
FUND MANAGEMENT (Continued)
WILLIAM B. GERLACH, Principal, MSDW, joined MAS in 1991. He served as a
Research Associate from 1991 to 1996 and has served as an Equity Portfolio
Manager since 1996. He joined the management team for the Small Cap Value and
Mid Cap Value Portfolios in 1996.
J. DAVID GERMANY, Managing Director, MSDW, joined MAS in 1991. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the Multi-
Market Fixed Income Portfolio in 1997.
JAMES J. JOLINGER, Principal, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
VITALY V. KORCHEVSKY, Vice President, MSDW, joined MAS as a Portfolio Manager
in 1999. He served as an Analyst/Portfolio Manager for Gardner Lewis Asset
Management from 1998-1999, and as a Portfolio Manager for Crestar Asset
Management Co. from 1995-1998. He joined the management team for the Mid Cap
Value and Small Cap Value Portfolios in 2000.
NICHOLAS J. KOVICH, Managing Director, MSDW, joined MAS as a Portfolio Manager
in 1988. He joined the management team for the Value Portfolio in 1997.
BRIAN KRAMP, Principal, MSDW, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
CoreStates Investment Advisors, from 1985 to 1997. He joined the management
team for the Equity Portfolio in 1998.
STEVEN K. KREIDER, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the Municipal Portfolio in 1992.
MICHELE A. KREISLER, Principal, MSDW, joined MAS in 1994. She received her
Ph.D. in Finance from the Wharton School of the University of Pennsylvania in
1996. She served as a Fixed Income Analyst from 1994 to 1995 and as a Portfolio
Manager from 1995 to 1998. She joined the management team of the Targeted
Duration and Limited Duration Portfolios in 1998.
MICHAEL KUSHMA, Principal, MSDW, joined Morgan Stanley Dean Witter Investment
Management Inc. in 1987. He served as a Global Fixed Income Strategist from
1987 to 1995, and has served as the Senior Global Fixed Income Portfolio
Manager since 1995. He joined the management team for the Global Fixed Income
and International Fixed Income Portfolios in 1996.
CHRIS LEAVY, Vice President, MSDW, joined MAS as a Portfolio Manager in 1997.
He served as a Portfolio Manager for Capitoline Investment Services from 1995-
1997; a Portfolio Manager for Premier Trust Company from 1994 to 1995; and as a
Research Analyst for Leavy Investment Management from 1993 to 1994. He joined
the management team for the Equity Portfolio in 2000.
GORDON W. LOERY, Principal, MSDW, joined MAS in 1996. He served as a Fixed
Income Analyst at Morgan Stanley Asset Management Inc. from 1990 to 1996. He
joined the management team for the High Yield Portfolio in 1999.
DEANNA L. LOUGHNANE, Principal, MSDW, joined MAS as a Financial Analyst in
1997. She served as a Vice President and Senior Corporate Bond Analyst for
Putnam Investments from 1993-1997. She joined the management team for the High
Yield Portfolio in 2000.
ANGELO G. MANIOUDAKIS, Principal, MSDW, joined MAS in 1993. He served as a
Fixed Income Analyst from 1993 to 1995. From 1995 to 1998, he served as a Fixed
Income Portfolio manager. He joined the management team for the Intermediate
Duration Portfolio in 1998 and the Domestic Fixed Income and Fixed Income II
Portfolios in 2000.
ROBERT J. MARCIN, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the Value Portfolio in 1990 and the Equity Portfolio in
1994.
PAUL F. O'BRIEN, Principal, MSDW, joined MAS in 1996. He served as Head of
European Economics from 1993 through 1995 for J.P. Morgan. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1996.
44
<PAGE>
FUND MANAGEMENT (Continued)
JONATHAN R. PAGE, Senior Vice President, MSDW Advisors, has served as Portfolio
Manager at MSDW Advisors since 1975. He serves as a Senior Portfolio Manager
for MSDW Advisors' taxable money market funds. He joined the management team
for the Cash Reserves Portfolio in 1999.
SCOTT F. RICHARD, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Limited Duration, Intermediate Duration and Advisory
Mortgage Portfolios in 1995, the Targeted Duration Portfolio in 1998 and the
Domestic Fixed Income and Fixed Income II Portfolios in 2000.
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
and International Fixed Income Portfolios in 1999.
ERIC F. SCHARPF, Vice President, MSDW, joined MAS as a Financial Analyst in
1997. He attended the Wharton School, University of Pennsylvania, from 1995-
1997, receiving an MBA, and served as a Financial Analyst for Salomon Brothers
from 1993-1995. He joined the management team for the Equity Portfolio in 2000.
GARY G. SCHLARBAUM, Managing Director, MSDW; Director, MAS Fund Distribution,
Inc., joined MAS in 1987. He joined the management team for the Equity and
Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992 and the
Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
ROBERTO M. SELLA, Managing Director, MSDW, joined MAS in 1992. He served as a
Financial Analyst from 1992-1998, and as a Portfolio Manager beginning in 1998.
He joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
NEIL STONE, Principal, MSDW, joined MAS in 1996. He served as Director of Fixed
Income Research at CS First Boston Corporation from 1985 to 1995, and as Vice
President of Mortgage Research at Morgan Stanley from 1995 to 1996. He joined
the management team for the Municipal Portfolio in 1998.
HORACIO A. VALEIRAS, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Multi-Asset-Class Portfolio in 1994 and the Balanced
Portfolio in 1996.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
45
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. Certain information
reflects financial results for a single Portfolio share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). As of the fiscal year ended September 30, 1999, the Targeted
Duration Portfolio had not commenced operations. This information has been
extracted from the Fund's financial statements which were audited by
PricewaterhouseCoopers LLP whose report, along with the Fund's financial
statements, are incorporated by reference into the Fund's Statement of
Additional Information and are included in the Fund's September 30, 1999 Annual
Report to Shareholders.
<TABLE>
<CAPTION>
NET GAINS OR DIVIDEND
NET ASSET LOSSES DISTRIBUTIONS CAPITAL GAIN NET ASSET
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS VALUE-
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER TOTAL END OF
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1999 $20.44 $ 0.14 $ 5.24 $ 5.38 ($0.17) ($5.83) -- ($6.00) $19.82
1998 29.45 0.24 (1.04) (0.80) (0.28) (7.93) -- (8.21) 20.44
1997 25.67 0.36 8.22 8.58 (0.40) (4.40) -- (4.80) 29.45
1996 24.43 0.50 3.26 3.76 (0.50) (2.02) -- (2.52) 25.67
1995 21.05 0.52 4.55 5.07 (0.52) (1.17) -- (1.69) 24.43
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/30/90)
1999 $18.62 ($0.01) $10.65 $10.64 ($0.00)& ($3.49) -- ($3.49) $25.77
1998 21.84 (0.03) 0.24 0.21 -- (3.43) -- (3.43) 18.62
1997 20.53 (0.01) 4.75 4.74 -- (3.43) -- (3.43) 21.84
1996 18.60 0.01 4.70 4.71 (0.03) (2.75) -- (2.78) 20.53
1995 16.29 0.03 4.21 4.24 (0.03) (1.90) -- (1.93) 18.60
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1999+++ $18.12 $0.12 $5.01 $5.13 ($0.06) ($1.31) -- ($1.37) $21.88
1998+++ 21.80 0.08 (1.53) (1.45) (0.04) (2.19) -- (2.23) 18.12
1997+++ 14.49 0.05 8.37 8.42 (0.10) (1.01) -- (1.11) 21.80
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) -- (1.59) 14.49
1995 10.00 0.55### 2.90 3.45 -- -- -- -- 13.45
SMALL CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 6/30/98)
1999+++ $ 8.57 ($0.13) $23.84 $23.71 -- -- -- -- $32.28
1998 10.00 (0.01) (1.42) (1.43) -- -- -- -- 8.57
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1999+++ $17.37 $ 0.13 $3.65 $ 3.78 ($0.07) ($2.46) -- ($2.53) $18.62
1998 24.97 0.16 (4.33) (4.17) (0.14) (3.29) -- (3.43) 17.37
1997 19.64 0.15 8.39 8.54 (0.11) (3.10) -- (3.21) 24.97
1996 18.28 0.18 3.62 3.80 (0.20) (2.24) -- (2.44) 19.64
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) -- (2.07) 18.28
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1999+++ $15.16 $ 0.21 $ 1.11 $ 1.32 ($0.28) ($2.61) -- ($2.89) $13.59
1998 20.37 0.34 (3.38) (3.04) (0.36) (1.81) -- (2.17) 15.16
1997+++ 15.61 0.34 5.75 6.09 (0.30) (1.03) -- (1.33) 20.37
1996 14.89 0.30 2.20 2.50 (0.32) (1.46) -- (1.78) 15.61
1995 12.63 0.31 3.34 3.65 (0.31) (1.08) -- (1.39) 14.89
<CAPTION>
NET ASSETS- RATIO OF RATIO OF
END OF EXPENSES TO NET INCOME PORTFOLIO
TOTAL PERIOD AVERAGE TO AVERAGE TURNOVER
RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
<S> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1999 30.15% $ 635,593 0.62% 0.64% 103%
1998 (2.66) 872,662 0.61 0.94 77
1997 38.46 1,312,547 0.60 1.30 85
1996 16.48 1,442,261 0.60 1.95 67
1995 26.15 1,597,632 0.61 2.39 67
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/30/90)
1999 64.27% $785,659 0.62% (0.07%) 208%
1998 2.00 429,955 0.62 (0.13) 172
1997 28.05 446,963 0.63 (0.07) 134
1996 28.81 403,281 0.60 0.04 141
1995 30.56 373,547 0.61 0.21 129
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1999+++ 29.44% $721,015 0.87% 0.57% 244%
1998+++ (6.92) 420,555 0.90 0.40 213
1997+++ 61.40 220,260 0.90++ 0.28 184
1996 22.30 50,449 0.88++ 1.61 377
1995 34.50 4,507 0.93*++ 10.13*### 639###
SMALL CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 6/30/98)
1999+++ 276.66% $93,229 1.18%++ (0.50%) 300%
1998 (14.30) 3,004 1.16*++ (0.46)* 67
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1999+++ 23.83% $897,629 0.86% 0.70% 251%
1998 (18.34) 716,729 0.86 0.71 163
1997 49.81 897,396 0.86 0.70 107
1996 24.00 585,457 0.86 0.99 145
1995 18.39 430,368 0.87 1.20 119
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1999+++ 8.30% $1,079,356 0.63% 1.38% 53%
1998 (16.41) 2,288,236 0.60 1.76 56
1997+++ 41.25 3,542,772 0.62 1.93 46
1996 18.41 1,844,740 0.61 2.07 53
1995 32.58 1,271,586 0.60 2.43 56
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Continued)
NET GAINS DIVIDEND
NET ASSET OR LOSSES DISTRIBUTIONS CAPITAL GAIN NET ASSET
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS VALUE-
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER TOTAL END OF
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1999 $1.000 $0.048 -- $0.048 ($0.048) -- -- ($0.048) $1.000
1998 1.000 .053 -- .053 (.053) -- -- (.053) 1.000
1997 1.000 .052 -- .052 (.052) -- -- (.052) 1.000
1996 1.000 .052 -- .052 (.052) -- -- (.052) 1.000
1995 1.000 .055 -- .055 (.055) -- -- (.055) 1.000
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/29/87)
1999 $11.40 $0.71 ($0.83) ($0.12) ($0.52) -- ($0.21)# ($0.73) $10.55
1998 11.27 0.73 0.32 1.05 (0.79) (0.13) -- (0.92) 11.40
1997 10.89 0.74 0.33 1.07 (0.67) (0.02) -- (0.69) 11.27
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61) 10.89
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23) 11.03
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1999+++ $12.22 $0.77 ($0.72) $0.05 ($0.71) -- ($0.30)# ($1.01) $11.26
1998+++ 12.22 0.78 0.14 0.92 (0.75) (0.17) -- (0.92) 12.22
1997+++ 11.83 0.80 0.50 1.30 (0.78) (0.13) -- (0.91) 12.22
1996 11.82 0.78 0.08 0.86 (0.79) (0.06) -- (0.85) 11.83
1995 10.93 0.80 0.69 1.49 (0.60) -- -- (0.60) 11.82
FIXED INCOME II PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1999 $11.69 $0.69 ($0.75) ($0.06) ($0.63) -- ($0.26)# ($0.89) $10.74
1998 11.46 0.61 0.40 1.01 (0.66) (0.12) -- (0.78) 11.69
1997 11.23 0.74 0.39 1.13 (0.79) (0.11) -- (0.90) 11.46
1996 11.33 0.70 (0.03) 0.67 (0.66) (0.08) (0.03)# (0.77) 11.23
1995 10.42 0.71 0.71 1.42 (0.51) -- -- (0.51) 11.33
GLOBAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/30/93)
1999 $11.03 $0.51 ($0.49) $0.02 ($0.44) ($0.19) -- ($0.63) $10.42
1998 10.64 0.55 0.38 0.93 (0.39) (0.15) -- (0.54) 11.03
1997+++ 11.01 0.60 (0.22) 0.38 (0.59) (0.16) -- (0.75) 10.64
1996 11.05 0.63 0.09 0.72 (0.71) (0.05) -- (0.76) 11.01
1995 10.20 0.71 0.81 1.52 (0.67) -- -- (0.67) 11.05
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1999+++ $8.99 $0.86 ($0.10) $0.76 ($0.79) ($0.04) ($0.15)# ($0.98) $8.77
1998+++ 10.15 0.85 (0.93) (0.08) (0.82) (0.26) -- (1.08) 8.99
1997+++ 9.32 0.86 0.87 1.73 (0.87) (0.03) -- (0.90) 10.15
1996 9.08 0.88 0.28 1.16 (0.92) -- -- (0.92) 9.32
1995 8.97 0.90 0.19 1.09 (0.85) (0.08) ($0.05)# (0.98) 9.08
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1999 $10.68 $0.72 ($0.65) $0.07 ($0.76) -- ($0.22)# ($0.98) $9.77
1998 10.48 0.58 0.28 0.86 (0.56) (0.10) -- (0.66) 10.68
1997+++ 10.28 0.61 0.27 0.88 (0.53) (0.15) -- (0.68) 10.48
1996 10.68 0.60 0.03 0.63 (0.65) (0.38) -- (1.03) 10.28
1995 10.00 0.69 0.42 1.11 (0.43) -- -- (0.43) 10.68
NET ASSETS- RATIO OF RATIO OF
END OF EXPENSES NET INCOME PORTFOLIO
TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
<S> <C> <C> <C> <C> <C>
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1999 4.93% $156,510 0.33%++ 4.77% N/A
1998 5.47 168,228 0.32++ 5.33 N/A
1997 5.32 98,464 0.33++ 5.20 N/A
1996 5.35 78,497 0.33++ 5.19 N/A
1995 5.57 44,624 0.33++ 5.45 N/A
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/29/87)
1999 (1.12%) $189,860 0.51% 6.09% 115%
1998 9.83 76,042 0.51++ 6.32 145
1997 10.20 96,954 0.51++ 6.48 217
1996 4.41 95,362 0.52++ 5.73 168
1995 14.33 36,147 0.51++ 6.80 313
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1999+++ 0.33% $4,338,939 0.48% 6.62% 103%
1998+++ 7.90 4,625,015 0.48 6.49 121
1997+++ 11.47 3,219,987 0.49 6.73 179
1996 7.63 1,790,146 0.48 6.77 162
1995 14.19 1,487,409 0.49 7.28 140
FIXED INCOME II PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1999 (0.57%) $384,893 0.48% 6.20% 106%
1998 9.23 443,923 0.50 6.19 92
1997 10.58 226,662 0.50 6.54 182
1996 6.12 191,740 0.50 6.06 165
1995 14.13 176,945 0.51 6.75 153
GLOBAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/30/93)
1999 (0.05%) $64,059 0.54% 4.83% 56%
1998 9.18 71,834 0.56 5.11 88
1997+++ 3.53 77,493 0.57 5.65 137
1996 6.83 67,282 0.60 5.25 133
1995 15.54 55,147 0.58 6.34 118
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1999+++ 8.81% $937,482 0.49% 9.61% 45%
1998+++ (1.17) 703,110 0.50 8.74 75
1997+++ 19.90 523,899 0.51 9.05 96
1996 13.83 289,810 0.49 10.04 115
1995 13.58 220,785 0.50 10.68 96
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1999 0.64% $50,513 0.49% 6.20% 97%
1998 8.57 116,891 0.52 5.84 131
1997+++ 8.93 72,119 0.55++ 5.93 204
1996 6.27 12,017 0.56++ 6.17 251
1995 11.39 19,237 0.52*++ 6.56* 168
</TABLE>
47
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
<TABLE>
<CAPTION>
NET GAINS DIVIDEND
NET ASSET OR LOSSES DISTRIBUTIONS CAPITAL GAIN NET ASSET
VALUE- NET ON SECURITIES TOTAL FROM (NET DISTRIBUTIONS VALUE-
BEGINNING INVESTMENT (REALIZED AND INVESTMENT INVESTMENT (REALIZED NET OTHER TOTAL END OF
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $10.75 $0.34 ($0.41) ($0.07) ($0.28) ($0.22) ($0.06)## ($0.56) $10.12
1998 10.19 0.45 0.56 1.01 (0.36) (0.09) -- (0.45) 10.75
1997 10.77 0.50 (0.44) 0.06 (0.38) (0.26) -- (0.64) 10.19
1996 11.01 0.52 0.12 0.64 (0.80) (0.08) -- (0.88) 10.77
1995 10.05 0.67 0.92 1.59 (0.63) -- -- (0.63) 11.01
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1999 $10.54 $0.68 ($0.31) $0.37 ($0.73) -- -- ($0.73) $10.18
1998 10.49 0.59 0.03 0.62 (0.57) -- -- (0.57) 10.54
1997 10.38 0.62 0.08 0.70 (0.59) -- -- (0.59) 10.49
1996 10.41 0.58 (0.03) 0.55 (0.58) -- -- (0.58) 10.38
1995 10.19 0.56 0.22 0.78 (0.55) -- ($0.01)# (0.56) 10.41
MULTI-MARKET FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/97)
1999 $9.86 $0.65 ($0.42) $0.23 ($0.63) -- -- ($0.63) $9.46
1998 10.00 0.56 (0.29) 0.27 (0.40) -- (0.01)# (0.41) 9.86
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1999 $11.96 $0.55 ($0.53) $0.02 ($0.59) -- -- ($0.59) $11.39
1998 11.64 0.54 0.28 0.82 (0.50) -- -- (0.50) 11.96
1997 11.23 0.53 0.40 0.93 (0.52) -- -- (0.52) 11.64
1996 10.75 0.51 0.49 1.00 (0.52) -- -- (0.52) 11.23
1995 10.04 0.59 0.71 1.30 (0.59) -- -- (0.59) 10.75
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1999 $12.33 $0.78 ($0.69) $0.09 ($0.73) ($0.04) ($0.33)# ($1.10) $11.32
1998 12.58 0.84 0.03 0.87 (0.85) (0.27) -- (1.12) 12.33
1997+++ 12.26 0.85 0.52 1.37 (0.87) (0.18) -- (1.05) 12.58
1996 12.53 0.83 0.08 0.91 (0.88) (0.30) -- (1.18) 12.26
1995 11.52 0.91 0.75 1.66 (0.65) -- -- (0.65) 12.53
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1999+++ $13.46 $0.45 $1.71 $2.16 ($0.43) ($1.36) -- ($1.79) $13.83
1998+++ 15.30 0.48 (0.11) 0.37 (0.49) (1.72) -- (2.21) 13.46
1997 13.81 0.51 2.91 3.42 (0.54) (1.39) -- (1.93) 15.30
1996 13.06 0.53 1.15 1.68 (0.50) (0.43) -- (0.93) 13.81
1995 11.28 0.54 1.78 2.32 (0.47) (0.07) -- (0.54) 13.06
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1999 $11.74 $0.37 $1.62 $1.99 ($0.34) ($0.96) -- ($1.30) $12.43
1998+++ 13.64 0.38 (0.45) (0.07) (0.34) (1.49) -- (1.83) 11.74
1997+++ 12.28 0.38 2.57 2.95 (0.51) (1.08) -- (1.59) 13.64
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) -- (0.57) 12.28
1995 9.97 0.44 1.33 1.77 (0.40) -- -- (0.40) 11.34
<CAPTION>
NET ASSETS- RATIO OF RATIO OF
END OF EXPENSES NET INCOME PORTFOLIO
TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE
<S> <C> <C> <C> <C> <C>
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
1999 (0.93%) $125,981 0.52% 3.68% 64%
1998 10.38 150,313 0.52 4.59 75
1997 0.44 152,752 0.53 5.27 107
1996 6.13 143,137 0.53 5.39 124
1995 16.36 127,882 0.54 6.35 140
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1999 3.61% $161,538 0.41% 6.16% 102%
1998 6.13 252,711 0.42 5.89 107
1997 6.98 155,570 0.43++ 6.15 130
1996 5.47 123,227 0.43 5.65 174
1995 7.95 100,186 0.43++ 5.96 119
MULTI-MARKET FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/97)
1999 2.36% $101,306 0.58% 6.79% 86%
1998 2.72 97,062 0.58*++ 6.48* 163
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1999 0.11% $121,917 0.51%++ 4.72% 88%
1998 7.20 82,282 0.52++ 4.58 140
1997 8.47 75,120 0.51++ 4.70 54
1996 9.46 54,536 0.51++ 4.66 78
1995 13.37 36,040 0.50++ 5.64 58
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1999 0.71% $459,674 0.49% 6.46% 124%
1998 7.31 552,269 0.49 6.89 105
1997+++ 11.78 492,784 0.49 6.88 198
1996 7.74 447,646 0.49 6.75 151
1995 14.97 390,258 0.49 7.33 143
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1999+++ 16.99% $341,886 0.58% 3.21% 111%
1998+++ 2.85 382,339 0.59 3.36 100
1997 27.44 343,284 0.58 3.56 145
1996 13.47 300,868 0.57 3.85 110
1995 21.37 334,630 0.58 4.55 95
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1999 17.71% $152,862 0.78%++ 2.86% 101%
1998+++ (0.46) 165,039 0.78++ 2.98 107
1997+++ 26.50 173,155 0.74++ 3.07 141
1996 13.75 129,558 0.58++ 3.82 122
1995 18.28 96,839 0.58++ 4.56 112
</TABLE>
48
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
# Represents distributions in excess of net realized gains.
## Represents distributions in excess of net investment income.
### Net Investment Income, the Ratio of Net Investment Income to
Average Net Assets and the Portfolio Turnover Rate reflect
activity relating to a nonrecurring initiative to invest in
higher-paying dividend income producing securities.
+ For the respective periods ended September 30, the Ratio of
Expenses to Average Net Assets for the following portfolios
excludes the effect of expense offsets. If expense offsets
were included, the Ratio of Expenses to Average Net Assets
would be as follows for the respective periods. Where listed
as N/A, if the expense offsets were included, the Ratio of
Expenses to Average Net Assets would not significantly differ.
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Equity 0.60 0.60 0.59 0.59 0.60
Mid Cap Growth 0.60 0.60 0.61 0.60 0.60
Mid Cap Value 0.88* 0.88 0.88 0.88 0.86
Small Cap Growth 1.15* 1.15
Small Cap Value 0.87 0.86 0.86 0.86 0.86
Value 0.60 0.60 0.61 0.59 0.62
Cash Reserves 0.32 0.32 0.32 0.32 0.32
Domestic Fixed Income 0.50 0.50 0.50 0.50 0.49
Fixed Income 0.48 0.48 0.48 0.47 0.47
Fixed Income II 0.49 0.49 0.49 0.49 0.47
Global Fixed Income 0.56 0.58 0.57 0.56 0.53
High Yield 0.49 0.48 0.50 0.48 0.48
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Intermediate Duration 0.52* 0.52 0.52 0.51 0.48
International Fixed Income 0.54 0.53 0.53 0.52 0.52
Limited Duration 0.42 0.42 0.42 0.41 0.41
Multi-Market Fixed Income 0.58* 0.58
Municipal 0.50 0.50 0.50 0.50 0.50
Special Purpose Fixed Income 0.48 0.49 0.48 0.48 0.48
Balanced 0.57 0.57 0.56 0.57 0.57
Multi-Asset-Class 0.58 0.58 0.74 0.78 0.78
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to
waive its advisory fees and/or reimburse certain expenses to
the extent necessary in order to keep Total Operating Expenses
actually deducted from portfolio assets for the respective
portfolios from exceeding voluntary expense limitations. For
the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed
amounts.
<TABLE>
<CAPTION>
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
PORTFOLIO 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Mid Cap Value 2.13* 0.18 0.02 -- --
Small Cap Growth 3.67* 0.15
Cash Reserves 0.11 0.09 0.07 0.05 0.04
Domestic Fixed
Income 0.09 0.01 0.01 0.01 --
Intermediate
Duration 0.08* 0.13 0.05 -- --
International
Fixed Income -- -- -- -- --
Limited Duration 0.02 -- 0.00& -- --
Multi-Market
Fixed Income 0.05* --
Municipal 0.09 0.09 0.05 0.04 0.09
Multi-Asset-
Class 0.14 0.08 0.08 0.04 0.02
</TABLE>
+++ Per share amounts for the year are based on average shares outstanding.
& Amount is less than 0.01%.
49
<PAGE>
INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JANUARY 31, 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.
James H. Scott
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 31, 2000, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year.
You may obtain the SAI and Shareholder Reports, without charge, by contacting
the Fund at the toll-free number below. If you purchased shares through a
financial intermediary, you may also obtain these documents, without charge, by
contacting your financial intermediary.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (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. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address:
[email protected]. 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.
0005-536-PROSMASINST-0100
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
<PAGE>
STABLE VALUE INVESTMENT CLASS PROSPECTUS
[LOGO MAS FUNDS]
This Prospectus must be preceded or accompanied by the Disclosure Memorandum
for the Morgan Stanley Dean Witter Stable Value Fund.
January 31, 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, 3 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Investment Class Shares of the following portfolios (each a "Portfolio"
and collectively the "Portfolios"):
CASH RESERVES
FIXED INCOME
INTERMEDIATE DURATION
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY.......................................................... 1
PORTFOLIOS
Cash Reserves............................................................. 2
Fixed Income.............................................................. 3
Intermediate Duration..................................................... 5
FEES AND EXPENSES OF THE PORTFOLIOS......................................... 6
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 7
VALUATION OF SHARES......................................................... 10
GENERAL SHAREHOLDER INFORMATION............................................. 10
FUND MANAGEMENT............................................................. 11
SERVICE PLAN................................................................ 12
FINANCIAL HIGHLIGHTS........................................................ 13
</TABLE>
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
. Investment Objective
. Principal Investment Strategy
. Principal Risks
Investor Suitability
. The Portfolios may be suitable for long-term investors who can accept the
risks of investing in the stock and bond markets.
. The Portfolios are designed principally for investment by fiduciary investors
who are entrusted with the responsibility of investing assets held for the
benefit of others.
. While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<PAGE>
CASH RESERVES PORTFOLIO
OBJECTIVE
The Cash Reserves Portfolio seeks to realize maximum current income, consistent
with the preservation of capital and liquidity.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing exclusively in liquid, high quality money market instruments of
private financial and non-financial corporations, as well as obligations of the
U.S. Government and its agencies and instrumentalities. The Portfolio's average
weighted maturity will not exceed 90 days, and no individual security will have
a remaining maturity in excess of 397 days.
Dollar weighted average maturity less than
90 days
- ---------------------------------------------
100% of non-U.S. Government securities rated
A-1/P-1 or better by Moody's or Standard &
Poor's at time of purchase
- ---------------------------------------------
Individual maturities 397 days or less
- ---------------------------------------------
Benchmark: Salomon 1-Month
Treasury Bill Index;
Lipper Money
Market Average
- ---------------------------------------------
Ticker Symbol: Not Available
- ---------------------------------------------
CUSIP No.: 552-913-543
- ---------------------------------------------
PORTFOLIO MANAGERS
- ---------------------------------------------
Dale R. Albright and Jonathan R. Page
PROCESS
The Portfolio's Sub-Adviser, Morgan Stanley Dean Witter Advisors Inc.,
determines the appropriate average maturity for the Portfolio based on the
shape of the money market yield curve and its view of the direction of short
term interest rates over the next one to six months. Securities are selected on
the basis of their value, adjusted for risk. The Sub-Adviser invests in a
variety of securities in order to diversify credit risk and interest rate risk.
The Sub-Adviser may sell securities when it believes that expected risk-
adjusted return is low compared to other investment opportunities, when a
security is downgraded, or for liquidity needs.
PRINCIPAL RISKS
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, the Portfolio is subject to various risks that could adversely
affect its net asset value, yield and total return. It is possible for an
investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating. Repurchase agreements are subject to additional
risks associated with the possibility of default by the seller at a time when
the collateral has declined in value, or insolvency of the seller, which may
affect the Portfolio's right to control the collateral.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[GRAPH]
- --------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on August 29, 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------ ------ ------ ------ ------ ------ ------ ------ ------
5.81% 3.46% 2.80% 3.93% 5.75% 5.24% 5.39% 5.36% 5.00%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 3/31/93
1.64% 0.66%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH SALOMON 1-MONTH LIPPER MONEY
RESERVES TREASURY BILL MARKET
PORTFOLIO INDEX AVERAGE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 5.00 4.44 4.46
- ------------------------------------------------------------------------------------------
Five Years 5.35 4.84 4.87
- ------------------------------------------------------------------------------------------
Since Inception
8/29/90 4.87 4.43 4.52
</TABLE>
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 and 5 year periods and since inception. The
table also shows the corresponding returns of the Portfolio's benchmark index
and the Lipper Money Market Average, an index that shows the performance of
other money market funds. The Investment Class Shares would have had similar
annual returns, but returns would have generally been lower as expenses of this
class are higher. The variability of performance over time provides an
indication of the risks of investing in the Portfolio. How the Portfolio has
performed in the past does not necessarily indicate how the Portfolio will
perform in the future. You may obtain the Portfolio's SEC 7-day current yield
by calling 1-800-522-1525.
2
<PAGE>
FIXED INCOME PORTFOLIO
OBJECTIVE
The Fixed Income Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
investment grade fixed income securities, particularly U.S. Government,
corporate and mortgage securities. The Portfolio ordinarily will maintain an
average weighted maturity in excess of five years. Although there is no minimum
or maximum maturity for any individual security, the Adviser actively manages
the interest rate risk of the Portfolio within a range relative to the
benchmark. The Portfolio may invest opportunistically in non-dollar denominated
securities and in below investment grade securities. The Adviser may use
futures, swaps and other types of derivatives in managing the Portfolio.
Generally at least 65% of total Portfolio
assets invested in fixed income securities
- ---------------------------------------------
Average weighted maturity generally greater
than 5 years
- ---------------------------------------------
At least 80% investment grade securities at
time of purchase
- ---------------------------------------------
Up to 20% high yield securities at time of
purchase
- ---------------------------------------------
May invest over 50% in mortgage securities
- ---------------------------------------------
Benchmark: Salomon Broad
Investment
Grade Index
- ---------------------------------------------
Ticker Symbol: MAFIX
- ---------------------------------------------
CUSIP No.: 552-913-568
- ---------------------------------------------
PORTFOLIO MANAGERS
- ---------------------------------------------
W. David Armstrong, Thomas L. Bennett,
Kenneth B. Dunn and Roberto M. Sella
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securi ties, and also may consider the relative
attractiveness of non dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regarding sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing on the level of real interest rates,
the shape of the yield curve, credit risk, prepayment risk, country risk and
currency valuations. The Adviser's management team builds an investment
portfolio designed to take advantage of its judgment on these factors, while
balancing the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
[CHART]
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on October 15, 1996
1997 1998 1999
------ ------ ------
9.52% 6.72% -0.73%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 6/30/97 Quarter Ended 6/30/99
3.98% -1.66%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME SALOMON BROAD
PORTFOLIO INVESTMENT GRADE INDEX
- ----------------------------------------------------------------------------------------
<S> <C> <C>
One Year -0.73 -0.85
- ----------------------------------------------------------------------------------------
Since Inception
10/15/96 5.60 6.02
</TABLE>
The bar chart and table above show the Portfolio's Investment Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
3
<PAGE>
FIXED INCOME PORTFOLIO (Continued)
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
4
<PAGE>
INTERMEDIATE DURATION PORTFOLIO
OBJECTIVE
The Intermediate Duration Portfolio seeks above average total return over a
market cycle of three to five years.
APPROACH
The Portfolio seeks value in the fixed income market with only a moderate
sensitivity to changes in interest rates. The Portfolio invests primarily in a
diversified mix of U.S. Government securities, investment grade corporate bonds
and mortgage securities. The Portfolio also may invest, to a limited extent, in
non-dollar denominated securities. The Portfolio generally maintains an average
duration between two and five years. The Adviser uses futures, swaps and other
derivatives to manage the Portfolio.
Generally at least 65% of total Portfolio
assets invested in fixed income securities
- ---------------------------------------------
100% investment grade securities at time of
purchase
- ---------------------------------------------
Average duration 2-5 years
- ---------------------------------------------
May invest over 50% in mortgage securities
- ---------------------------------------------
Benchmark: Lehman Brothers
Intermediate
Government/
Corporate Index
- ---------------------------------------------
Ticker Symbol: Not Available
- ---------------------------------------------
CUSIP No.: 552-913-220
- ---------------------------------------------
PORTFOLIO MANAGERS
- ---------------------------------------------
Angelo G. Manioudakis and Scott F. Richard
PROCESS
The Adviser employs a value approach toward fixed income investing. The Adviser
makes securities and sector decisions based on the anticipated tradeoff between
long-run expected return and risk. The Adviser relies upon value measures,
including the attractiveness of the extra yield offered by non-Treasury
securities, the level of real interest rates, and the steepness of the yield
curve, to guide its decision regarding duration management, and country, sector
and security selection. Teams of portfolio managers implement strategies based
on these types of value measures. Sector teams seek specific bonds within each
sector, while a portfolio team seeks to ensure that the aggregate risk exposures
to changes in the level of interest rates and yield spreads match the
Portfolio's objective. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[GRAPH]
- --------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on October 3, 1994
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
15.38% 5.94% 8.07% 7.03% 0.86%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 3/31/95 Quarter Ended 6/30/99
4.80% -1.10%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEHMAN BROTHERS
INTERMEDIATE INTERMEDIATE
DURATION GOVERNMENT/CORPORATE
PORTFOLIO INDEX
- -----------------------------------------------------------------------------------------
<S> <C> <C>
One Year 0.86 0.39
- -----------------------------------------------------------------------------------------
Five Years 7.36 7.10
- -----------------------------------------------------------------------------------------
Since Inception
10/3/94 6.90 6.73
</TABLE>
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 and 5 year periods and since inception. The
table also shows the corresponding returns of the Portfolio's benchmark index.
The Investment Class Shares would have had similar returns, but returns would
have generally been lower as expenses of this class are higher. The variability
of performance over time provides an indication of the risks of investing in
the Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
5
<PAGE>
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right the fees and expenses that you may pay if
you buy and hold shares of the Portfolios. The Portfolios do not charge any
sales loads or other fees when you purchase or redeem shares.
Example
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be
equal to the amounts reflected in the table to the right.
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES* EXPENSES
<S> <C> <C> <C> <C>
Cash Reserves Portfolio .250% None .270% .520%**
- ------------------------------------------------------------------------
Fixed Income Portfolio .375% None .255% .630%
- ------------------------------------------------------------------------
Intermediate Duration
Portfolio .375% None .265% .640%
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements and/or voluntary waivers.
* Other expenses include a shareholder servicing fee of 0.15%.
** The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown in the table below. Fee waivers and/or expense reimbursements are
voluntary and the Adviser reserves the right to terminate any waiver and/or
reimbursement at any time and without notice.
<TABLE>
<CAPTION>
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
-------------------------------------------------------------------
<S> <C>
Cash Reserves Portfolio .470%
-------------------------------------------------------------------
</TABLE>
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Cash Reserves Portfolio $53 $167 $291 $653
- --------------------------------------------------------------------------
Fixed Income Portfolio $64 $202 $351 $786
- --------------------------------------------------------------------------
Intermediate Duration Portfolio $65 $205 $357 $798
</TABLE>
6
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS
FIXED INCOME SECURITIES FOREIGN SECURITIES
Fixed income securities are securities that pay a fixed rate of interest until
a stated maturity date. Fixed income securities include U.S. Government
securities, securities issued by federal or federally sponsored agencies
("agencies"), corporate bonds and notes, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Yankee Bonds,
repurchase agreements, commercial paper and cash equivalents.
These securities are subject to risks related to changes in interest rates and
in the financial health or credit rating of the issuers. 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.
Adjustable rate 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. 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. Fixed income
securities include inverse floaters, which are designed to respond in a
targeted fashion to changes in interest rates.
Fixed income securities may be called (redeemed by the issuer) prior to final
maturity. If a callable security is called, a Portfolio may have to reinvest
the proceeds at a lower rate of interest.
DURATION
The average duration of a portfolio of fixed income securities represents its
exposure to changing interest rates. A portfolio with a lower average duration
generally will experience less price volatility in response to changes in
interest rates than a portfolio with a higher average duration.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as junk bonds or high yield, high risk securities. These securities offer a
higher yield than other, higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high
yield securities are influenced more by changes in the financial and business
position of the issuing company than by changes in interest rates when compared
to investment grade securities.
MORTGAGE SECURITIES
These are fixed income securities that derive their value from or represent
interests in a pool of mortgages or mortgage securities. Mortgage securities
are subject to prepayment risk--the risk that, as interest rates fall,
borrowers will refinance their mortgages and "prepay" principal. A portfolio
holding mortgage securities that are experiencing prepayments will have to
reinvest these 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. It can be difficult
to measure precisely the remaining life of a mortgage security or the average
life of a portfolio of such securities.
YANKEE BONDS
Yankee bonds are U.S.-dollar denominated debt obligations issued by foreign
governments and corporations and sold in the United States. They are considered
U.S. securities for purposes of Portfolio investments, except for the Domestic
Fixed Income Portfolio.
FOREIGN SECURITIES
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
7
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
movements. 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
an investing portfolio's investment. There also can be difficulty obtaining and
enforcing judgments against issuers in foreign countries. 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.
FOREIGN CURRENCY
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since investing
portfolios must convert the value of foreign securities into dollars, changes
in currency exchange rates can increase or decrease the U.S. dollar value of
the portfolios' assets. The Adviser may use derivatives to offset this risk.
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. In addition, 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, the market may be dominated by
a few issuers or sectors. 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 by foreign investors.
DERIVATIVES AND OTHER INVESTMENTS
Derivatives are financial instruments whose value and performance are based on
the value and performance of another security or financial instrument.
Derivatives sometimes offer the most economical way of pursuing an investment
strategy, limiting risks or enhancing returns, although there is no guarantee
of success. Hedging strategies or instruments may not be available or practical
in all circumstances. Derivative instruments may be publicly traded or
privately negotiated. Derivatives used by the Adviser include futures
contracts, options contracts, forward contracts, swaps, collateralized mortgage
obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), and
structured notes.
A forward 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. Forward contracts are used to protect against uncertainty in the
level of future foreign currency exchange rates. A futures contract provides
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. The Portfolios may use futures contracts to gain exposure to an entire
market (e.g., stock index futures) or to control their exposure to changing
foreign currency exchange rates.
If a Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an agreed-
upon price. If a Portfolio "writes" an option, it sells to another person the
right to buy from or sell to the Portfolio a specific amount of a security or
futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices or commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
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
8
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
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").
A 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. A Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. A Portfolio will not use derivatives as an indirect way
of investing in assets that it cannot, as a matter of policy, invest in
directly.
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
The Fixed Income and Intermediate Duration Portfolios 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 Fixed Income and Intermediate Duration Portfolios may invest in
derivatives, such as forwards, futures, options, mortgage derivatives and when-
issued securities that require a Portfolio to segregate some or all of its cash
or liquid securities to cover its obligations under those instruments. This can
cause a Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations. A
Portfolio in that position could be forced to sell other securities that it
wanted to retain or to realize unintended gains or losses.
RISK OF DERIVATIVES
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by a Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
Hedging the Portfolio's currency risks involves the risks of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
Mortgage derivatives are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMO or SMBS that a Portfolio holds, these price
movements may be significantly greater than those experienced by mortgage
securities generally, depending on whether the payments are predominantly based
on the principal or interest paid on the underlying mortgages. In addition, the
yield to maturity of IOs and POs is extremely sensitive to prepayment levels.
As a result, a high rate of prepayments can have a material effect on a
Portfolio's yield to maturity and could cause a Portfolio to suffer losses.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in fixed income
securities for temporary defensive purposes, as described in the Statement of
Additional Information. If the Adviser incorrectly predicts the effects of
these changes, the defensive investments may adversely affect the Portfolio's
performance.
PORTFOLIO TURNOVER
Consistent with their investment policies, the Portfolios 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. Nonetheless, short-term trading activities that result
in high turnover rates are not incompatible with a stated objective of long-
term capital growth or other long-term goals, and can lead to gains that may
increase share value.
9
<PAGE>
VALUATION OF SHARES
We determine the NAV of the following Portfolios at the following times on each
day the Portfolios are open for business:
[_] Fixed]Income and Intermediate Duration Portfolios as of one hour after the
close of the bond markets (normally 4:00 p.m. Eastern Time).
[_] Cash]Reserves Portfolio as of 12:00 noon (Eastern Time).
The Fixed Income and Intermediate Duration Portfolios value their securities at
market value. The Cash Reserves Portfolio values its securities using amortized
cost valuation. When no quotations are readily available for securities or when
the value of securities has been materially affected by events occurring after
the close of the market, we will determine the value for those securities in
good faith at fair value using methods approved by the Board of Trustees.
The NAV of Investment Class Shares may differ from that of other classes
because of class-specific expenses that each class may pay, the distribution
fees charged to Adviser Class Shares and the shareholder servicing fees charged
to Investment Class Shares.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In
addition, the Cash Reserves Portfolio is closed on Columbus Day and Veterans
Day. The value of portfolio securities may change on a day when you cannot
purchase or redeem shares if a Portfolio invests in foreign securities that
trade on days when the Fund is closed.
GENERAL SHAREHOLDER INFORMATION
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. Corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such Portfolios from
U.S. corporations. Capital gains distributions may be taxable at different
rates depending on the length of time the Fund holds its assets.
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign
income taxes that they paid.
Distributions paid in January but declared by a Portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PORTFOLIO MONTHLY QUARTERLY
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Reserves X
- ------------------------------------------------------------------------------------------------
Fixed Income X
- ------------------------------------------------------------------------------------------------
Intermediate Duration X
</TABLE>
If any net gains are realized from the sale of underlying securities, the
Portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise.
10
<PAGE>
FUND MANAGEMENT
ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP ("MAS" or
the "Adviser"), is a Pennsylvania limited liability partnership founded in
1969. The Adviser is wholly-owned by indirect subsidiaries of Morgan Stanley
Dean Witter & Co. and is a division of Morgan Stanley Dean Witter Investment
Management ("MSDW"). 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 November 30, 1999, Morgan Stanley Dean Witter Investment
Management had in excess of $177 billion in assets under management.
The Adviser makes investment decisions for the Fund's Portfolios and places
each Portfolio's purchase and sales orders. Each Portfolio, in turn, pays the
Adviser an annual advisory fee calculated by applying a quarterly rate. The
following table shows the Adviser's annual contractual and actual rates of
compensation for the Fund's 1999 fiscal year.
SUB-ADVISER
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors") serves as Sub-
Adviser to the Cash Reserves Portfolio. As Sub-Adviser, MSDW Advisors makes
day-to-day investment decisions for the Cash Reserves Portfolio and places the
Portfolio's purchase and sales orders. The Adviser pays MSDW Advisors 40% of
the fee the Adviser receives from the Cash Reserves Portfolio as compensation
for its sub-advisory services. MSDW Advisors, located at Two World Trade
Center, New York, New York 10048, is a wholly-owned subsidiary of MSDW. MSDW
Advisors develops, markets and manages a broad spectrum of proprietary mutual
funds that are sold by MSDW financial advisors and offers professional money
management services on a customized basis to individuals, institutional
investors and retirement plan sponsors. MSDW Advisors and its wholly-owned
subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various
investment advisory and administrative capacities to 100 investment companies
and other portfolios with net assets under management of approximately $145
billion as of December 31, 1999.
<TABLE>
<CAPTION>
CONTRACTUAL FY 1999
COMPENSATION ACTUAL
RATE COMPENSATION RATE
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cash Reserves Portfolio* .250 .210
- --------------------------------------------------------------------
Fixed Income Portfolio .375 .375
- --------------------------------------------------------------------
Intermediate Duration Portfolio .375 .375
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Cash Reserves Portfolio to keep Total Operating
Expenses from exceeding .470%.
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's Portfolios is as follows:
Dale R. Albright, Vice President, MSDW Advisors, has served as Portfolio
Manager/Analyst at MSDW Advisors since 1990. He serves as a Portfolio Manager
for MSDW Advisors' taxable money market funds. He joined the management team
for the Cash Reserves Portfolio in 1999.
W. David Armstrong, Managing Director, MSDW, joined MSDW Investment Management
as a Portfolio Manager in 1998. He served as a Senior Vice President and
Manager of U.S. proprietary trading at Lehman Brothers from 1995-1997. He
joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
Thomas L. Bennett, Managing Director, MSDW, joined MAS in 1984. He joined the
management team for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio in 1987, the Fixed Income II Portfolio in 1990, the Special
Purpose Fixed Income and Balanced Portfolios in 1992, the Multi-Asset-Class
Portfolio in 1994 and the Multi-Market Fixed Income Portfolio in 1997.
Kenneth B. Dunn, Managing Director, MSDW, joined MAS in 1987. He joined the
management team for the Fixed Income Portfolio in 1987, the Special Purpose
Fixed Income Portfolio in 1992 and the Multi-Market Fixed Income Portfolio in
1997.
11
<PAGE>
FUND MANAGEMENT (Continued)
Angelo G. Manioudakis, Principal, MSDW, joined MAS in 1993. He served as a
Fixed Income Analyst from 1993 to 1995. From 1995 to 1998, he served as a Fixed
Income Portfolio manager. He joined the management team for the Intermediate
Duration Portfolio in 1998 and the Domestic Fixed Income and Fixed Income II
Portfolios in 2000.
Jonathan R. Page, Senior Vice President, MSDW Advisors, has served as Portfolio
Manager at MSDW Advisors since 1975. He serves as a Senior Portfolio Manager
for MSDW Advisors' taxable money market funds. He joined the management team
for the Cash Reserves Portfolio in 1999.
Scott F. Richard, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Limited Duration, Intermediate Duration and Advisory
Mortgage Portfolios in 1995, the Targeted Duration Portfolio in 1998 and the
Domestic Fixed Income and Fixed Income II Portfolios in 2000.
Roberto M. Sella, Managing Director, MSDW, joined MAS in 1992. He served as a
Financial Analyst from 1992-1998, and as a Portfolio Manager beginning in 1998.
He joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
SERVICE PLAN
The Fund has adopted a Service Plan (the "Service Plan") for each Portfolio's
Investment Class Shares. Under the Service Plan, each Portfolio pays the
Distributor a monthly shareholder servicing fee at an annual rate of 0.15% of
the Portfolio's average daily net assets attributable to Investment Class
Shares. The Distributor may compensate other parties for providing shareholder
support services to investors who purchase Investment Class Shares. Shareholder
servicing fees are separate fees of the Investment Class Shares of each
Portfolio and will reduce the net investment income and total return of the
Investment Class Shares of these Portfolios.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been extracted from the Fund's financial
statements which were audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, are incorporated by reference into
the Fund's Statement of Additional Information and are included in the Fund's
September 30, 1999 Annual Report to Shareholders.
<TABLE>
<CAPTION>
Net Gains
or Losses
on Dividend Capital Gain
Net Asset Securities Distributions Distributions Net Asset
Value- Net (realized Total from (net (realized net Value-
Beginning Investment and Investment investment capital Other Total End of Total
of Period Income unrealized) Activities income) gains) Distributions Distributions Period Return**
Cash Reserves Portfolio (Commencement of Investment Class Operations 8/16/99)
1999 $1.000 $0.006 -- $0.006 ($0.006) -- -- ($0.006) $1.000 0.60%
Fixed Income Portfolio (Commencement of Investment Class Operations 10/15/96)
1999+++ $12.22 $0.76 ($0.72) $0.04 ($0.69) -- ($0.30)# ($0.99) $11.27 0.24%
1998+++ 12.22 0.76 0.14 0.90 (0.73) (0.17) -- (0.90) 12.22 7.72
1997+++ 11.80 0.75 0.40 1.15 (0.60) (0.13) -- (0.73) 12.22 10.07
Intermediate Duration Portfolio (Commencement of Investment Class Operations 8/16/99)
1999 $ 9.76 $ 0.11 $ 0.04 $ 0.15 ($0.14) -- -- -- $ 9.77 1.49%
<CAPTION>
Ratio of
Expenses
Net Assets- to Ratio of
End of Average Net Income Portfolio
Period Net to Average Turnover
(thousands) Assets+ Net Assets Rate
<S> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Investment Class Operations 8/16/99)
1999 $ 919 0.48%*++ 4.83%* N/A
Fixed Income Portfolio (Commencement of Investment Class Operations 10/15/96)
1999+++ $39,165 0.63% 6.50% 103%
1998+++ 48,944 0.63 6.31 121
1997+++ 9,527 0.66*++ 6.57* 179
Intermediate Duration Portfolio (Commencement of Investment Class Operations 8/16/99)
1999 $9,304 0.64%* 8.99%* 97%
</TABLE>
Notes to the Financial Highlights
# Represents distribution in excess of net realized gains.
* Annualized
** Total return figures for partial years are not annualized.
+ For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following Portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
<TABLE>
<CAPTION>
Portfolio 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Cash Reserves 0.47%*
Fixed Income 0.65 0.62 0.62
Intermediate Duration 0.63*
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
<TABLE>
<CAPTION>
Voluntarily waived and/or reimbursed expenses for:
Portfolio 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Cash Reserves 0.04%*
Fixed Income 0.12%* -- --
Intermediate
Duration --
</TABLE>
+++ Per share amounts for the year are based on average shares outstanding.
13
<PAGE>
STABLE VALUE INVESTMENT CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
January 31, 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.
James H. Scott
Officers of the Fund
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, Vice President & John H. Grady, Jr., Assistant Secretary
Treasurer
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January 31, 2000, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by
contacting your financial intermediary.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (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. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address:
[email protected]. To aid you in obtaining this information, the Fund's
Investment Company Act registration number is 811-03980.
MAS Funds
One Tower Bridge, West Conshohocken, PA 19428-0868.
For Shareholder Inquiries, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
<PAGE>
ADVISER CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
January 31, 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, 10 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Adviser Class Shares of the following portfolios (each a "Portfolio" and
collectively the "Portfolios"):
EQUITY PORTFOLIOS
-----------------
EQUITY
MID CAP GROWTH
MID CAP VALUE
SMALL CAP VALUE
VALUE
FIXED INCOME PORTFOLIOS
-----------------------
DOMESTIC FIXED INCOME
FIXED INCOME
HIGH YIELD
BALANCED PORTFOLIOS
-------------------
BALANCED
MULTI-ASSET-CLASS
Investment Adviser
Miller Anderson & Sherrerd, LLP
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
MORGAN STANLEY DEAN WITTER
--------------------------
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST
CONSHOHOCKEN, PA 19428
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY.......................................................... 1
Equity Portfolios
Equity.................................................................... 2
Mid Cap Growth............................................................ 3
Mid Cap Value............................................................. 5
Small Cap Value........................................................... 7
Value..................................................................... 9
Fixed Income Portfolios
Domestic Fixed Income..................................................... 10
Fixed Income.............................................................. 12
High Yield................................................................ 14
Balanced Portfolios
Balanced.................................................................. 16
Multi-Asset-Class......................................................... 18
FEES AND EXPENSES OF THE PORTFOLIOS......................................... 20
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 22
PURCHASING SHARES........................................................... 27
REDEEMING SHARES............................................................ 28
VALUATION OF SHARES......................................................... 29
GENERAL SHAREHOLDER INFORMATION............................................. 29
FUND MANAGEMENT............................................................. 30
DISTRIBUTION PLAN........................................................... 34
FINANCIAL HIGHLIGHTS........................................................ 35
</TABLE>
<PAGE>
INVESTMENT SUMMARY
This section explains each Portfolio's:
[_] Investment Objective
[_] Principal Investment Strategy
[_] Principal Risks
INVESTOR SUITABILITY
[_] The Portfolios may be suitable for long-term investors who can accept the
risks of investing in the stock and bond markets.
[_] The Portfolios are designed principally for investment by fiduciary
investors who are entrusted with the responsibility of investing assets
held for the benefit of others.
[_] While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<PAGE>
EQUITY PORTFOLIO
OBJECTIVE
The Equity Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of large U.S. companies. The
Portfolio invests, to a limited extent, in stocks of small companies and foreign
equity securities.
PROCESS
The Adviser assigns each member of the portfolio management team to specific
"value" or "growth" sectors. The Portfolio's overall sector allocation is driven
by bottom-up stock selection. The Adviser seeks to diversify the Portfolio's
investments across market sectors, and to obtain the best values within each
sector. In determining whether securities should be sold, the Adviser considers
factors such as deteriorating fundamentals and relative valuation.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS
- -------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $5 BILLION
- -------------------------------------------
BENCHMARK: S&P 500 INDEX
- -------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- -------------------------------------------
CUSIP No.: 552-913-345
- -------------------------------------------
PORTFOLIO MANAGERS
- -------------------------------------------
ARDEN C. ARMSTRONG, STEVEN EPSTEIN,
JAMES J. JOLINGER, BRIAN KRAMP, CHRIS
LEAVY, ROBERT J. MARCIN, ERIC F. SCHARPF
AND GARY G. SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers. Some of the Portfolio's investments may be
denominated in a foreign currency. Changes in the values of those currencies
compared to the U.S. dollar may affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on January 16, 1998
1999
------
28.39%
HIGH (QUARTER) LOW (QUARTER)
Quarter Ended 12/31/99 Quarter Ended 9/30/99
19.99% -9.64%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
EQUITY S&P 500
PORTFOLIO INDEX
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year 28.39 21.04
- --------------------------------------------------------------------------------------------------
Since Inception
1/16/98 25.41 25.92
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares perfor-
mance year-by-year, best and worst performance for a quarter, and average an-
nual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of in-
vesting in the Portfolio. How the Portfolio has performed in the past does not
necessarily indicate how the Portfolio will perform in the future.
2
<PAGE>
MID CAP GROWTH PORTFOLIO
OBJECTIVE
The Mid Cap Growth Portfolio seeks long-term capital growth.
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the S&P MidCap 400 Index.
The Adviser focuses on companies that demonstrate one or more of the following
characteristics: high earnings growth rates, growth stability, rising
profitability and the ability to produce earnings that consistently beat market
expectations. The Portfolio may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquisition. The Portfolio may in-
vest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser uses a quantitative screen to sort stocks based on proprietary
revisions to analysts' earnings predictions. The Adviser then researches those
companies with the most attractive earnings revisions, and evaluates their
market valuations to eliminate the most overvalued stocks. The Portfolio's
overall sector allocation is driven by bottom-up stock selection. The Adviser
follows a strict sell discipline, selling stocks when their earnings revision
scores fall to unacceptable levels, when research reveals unfavorable trends or
when their market valuations exceed levels that are reasonable in relation to
their growth prospects.
GENERALLY 65% OF TOTAL PORTFOLIO ASSETS
INVESTED IN COMMON STOCKS OF MID CAP
COMPANIES
- -----------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING
THE BENCHMARK (CURRENTLY $500 MILLION TO
$6 BILLION)
- -----------------------------------------
FOCUS ON GROWTH SECURITIES
- -----------------------------------------
BENCHMARK: S&P MIDCAP
400 INDEX
- -----------------------------------------
TICKER SYMBOL: MACGX
- -----------------------------------------
CUSIP NO.: 552-913-436
- -----------------------------------------
PORTFOLIO MANAGERS
- -----------------------------------------
ARDEN C. ARMSTRONG, DAVID P. CHU AND
STEVEN B. CHULIK
[CHART]
- --------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on January 31, 1997
1998 37.00%
1999 67.89%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 12/31/99 Quarter Ended 9/30/98
39.22% -19.21%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MID CAP
GROWTH S&P MIDCAP
PORTFOLIO 400 INDEX
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 67.89 14.72
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION
1/31/97 45.31 20.97
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and events that affect a particular is-
suer. Investments in mid cap companies may involve greater risk than investments
in larger, more established companies, and smaller companies' securities may be
subject to more abrupt or erratic price movements. Some market conditions may
favor growth stocks or stocks of mid-sized companies, while other conditions may
favor value stocks or stocks of larger or smaller companies.
The Portfolio's purchase of shares issued in IPOs exposes it to the risks
associated with companies that have little
3
<PAGE>
MID CAP GROWTH PORTFOLIO (Continued)
operating history as public companies, as well as to the risks inherent in
those sectors of the market where these new issuers operate. The market for IPO
issuers has been volatile, and share prices of newly-public companies in the
technology sector have fluctuated in significant amounts over short periods of
time. In addition, the Adviser cannot guarantee continued access to IPOs.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
4
<PAGE>
MID CAP VALUE PORTFOLIO
OBJECTIVE
The Mid Cap Value Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the S&P MidCap 400 Index.
The Portfolio purchases stocks that typically do not pay dividends. The Portfo-
lio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser analyzes securities to identify stocks that are undervalued, and
measures the relative attractiveness of the Portfolio's current holdings against
potential purchases. Sector weightings normally are kept within 5% of those of
the S&P MidCap 400 Index. In determining whether securities should be sold, the
Adviser considers factors such as high valuations relative to other investment
opportunities, and deteriorating short or long-term earnings growth projections.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS OF MID
CAP COMPANIES
- -------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING
THE BENCHMARK (CURRENTLY $500 MILLION TO
$6 BILLION)
- -------------------------------------------
FOCUS ON VALUE SECURITIES
- -------------------------------------------
BENCHMARK: S&P MIDCAP
400 INDEX
- -------------------------------------------
TICKER SYMBOL: MMCAX
- -------------------------------------------
CUSIP NO.: 552-913-337
- -------------------------------------------
PORTFOLIO MANAGERS
- -------------------------------------------
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
VITALY V. KORCHEVSKY AND GARY G.
SCHLARBAUM
[CHART]
- --------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on July 17, 1998
1999 19.56%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 6/30/99 Quarter Ended 9/30/99
17.65% -6.82%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
MID CAP VALUE S&P MIDCAP
PORTFOLIO 400 INDEX
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 19.56 14.72
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
7/17/98 14.30 13.83
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in mid cap companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some market
conditions may favor value stocks or stocks of mid-sized companies, while other
conditions may favor growth stocks or stocks of larger or smaller companies.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a
country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
5
<PAGE>
MID CAP VALUE PORTFOLIO (Continued)
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
6
<PAGE>
SMALL CAP VALUE PORTFOLIO (Not currently being offered to new investors)
OBJECTIVE
The Small Cap Value Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with equity
capitalizations in the range of companies included in the Russell 2000 Index.
The Portfolio purchases stocks that typically do not pay dividends. The
Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser analyzes securities to identify stocks that are undervalued, and
measures the relative attractiveness of the Portfolio's current holdings
against potential purchases. Sector weightings normally are kept within 5% of
those of the Russell 2000 Index. In determining whether securities should be
sold, the Adviser considers factors such as high valuations relative to other
investment opportunities, and deteriorating short or long-term earnings growth
projections.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS OF SMALL
CAP COMPANIES
- -------------------------------------------
EQUITY CAPITALIZATION GENERALLY MATCHING
THE BENCHMARK (CURRENTLY $100 MILLION TO
$2 BILLION)
- -------------------------------------------
FOCUS ON VALUE SECURITIES
- -------------------------------------------
BENCHMARK: RUSSELL 2000
INDEX
- -------------------------------------------
TICKER SYMBOL: MCVAX
- -------------------------------------------
CUSIP NO.: 552-913-261
- -------------------------------------------
PORTFOLIO MANAGERS
- -------------------------------------------
BRADLEY S. DANIELS, WILLIAM B. GERLACH,
VITALY V. KORCHEVSKY AND GARY G. SCHLARBAUM
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some market
conditions may favor value stocks or stocks of small companies, while other
conditions may favor growth stocks or stocks of larger companies.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a country
or region will affect those markets and their issuers, but may not affect the
U.S. market or similar U.S. issuers.
[CHART]
- -------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on July 1, 1986
1990 -16.55%
1991 63.78%
1992 22.77%
1993 21.16%
1994 2.18%
1995 21.04%
1996 35.15%
1997 30.63%
1998 -1.42%
1999 26.02%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 3/31/91 Quarter Ended 9/30/90
31.89% -27.20%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SMALL CAP RUSSELL 2000
VALUE PORTFOLIO INDEX
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 26.02 21.26
- ---------------------------------------------------------------------------------------------
FIVE YEARS 21.56 16.69
- ---------------------------------------------------------------------------------------------
TEN YEARS 18.62 13.40
- ---------------------------------------------------------------------------------------------
SINCE INCEPTION
7/1/86 14.15 11.01
</TABLE>
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5 and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
7
<PAGE>
SMALL CAP VALUE PORTFOLIO (Continued)
Some of the Portfolio's investments may be denominated in a foreign currency.
Changes in the values of those currencies compared to the U.S. dollar may
affect the value of the Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
8
<PAGE>
VALUE PORTFOLIO
OBJECTIVE
The Value Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in common stocks of companies with equity
capitalizations greater than $2.5 billion. The Portfolio focuses on stocks that
are undervalued in comparison with the stock market as a whole, as measured by
the S&P 500 Index. The Portfolio may purchase stocks that do not pay dividends.
The Portfolio may invest, to a limited extent, in foreign equity securities.
PROCESS
The Adviser selects investments through a three part analysis. The Adviser
identifies stocks with low price/ earnings ratios. The Adviser then applies
fundamental analysis and its investment judgment to determine which of those
securities are the most attractive. Finally, the Adviser may favor securities of
companies that are in undervalued industries. The Adviser employs a formal sell
discipline, under which the Portfolio sells securities when their price-
/earnings ratios rise.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN COMMON STOCKS
- -------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $2.5 BILLION
- -------------------------------------------
FOCUS ON VALUE SECURITIES
- -------------------------------------------
BENCHMARK: S&P 500 INDEX
- -------------------------------------------
TICKER SYMBOL: MPVAX
- -------------------------------------------
CUSIP NO.: 552-913-451
- -------------------------------------------
PORTFOLIO MANAGERS
- -------------------------------------------
RICHARD M. BEHLER, NICHOLAS J. KOVICH AND
ROBERT J. MARCIN
[CHART]
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Commenced operations on July 17, 1996
1997 22.99%
1998 -3.11%
1999 -2.34%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 9/30/99 Quarter Ended 9/30/98
15.24% -19.10%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
VALUE PORTFOLIO S&P 500 INDEX
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -2.34 21.04
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
7/17/96 11.15 29.57
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. Some market
conditions may favor value stocks, while other conditions may favor growth
stocks.
Foreign securities may involve greater risks than those issued by U.S. companies
or the U.S. government. Economic, political and other events unique to a
country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
9
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO
OBJECTIVE
The Domestic Fixed Income Portfolio seeks above-average total return over a
market cycle of three to five years.
APPROACH
The Portfolio invests in a diversified mix of dollar denominated fixed income
securities, particularly U.S. Government, corporate and mortgage securities.
The Portfolio will ordinarily maintain an average weighted maturity in excess
of five years. Although there is no minimum or maximum maturity for any
individual security, the Adviser actively manages the interest rate risk of the
Portfolio within a range relative to the benchmark. The Portfolio invests
exclusively in securities issued by U.S. based entities that carry an investment
grade rating at the time of purchase. The Adviser may use futures, swaps and
other types of derivatives in managing the Portfolio.
100% U.S. ISSUERS
- -----------------------------------------
GENERALLY AT LEAST 65% OF TOTAL
PORTFOLIO ASSETS INVESTED IN FIXED
INCOME SECURITIES
- -----------------------------------------
AT LEAST 80% OF FIXED INCOME SECURITIES
RATED A OR HIGHER (OR EQUIVALENT) AT
TIME OF PURCHASE
- -----------------------------------------
UP TO 20% OF FIXED INCOME SECURITIES
RATED BBB (OR EQUIVALENT) AT TIME OF
PURCHASE
- -----------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY
GREATER THAN 5 YEARS
- -----------------------------------------
MAY INVEST OVER 50% IN MORTGAGE
SECURITIES
- -----------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- -----------------------------------------
TICKER SYMBOL: NOT
AVAILABLE
- -----------------------------------------
CUSIP NO.: 552-913-279
- -----------------------------------------
PORTFOLIO MANAGERS
- -----------------------------------------
THOMAS L. BENNETT, ANGELO G. MANIOUDAKIS
AND SCOTT F. RICHARD
[CHART]
- -------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on September 29, 1987
1990 7.19%
1991 21.54%
1992 9.12%
1993 13.75%
1994 -3.89%
1995 18.85%
1996 3.89%
1997 9.62%
1998 7.23%
1999 -1.64%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 9/30/91 Quarter Ended 3/31/92
7.48% -2.28%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON
DOMESTIC FIXED BROAD INVESTMENT
INCOME PORTFOLIO GRADE INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -1.64 -0.85
- --------------------------------------------------------------------------------------------
FIVE YEARS 7.38 7.74
- --------------------------------------------------------------------------------------------
TEN YEARS 8.30 7.75
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
9/29/87 8.82 8.60
</TABLE>
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1, 5, and 10 year periods and since inception.
The table also shows the corresponding returns of the Portfolio's benchmark
index. The Adviser Class Shares would have had similar annual returns, but
returns would have generally been lower as expenses of this class are higher.
The variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
Process
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities. The Adviser relies upon value measures
to guide its decisions regarding sector and security selection, such as the
relative attractiveness of the extra yield offered by securities other than
those issued by the U.S. Treasury. The Adviser also measures various types of
risk, focusing on the level of real interest rates, the shape of the yield
curve, credit risk and prepayment risk. The Adviser's management team builds an
investment portfolio designed to take advantage of its judgment on these
factors, while balancing the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
10
<PAGE>
DOMESTIC FIXED INCOME PORTFOLIO (Continued)
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
11
<PAGE>
FIXED INCOME PORTFOLIO
OBJECTIVE
The Fixed Income Portfolio seeks above-average total return over a market cycle
of three to five years.
APPROACH
The Portfolio invests primarily in a diversified mix of dollar denominated
investment grade fixed income securities, particularly U.S. Government,
corporate and mortgage securities. The Portfolio ordinarily will maintain an
average weighted maturity in excess of five years. Although there is no minimum
or maximum maturity for any individual security, the Adviser actively manages
the interest rate risk of the Portfolio within a range relative to the
benchmark. The Portfolio may invest opportunistically in non-dollar denominated
securities and in below investment grade securities. The Adviser may use
futures, swaps and other types of derivatives in managing the Portfolio.
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams identify relative attractiveness among corporate,
mortgage and U.S. Government securities, and also may consider the relative
attractiveness of non-dollar denominated issues. The Adviser relies upon value
measures to guide its decisions regard-ing sector, security and country
selection, such as the relative attractiveness of the extra yield offered by
securities other than those issued by the U.S. Treasury. The Adviser also
measures various types of risk, focusing on the level of real interest rates,
the shape of the yield curve, credit risk, prepayment risk, country risk and
currency valuations. The Adviser's management team builds an investment
portfolio designed to take advantage of its judgment on these factors, while
balancing the overall risk of the Portfolio. The Adviser may sell securities
when it believes that expected risk-adjusted return is low compared to other
investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO ASSETS
INVESTED IN FIXED INCOME SECURITIES
- -------------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER THAN
5 YEARS
- -------------------------------------------------
AT LEAST 80% INVESTMENT GRADE SECURITIES
AT TIME OF PURCHASE
- -------------------------------------------------
UP TO 20% HIGH YIELD SECURITIES AT TIME
OF PURCHASE
- -------------------------------------------------
MAY INVEST OVER 50% IN MORTGAGE
SECURITIES
- -------------------------------------------------
BENCHMARK: SALOMON
BROAD
INVESTMENT
GRADE INDEX
- -------------------------------------------------
TICKER SYMBOL: MFXAX
- -------------------------------------------------
CUSIP NO: 552-913-444
- -------------------------------------------------
PORTFOLIO MANAGERS
- -------------------------------------------------
W. DAVID ARMSTRONG, THOMAS L. BENNETT,
KENNETH B. DUNN AND ROBERTO M. SELLA
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 7, 1996
1997 9.34%
1998 6.63%
1999 -0.84%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 6/30/97 Quarter Ended 6/30/99
3.98% -1.57%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
FIXED INCOME SALOMON BROAD
PORTFOLIO INVESTMENT GRADE INDEX
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -0.84 -0.85
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
11/7/96 4.92 5.52
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
12
<PAGE>
FIXED INCOME PORTFOLIO (Continued)
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity, and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
13
<PAGE>
HIGH YIELD PORTFOLIO
OBJECTIVE
The High Yield Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests primarily in high yield securities (commonly referred to
as "junk bonds"). The Portfolio also may invest in investment grade fixed income
securities, including U.S. Government securities, corporate bonds and mortgage
securities. The Portfolio may invest to a limited extent in foreign fixed income
securities, including emerging market securities. The Adviser may use futures,
swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser uses equity and fixed income valuation techniques, together with
analyses of economic and industry trends, to determine the Portfolio's overall
structure, sector allocation and desired maturity. The Adviser emphasizes
securities of companies that have strong industry positions and favorable
outlooks for cash flow and asset values. The Adviser conducts a credit analysis
for each security considered for investment to evaluate its attractiveness
relative to the level of risk it presents. The Portfolio maintains a high level
of diversification to minimize its exposure to the risks associated with any
particular issuer. The Adviser may sell securities when it believes that
expected risk-adjusted return is low compared to other investment opportunities.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN HIGH YIELD SECURITIES
- ---------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ---------------------------------------------
BENCHMARK: CS FIRST BOSTON
HIGH YIELD INDEX
- ---------------------------------------------
TICKER SYMBOL: MAHYX
- ---------------------------------------------
CUSIP NO.: 552-913-428
- ---------------------------------------------
PORTFOLIO MANAGERS
- ---------------------------------------------
ROBERT E. ANGEVINE, STEPHEN F. ESSER,
GORDON W. LOERY AND DEANNA L. LOUGHNANE
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices
[CHART]
- -------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on January 31, 1997
1998 2.83%
1999 7.61%
- --------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- --------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
5.09% -6.36%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
CS FIRST
BOSTON SALOMON
HIGH YIELD HIGH YIELD HIGH
PORTFOLIO INDEX YIELD INDEX
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 7.61 3.28 1.74
- --------------------------------------------------------------------------------
SINCE INCEPTION
1/31/97 8.14 5.28 5.97
</TABLE>
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index, the CS
First Boston High Yield Index. Previously, the Portfolio's returns had been
compared to the Salomon High Yield Index. The Adviser believes that the CS First
Boston High Yield Index has a more comprehensive coverage of geographic regions
and types of securities in which the Portfolio may invest. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
14
<PAGE>
HIGH YIELD PORTFOLIO (Continued)
of fixed income securities generally will move in correlation to changes in an
issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. These investments are considered speculative under
traditional investment standards. Prices of high yield securities will rise and
fall primarily in response to changes in the issuer's financial health,
although changes in market interest rates also will affect prices. High yield
securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Some of the Portfolio's
investments may be denominated in a foreign currency. Changes in the values of
those currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
15
<PAGE>
BALANCED PORTFOLIO
OBJECTIVE
The Balanced Portfolio seeks above-average total return over a market cycle of
three to five years.
APPROACH
The Portfolio invests in a mix of equity and fixed income securities. The
Portfolio normally invests 45-75% of its assets in equity securities and 25-55%
of its assets in fixed income securities. The Portfolio may invest up to 25% of
its assets in foreign equity and foreign fixed income securities, including
emerging market securities. Equity securities generally will be issued by larger
corporations. The Portfolio's investments generally will include mortgage
securities and high yield securities (commonly called "junk bonds"). The Adviser
uses futures, swaps and other derivatives in managing the Portfolio.
PROCESS
The Adviser determines the Portfolio's equity and fixed income investment
strategies separately and then determines the mix of those strategies that will
maximize the return available from both the stock and bond markets, based on
proprietary valuation disciplines and analysis. The Adviser evaluates
international economic developments in determining the amount to invest in
foreign securities. The Adviser also measures various types of risk, focusing on
the level of real interest rates and credit risk. In determining whether
securities should be sold, the Adviser considers factors such as deteriorating
earnings, cash flow and other fundamentals, as well as high valuations relative
to the Portfolio's investment universe.
GENERALLY 45-75% OF PORTFOLIO ASSETS
INVESTED IN EQUITIES, 25-55% IN FIXED
INCOME SECURITIES
- ---------------------------------------------
AT LEAST 25% OF PORTFOLIO ASSETS
INVESTED IN SENIOR FIXED INCOME
SECURITIES
- ---------------------------------------------
UP TO 25% OF PORTFOLIO ASSETS INVESTED
IN FOREIGN EQUITY AND FOREIGN FIXED
INCOME SECURITIES
- ---------------------------------------------
UP TO 10% OF PORTFOLIO ASSETS INVESTED
IN BRADY BONDS (A TYPE OF EMERGING
MARKET FIXED INCOME SECURITY)
- ---------------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $1 BILLION
- ---------------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED
INCOME SECURITIES GENERALLY GREATER THAN
5 YEARS
- ----------------------------------------------
BENCHMARK: WEIGHTED BLEND OF QUARTERLY
RETURNS OF 60% S&P 500 INDEX
40% SALOMON BROAD INVESTMENT
GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: MBAAX
- ----------------------------------------------
CUSIP NO.: 552-913-394
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
THOMAS L. BENNETT, GARY G. SCHLARBAUM
AND HORACIO A. VALEIRAS
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
16
<PAGE>
BALANCED PORTFOLIO (Continued)
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. A substantial portion of the
Portfolio's investments may be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These risks are greater in emerging market
countries.
At various times, equity securities may perform better or worse than fixed
income securities. There is a risk that the Portfolio could invest too much or
too little in an asset class, which could adversely affect the Portfolio's
overall performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on November 1, 1996
1997 19.26%
1998 15.09%
1999 15.91%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.08% -6.81%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON BROAD 60/40
BALANCED S&P 500 INVESTMENT GRADE BLENDED
PORTFOLIO INDEX INDEX INDEX*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 15.91 21.04 -0.85 12.21
- ---------------------------------------------------------------------------------------
Since Inception
11/1/96 17.12 28.16 5.69 19.21
</TABLE>
*The 60/40 Blended Index is an unmanaged index comprised of 60% S&P 500 Index
and 40% Salomon Broad Investment Grade Index.
The bar chart and table above show the Portfolio's Adviser Class Shares
performance year-by-year, best and worst performance for a quarter, and average
annual total return for the past 1 year period and since inception. The table
also shows the corresponding returns of the Portfolio's benchmark index. The
variability of performance over time provides an indication of the risks of
investing in the Portfolio. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
17
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Not currently open in the Adviser Class)
OBJECTIVE
The Multi-Asset-Class Portfolio seeks above-average total return over a market
cycle of three to five years.
APPROACH
The Portfolio invests in equity securities and fixed income securities of U.S.
and foreign issuers in accordance with the Adviser's target allocation among
certain classes. These securities may include, to a limited extent, emerging
market securities. The Portfolio's equity securities generally will be issued by
large corporations. The Portfolio's investments generally will include mortgage
securities and high yield securities (commonly called "junk bonds"). The
Portfolio seeks to invest in a combination of asset classes that do not move in
tandem with each other, in order to improve potential return and control the
Portfolio's overall risks. The Portfolio's neutral position is generally 50%
domestic equity securities, 24% domestic fixed income securities, 14% foreign
equity securities, 6% foreign fixed income securities and 6% high yield
securities. The Adviser uses futures, swaps and other derivatives in managing
the Portfolio.
GENERALLY AT LEAST 65% OF PORTFOLIO
ASSETS INVESTED IN ISSUERS LOCATED IN AT
LEAST 3 COUNTRIES, INCLUDING THE U.S.
- -----------------------------------------
EQUITY CAPITALIZATION GENERALLY GREATER
THAN $1 BILLION
- -----------------------------------------
AVERAGE WEIGHTED MATURITY OF FIXED
INCOME SECURITIES GENERALLY GREATER THAN
5 YEARS
- -----------------------------------------
BENCHMARK: A WEIGHTED BLEND OF
QUARTERLY RETURNS OF
50% S&P 500 INDEX
24% SALOMON BROAD
INVESTMENT GRADE
INDEX
14% MSCI EAFE INDEX
6% SALOMON WORLD
GOVERNMENT BOND
EX-U.S. INDEX
6% CS FIRST BOSTON
HIGH YIELD INDEX
- -----------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- -----------------------------------------
CUSIP NO.: 552-913-634
- -----------------------------------------
PORTFOLIO MANAGERS
- -----------------------------------------
THOMAS L. BENNETT, BARTON M. BIGGS, J.
DAVID GERMANY, GARY G. SCHLARBAUM AND
HORACIO A. VALEIRAS
[CHART]
- -------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on July 29, 1994
1995 24.62%
1996 15.93%
1997 17.48%
1998 13.87%
1999 16.84%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
Quarter Ended 12/31/98 Quarter Ended 9/30/98
12.82% -8.64%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
SALOMON
MULTI- BROAD
ASSET-CLASS S&P 500 INVESTMENT MSCI EAFE BLENDED
PORTFOLIO INDEX GRADE INDEX INDEX INDEX*
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 16.84 21.04 -0.85 26.96 13.91
- -----------------------------------------------------------------------------
FIVE YEARS 17.69 28.55 7.74 12.83 19.20
- -----------------------------------------------------------------------------
SINCE INCEPTION
7/29/94 15.90 26.40 6.92 11.38 17.65
</TABLE>
* The Blended Index is an unmanaged index comprised of 50% S&P 500 Index, 24%
Salomon Broad Investment Grade Index, 14% MSCI EAFE Index, 6% Salomon World
Government Bond Ex-U.S. Index and 6% CS First Boston High Yield Index.
Previously, the Blended Index included the Salomon High Yield Index as its
high yield component. The Adviser believes that the CS First Boston High
Yield Index has a more comprehensive coverage of geographic regions and types
of securities in which the Portfolio may invest. If the Blended Index were to
include the Salomon High Yield Index, its performance would have been 13.81%
for the 1 year period, 19.24% for the 5 year period and 17.68% since
inception.
The bar chart and table above show the Portfolio's Institutional Class Shares
performance year-by-year, best and worst performance for a quarter, and
average annual total return for the past 1 and 5 year periods and since
inception. The table also shows the corresponding returns of the Portfolio's
benchmark index. The Adviser Class Shares would have had similar annual
returns, but returns would have generally been lower as expenses of this class
are higher. The variability of performance over time provides an indication of
the risks of investing in the Portfolio. How the Portfolio has performed in
the past does not necessarily indicate how the Portfolio will perform in the
future.
18
<PAGE>
MULTI-ASSET-CLASS PORTFOLIO (Continued)
PROCESS
The Adviser makes strategic judgments based on proprietary measures used to
compare the relative risks and returns of stock and bond markets around the
world. The Adviser's asset allocation team sets the target exposures for
domestic and international equity and fixed income securities, high yield
securities and cash, depending on the Adviser's appraisal of the relative
attractiveness of each type of investment. The Adviser also measures various
types of risk, focusing on the level of real interest rates and credit risk. In
determining whether securities should be sold, the Adviser considers factors
such as deteriorating earnings, cash flows and other fundamentals, as well as
high valuations relative to the Portfolio's investment opportunities.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of equity securities rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally will move in correlation to changes
in an issuer's credit rating.
The Portfolio's investments in high yield securities expose it to a substantial
degree of credit risk. Prices of high yield securities will rise and fall
primarily in response to actual or perceived changes in the issuer's financial
health, although changes in market interest rates also will affect prices. High
yield securities may experience reduced liquidity and sudden and substantial
decreases in price.
Mortgage securities are subject to the risk that if interest rates decline,
borrowers may pay off their mortgages sooner than expected. The Portfolio's
return may be reduced if prepayments occur and the Portfolio has to reinvest at
lower interest rates. Prepayment rates can also shorten or extend the average
life of the Portfolio's mortgage securities.
Foreign securities may involve greater risks than those issued by U.S.
companies or the U.S. government. Economic, political and other events unique
to a country or region will affect those markets and their issuers, but may not
affect the U.S. market or similar U.S. issuers. A substantial portion of the
Portfolio's investments may be denominated in a foreign currency. Changes in
the values of those currencies compared to the U.S. dollar may affect the value
of the Portfolio's investments. These risks are greater in emerging market
countries.
At various times, some asset classes will perform better or worse than others.
There is a risk that the Portfolio could invest too much or too little in
particular asset classes, which could adversely affect the Portfolio's overall
performance.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
19
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right the fees and expenses that you may pay if you
buy and hold shares of the Portfolios. The Portfolios do not charge any sales
loads or other fees when you purchase or redeem shares.
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
Equity Portfolio .500% 0.25% .120% .870%
- -------------------------------------------------------------------------------
Mid Cap Growth Portfolio .500% 0.25% .130% .880%
- -------------------------------------------------------------------------------
Mid Cap Value Portfolio .750% 0.25% .120% 1.120%
- -------------------------------------------------------------------------------
Small Cap Value Portfolio .750% 0.25% .110% 1.110%
- -------------------------------------------------------------------------------
Value Portfolio .500% 0.25% .130% .880%
- -------------------------------------------------------------------------------
Domestic Fixed Income Portfolio .375% 0.25% .125% .750%**
- -------------------------------------------------------------------------------
Fixed Income Portfolio .375% 0.25% .105% .730%
- -------------------------------------------------------------------------------
High Yield Portfolio .450% 0.25% .115% .815%
- -------------------------------------------------------------------------------
Balanced Portfolio .450% 0.25% .130% .830%
- -------------------------------------------------------------------------------
Multi-Asset-Class Portfolio .650% 0.25% .150%* 1.050%**
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements and/or voluntary waivers.
* Other Expenses are based on estimated amounts for the current year.
** The Adviser has voluntarily agreed to reduce its advisory fee and/or
reimburse the Portfolios so that total expenses will not exceed the rates
shown in the table below. Fee waivers and/or expense reimbursements are
voluntary and the Adviser reserves the right to terminate any waiver and/or
reimbursement at any time and without notice.
<TABLE>
<CAPTION>
TOTAL ANNUAL FUND OPERATING
EXPENSES AFTER MAS WAIVER/
REIMBURSEMENT & OFFSETS
-------------------------------------------------------------
<S> <C>
Domestic Fixed Income Portfolio .750%
-------------------------------------------------------------
Multi-Asset-Class Portfolio 1.030%
-------------------------------------------------------------
</TABLE>
20
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS (Continued)
EXAMPLE
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be
equal to the amounts reflected in the table to the right.
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Equity Portfolio $ 89 $278 $482 $1,073
- ---------------------------------------------------------------------------
Mid Cap Growth Portfolio $ 90 $281 $488 $1,084
- ---------------------------------------------------------------------------
Mid Cap Value Portfolio $114 $356 $617 $1,363
- ---------------------------------------------------------------------------
Small Cap Value Portfolio $113 $353 $612 $1,352
- ---------------------------------------------------------------------------
Value Portfolio $ 90 $281 $488 $1,084
- ---------------------------------------------------------------------------
Domestic Fixed Income Portfolio $ 77 $240 $417 $ 930
- ---------------------------------------------------------------------------
Fixed Income Portfolio $ 75 $233 $406 $ 906
- ---------------------------------------------------------------------------
High Yield Portfolio $ 83 $260 $452 $1,008
- ---------------------------------------------------------------------------
Balanced Portfolio $ 85 $265 $460 $1,025
- ---------------------------------------------------------------------------
Multi-Asset-Class Portfolio $107 $334 $579 $1,283
</TABLE>
21
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible
securities, ADRs, rights, warrants and shares of investment companies. The
Portfolios may invest in equity securities that are publicly traded on
securities exchanges or over-the-counter or in equity securities that are not
publicly traded. Securities that are not publicly traded may be more difficult
to sell and their value may fluctuate more dramatically than other securities.
Each Portfolio may purchase shares of other investment companies subject to
limits imposed by the Investment Company Act of 1940 ("1940 Act") and any other
applicable law.
Smaller companies carry greater risk than larger companies. The securities
issued by smaller companies may be less liquid. In addition, smaller companies
may have more limited markets, financial resources and product lines, and may
lack the depth of management of larger companies.
ADRs are U.S. dollar-denominated securities that represent claims to shares of
foreign stocks. The Portfolios treat ADRs as U.S. securities for purposes of
foreign investment limitations.
Growth stocks generally have higher growth rates, betas, and price/earnings
ratios, and lower yields than the stock market in general as measured by an
appropriate stock market index. Value stocks are stocks that are deemed by the
Adviser to be undervalued relative to the stock market in general. The Adviser
makes value decisions guided by the appropriate market index, based on value
characteristics such as price/earnings and price/book ratios. Value stocks
generally are dividend paying common stocks. However, non-dividend paying
stocks also may be selected for their value characteristics.
IPOs
Equity Portfolios of the Fund may purchase shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), and may at times
dispose of those shares shortly after their acquisition. A Portfolio's purchase
of shares issued in IPOs exposes it to the risks associated with companies that
have little operating history as public companies, as well as to the risks
inherent in those sectors of the market where these new issuers operate. The
market for IPO issuers has been volatile, and share prices of newly-public
companies have fluctuated in significant amounts over short periods of time.
FIXED INCOME SECURITIES
Fixed income securities are securities that pay a fixed rate of interest until
a stated maturity date. Fixed income securities include U.S. Government
securities, securities issued by federal or federally sponsored agencies
("agencies"), corporate bonds and notes, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds,
Yankee Bonds, repurchase agreements, commercial paper and cash equivalents.
These securities are subject to risks related to changes in interest rates and
in the financial health or credit rating of the issuers. 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
22
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
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.
Adjustable rate 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. 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. Fixed income
securities include inverse floaters, which are designed to respond in a
targeted fashion to changes in interest rates.
Fixed income securities may be called (redeemed by the issuer) prior to final
maturity. If a callable security is called, a Portfolio may have to reinvest
the proceeds at a lower rate of interest.
DURATION
The average duration of a portfolio of fixed income securities represents its
exposure to changing interest rates. A portfolio with a lower average duration
generally will experience less price volatility in response to changes in
interest rates than a portfolio with a higher average duration.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as junk bonds or high yield, high risk securities. These securities offer a
higher yield than other higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high
yield securities are influenced more by changes in the financial and business
position of the issuing company than by changes in interest rates when compared
to investment grade securities.
MORTGAGE SECURITIES
These are fixed income securities that derive their value from or represent
interests in a pool of mortgages or mortgage securities. Mortgage securities
are subject to prepayment risk--the risk that, as interest rates fall,
borrowers will refinance their mortgages and "prepay" principal. A portfolio
holding mortgage securities that are experiencing prepayments will have to
reinvest these 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. It can be difficult
to measure precisely the remaining life of a mortgage security or the average
life of a portfolio of such securities.
EUROBONDS
Eurobonds 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.
BRADY BONDS
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).
23
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
YANKEE BONDS
Yankee bonds are U.S.-dollar denominated debt obligations issued by foreign
governments and corporations and sold in the United States. They are considered
U.S. securities for purposes of Portfolio investments, except for the Domestic
Fixed Income Portfolio.
FOREIGN SECURITIES
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. 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 an investing portfolio's
investment. There also can be difficulty obtaining and enforcing judgments
against issuers in foreign countries. 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.
FOREIGN CURRENCY
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since investing
portfolios must convert the value of foreign securities into dollars, changes
in currency exchange rates can increase or decrease the U.S. dollar value of
the portfolios' assets. The Adviser may use derivatives to offset this risk.
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. In addition, 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, the market may be dominated by
a few issuers or sectors. 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 by foreign investors.
DERIVATIVES AND OTHER INVESTMENTS
Derivatives are financial instruments whose value and performance are based on
the value and performance of another security or financial instrument.
Derivatives sometimes offer the most economical way of pursuing an investment
strategy, limiting risks or enhancing returns, although there is no guarantee
of success. Hedging strategies or instruments may not be available or practical
in all circumstances. Derivative instruments may be publicly traded or
privately negotiated. Derivatives used by the Adviser include futures
contracts, options contracts, forward contracts, swaps, collateralized mortgage
obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), and
structured notes.
A forward 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
24
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
parties, at a price set at the time of the contract. Forward contracts are used
to protect against uncertainty in the level of future foreign currency exchange
rates. A futures contract provides 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. The Portfolios may use futures contracts
to gain exposure to an entire market (e.g., stock index futures) or to control
their exposure to changing foreign currency exchange rates.
If a Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an agreed-
upon price. If a Portfolio "writes" an option, it sells to another person the
right to buy from or sell to the Portfolio a specific amount of a security or
futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices or commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
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").
A 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. A Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. A Portfolio will not use derivatives as an indirect way
of investing in assets that it cannot, as a matter of policy, invest in
directly.
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Any Fixed Income Portfolio may enter into futures contracts and options on
futures contracts for bona fide hedging purposes to an unlimited extent. It also
can enter into futures contracts and options thereon for other purposes,
provided that no more than 5% of the Portfolio's total assets at the time of the
transaction are required as margin and option premiums to secure the Portfolio's
obligations under such contracts.
Any Equity Portfolio or Balanced Portfolio may enter into futures contracts
subject to the limitation that it cannot incur obligations to purchase
securities under futures and options contracts in excess of 50% of the
Portfolio's total assets. It also is subject to the limit that no more than 5%
of the Portfolio's total assets at the time of the transaction may be required
as
25
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
margin and option premiums to secure the Portfolio's obligations under futures
contracts and options thereon entered into for purposes other than bona fide
hedging.
Each Portfolio may invest in certain derivatives, such as forwards, futures,
options and mortgage derivatives as well as when-issued securities that require
a Portfolio to segregate some or all of its cash or liquid securities to cover
its obligations under those instruments. This can cause a Portfolio to lose
flexibility in managing its investments properly, responding to shareholder
redemption requests, or meeting other obligations. A Portfolio in that position
could be forced to sell other securities that it wanted to retain or to realize
unintended gains or losses.
RISKS OF DERIVATIVES
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by a Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
Hedging the Portfolio's currency risks involves the risks of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
Mortgage derivatives are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMO or SMBS that a Portfolio holds, these price
movements may be significantly greater than those experienced by mortgage
securities generally, depending on whether the payments are predominantly based
on the principal or interest paid on the underlying mortgages. In addition, the
yield to maturity of IOs and POs is extremely sensitive to prepayment levels.
As a result, a high rate of prepayments can have a material effect on a
Portfolio's yield to maturity and could cause a Portfolio to suffer losses.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in fixed income
securities for temporary defensive purposes, as described in the Statement of
Additional Information. If the Adviser incorrectly predicts the effects of
these changes, the defensive investments may adversely affect the Portfolio's
performance.
PORTFOLIO TURNOVER
Consistent with their investment policies, the Portfolios 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. Nonetheless, short-term trading activities that result
in high turnover rates are not incompatible with a stated objective of long-
term capital growth or other long-term goals, and can lead to gains that may
increase share value.
26
<PAGE>
PURCHASING SHARES
Adviser Class Shares are available to clients of the Adviser with combined
investments of $500,000 and corporations or other institutions, such as trusts,
foundations or broker-dealers, who have a contractual arrangement with the Fund
or its Distributor and who purchase shares for the accounts of others
(Shareholder Organizations).
Adviser Class Shares of each Portfolio may be purchased at the net asset value
per share (NAV) next determined after we receive your purchase order.
INITIAL PURCHASE BY MAIL
You may open an account, subject to acceptance by MAS Funds, by completing and
signing an Account Registration Form provided by MAS Funds Client Services
("Client Services") and mailing it to MAS Funds c/o Miller Anderson & Sherrerd,
LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 together with a check
payable to MAS Funds.
Please note that payments to investors who redeem shares purchased by check will
not be made until payment of the purchase has been collected, which may take up
to eight business days after purchase. You can avoid this delay by purchasing
shares by wire.
INITIAL PURCHASE BY WIRE
You may purchase Adviser Class Shares of each Portfolio by wiring Federal Funds
to the Fund's Custodian Bank, The Chase Manhattan Bank ("Chase"). You should
forward a completed Account Registration Form to Client Services in advance of
the wire. For all Portfolios, notification must be given to Client Services at
1-800-354-8185 prior to the determination of NAV. See the section below entitled
"Valuation of Shares." (Prior notification must also be received from investors
with existing accounts.) Instruct your bank to send a Federal Funds wire in a
specified amount to Chase using the following wire instructions:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
ADDITIONAL INVESTMENTS
You may make additional investments in Adviser Class Shares (minimum additional
investment $1,000) at the NAV next determined after the request is received in
good order, by mailing a check (payable to MAS Funds) to Client Services at the
address noted under Initial Purchase by Mail or by wiring Federal Funds to Chase
as outlined above. For all Portfolios, notification must be given to Client
Services at 1-800-354-8185 prior to the determination of NAV.
OTHER PURCHASE INFORMATION
We may suspend the offering of shares, or any class of shares, of any Portfolio
or reject any purchase orders when we think it is in the best interest of the
Fund. We may waive the minimum initial and additional investment amounts in
certain cases.
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for fractional
shares, however, will not be issued.
27
<PAGE>
REDEEMING SHARES
BY MAIL
You may redeem shares of each Portfolio by mail, or, if authorized, by telephone
at no charge. The value of shares redeemed may be more or less than the purchase
price, depending on the NAV at the time of redemption. Each Portfolio will
redeem shares at the NAV next determined after the request is received in good
order.
Requests should be addressed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP,
One Tower Bridge, West Conshohocken, PA 19428-0868.
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(c) Any required signature guarantees. Signature guarantees are required for (1)
redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s) and the registered address, and (2) share transfer
requests. Please contact Client Services for further details; and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE
If you have authorized the Telephone Redemption Option on the Account
Registration Form, you may request a redemption of shares by calling Client
Services at 1-800-354-8185 and requesting that the redemption proceeds be mailed
or wired to you. You cannot redeem shares by telephone if you hold share
certificates for those shares.
BY FACSIMILE
Written requests in good order for redemptions, exchanges and transfers may be
forwarded to the Fund via facsimile at (610) 940-5284. If you make a request via
facsimile, you must call Client Services to ensure that the Fund properly
received your instructions. The original request must be promptly mailed to MAS
Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken,
PA 19428-0868.
We will ordinarily pay redemption proceeds within three business days after
receipt of your request. We may suspend the right of redemption or postpone the
payment of redemption proceeds at times when the New York Stock Exchange
("NYSE") is closed, the Fund is closed or under other circumstances in
accordance with interpretations or orders of the U.S. Securities and Exchange
Commission.
If we determine that it is in the best interest of other shareholders not to pay
redemption proceeds in cash, we may pay you partly or entirely by distributing
to you readily marketable securities held by the Portfolio from which you are
redeeming. You may incur brokerage charges when you sell those securities.
28
<PAGE>
VALUATION OF SHARES
We determine the NAV of the following Portfolios at the following times on each
day the Portfolio(s) is open for business:
[_] Equity Portfolios as of the close of the NYSE (normally 4:00 p.m. Eastern
Time).
[_] Fixed Income Portfolios as of one hour after the close of the bond markets
(normally 4:00 p.m. Eastern Time).
[_] Balanced and Multi-Asset-Class Portfolios as of the later of the close of
the NYSE or one hour after the close of the bond markets (normally 4:00 p.m.
Eastern Time).
Each Portfolio values its securities at market value. When no quotations are
readily available for securities or when the value of securities has been
materially affected by events occurring after the close of the market, we will
determine the value for those securities in good faith at fair value using
methods approved by the Board of Trustees.
The NAV of Adviser Class Shares may differ from that of other classes because of
class-specific expenses that each class may pay, the distribution fees charged
to Adviser Class Shares and the shareholder servicing fees charged to Investment
Class Shares.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The value
of portfolio securities may change on a day when you cannot purchase or redeem
shares if a Portfolio invests in foreign securities that trade on days when the
Fund is closed.
GENERAL SHAREHOLDER INFORMATION
EXCHANGE PRIVILEGE
You may exchange each Portfolio's Adviser Class Shares for Adviser Class Shares
of the Fund's other Portfolios based on their respective NAVs. The exchange
privilege is only available with respect to Portfolios offering Adviser Class
Shares that are qualified for sale in your state of residence. We charge no fee
for exchanges. You should send exchange requests to MAS Funds, c/o Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868, or
by facsimile with a follow-up phone call. Exchange requests can also be made by
telephone, provided the telephone redemption option has been authorized. We
reserve the right to change the terms or conditions of the exchange privilege
upon sixty days' notice.
Frequent trading by shareholders can disrupt management of a Portfolio and raise
its expenses. Therefore, we may not accept any request for an exchange when we
think the exchange privilege is being used as a tool for market timing, and we
may bar a shareholder who trades excessively from making further purchases for
an indefinite period.
29
<PAGE>
GENERAL SHAREHOLDER INFORMATION (continued)
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
PORTFOLIO QUARTERLY ANNUALLY
<S> <C> <C>
Equity X
---------------------------------------------------------------------------------------------
Mid Cap Growth X
---------------------------------------------------------------------------------------------
Mid Cap Value X
---------------------------------------------------------------------------------------------
Small Cap Value X
---------------------------------------------------------------------------------------------
Value X
---------------------------------------------------------------------------------------------
Domestic Fixed Income X
---------------------------------------------------------------------------------------------
Fixed Income X
---------------------------------------------------------------------------------------------
High Yield X
---------------------------------------------------------------------------------------------
Balanced X
---------------------------------------------------------------------------------------------
Multi-Asset-Class X
</TABLE>
If any net gains are realized from the sale of underlying securities, the
Portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. Corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such Portfolios from
U.S. corporations. Capital gains distributions may be taxable at different
rates depending on the length of time the Fund holds its assets.
Investment income received by the Portfolios from sources within foreign
countries may be subject to foreign income taxes. The Portfolios may be able to
pass through to you for foreign tax credit purposes the amount of foreign
income taxes that they paid.
Distributions paid in January but declared by a Portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
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., and is a division of Morgan Stanley Dean Witter Investment
Management ("MSDW"). 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 November 30, 1999, Morgan Stanley Dean Witter Investment
Management had in excess of $177 billion in assets under management.
30
<PAGE>
FUND MANAGEMENT (Continued)
The Adviser makes investment decisions for the Fund's Portfolios and places
each Portfolio's purchase and sales orders. Each Portfolio, in turn, pays the
Adviser an annual advisory fee calculated by applying a quarterly rate. The
following table shows the Adviser's annual contractual and actual rates of
compensation for the Fund's 1999 fiscal year.
<TABLE>
<CAPTION>
CONTRACTUAL FY 1999
COMPENSATION ACTUAL
RATE COMPENSATION RATE
------------------------------------------------------------------
<S> <C> <C>
Equity Portfolio .500 .500
------------------------------------------------------------------
Mid Cap Growth Portfolio .500 .500
------------------------------------------------------------------
Mid Cap Value Portfolio .750 .750
------------------------------------------------------------------
Small Cap Value Portfolio .750 .750
------------------------------------------------------------------
Value Portfolio .500 .500
------------------------------------------------------------------
Domestic Fixed Income Portfolio* .375 .375
------------------------------------------------------------------
Fixed Income Portfolio .375 .375
------------------------------------------------------------------
High Yield Portfolio+ .450 .375
------------------------------------------------------------------
Balanced Portfolio .450 .450
------------------------------------------------------------------
Multi-Asset-Class Portfolio* .650 .627
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Domestic Fixed Income Portfolio and the Multi-Asset-
Class Portfolio to keep Total Operating Expenses from exceeding .750% and
1.030%, respectively.
+ Effective October 1, 1999, the Management Fee for the High Yield Portfolio
increased from .375% to .450%.
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's Portfolios is as follows:
Robert E. Angevine, Principal, MSDW, joined Morgan Stanley Dean Witter
Investment Management Inc. in 1988 as a Fixed Income Portfolio Manager. He
joined the management team for the High Yield Portfolio in 1996.
Arden C. Armstrong, Managing Director, MSDW, joined MAS in 1986. She joined the
management team for the Mid Cap Growth Portfolio in 1990 and the Equity
Portfolio in 1994.
W. David Armstrong, Managing Director, MSDW, joined MSDW as a Portfolio Manager
in 1998. He served as a Senior Vice President and Manager of U.S. proprietary
trading at Lehman Brothers from 1995-1997. He joined the management team for
the Fixed Income and Special Purpose Fixed Income Portfolios in 2000.
Richard M. Behler, Principal, MSDW, joined MAS in 1995. He served as a
Portfolio Manager from 1992 through 1995 for Moore Capital Management. He
joined the management team for the Value Portfolio in 1996.
31
<PAGE>
FUND MANAGEMENT (continued)
Thomas L. Bennett, Managing Director, MSDW, joined MAS in 1984. He joined the
management team for the Fixed Income Portfolio in 1984, the Domestic Fixed
Income Portfolio in 1987, the Fixed Income II Portfolio in 1990, the Special
Purpose Fixed Income and Balanced Portfolios in 1992, the Multi-Asset-Class
Portfolio in 1994 and the Multi-Market Fixed Income Portfolio in 1997.
Barton M. Biggs, Managing Director, MSDW since 1975, Chairman of Morgan Stanley
Dean Witter Investment Management Inc. since 1980 and a director of Morgan
Stanley Group, Inc. He is also a director and chairman of various registered
investment companies to which Morgan Stanley Dean Witter Investment Management,
Inc. and certain of its affiliates provide investment advisory services. He
joined the management team for the Multi-Asset Class Portfolio in 1999.
David P. Chu, Principal, MSDW, joined MAS in 1998. He served as Senior Equity
Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997 for NationsBank
and its subsidiary, TradeStreet Investment Associates. He joined the management
team for the Mid Cap Growth and Small Cap Growth Portfolios in 1998.
Steven B. Chulik, Vice President, MSDW, joined MAS in 1997. He served as a
Quantitative Hedge Fund Analyst at IBJ Schroder Bank and Trust from 1994 to
1995. He attended the Wharton School of the University of Pennsylvania from 1995
to 1997 and received his MBA in 1997. He served as an Equity Analyst at MAS from
1997 to 1999. He joined the management team for the Mid Cap Growth and Small Cap
Growth Portfolios in 1999.
Bradley S. Daniels, Principal, MSDW, joined MAS in 1985. He joined the
management team for the Small Cap Value Portfolio in 1986 and the Mid Cap Value
Portfolio in 1994.
Kenneth B. Dunn, Managing Director, MSDW, joined MAS in 1987. He joined the
management team for the Fixed Income Portfolio in 1987, the Special Purpose
Fixed Income Portfolio in 1992 and the Multi-Market Fixed Income Portfolio in
1997.
Steven Epstein, Vice President, MSDW, joined MAS as a Financial Analyst in 1996.
He attended the Wharton School, University of Pennsylvania, from 1994-1996,
receiving an MBA. He joined the management team for the Equity Portfolio in
2000.
Stephen F. Esser, Managing Director, MSDW, joined MAS in 1988. He joined the
management team for the High Yield Portfolio in 1989 and the Multi-Market Fixed
Income Portfolio in 1997.
William B. Gerlach, Principal, MSDW, joined MAS in 1991. He served as a Research
Associate from 1991 to 1996 and has served as an Equity Portfolio Manager since
1996. He joined the management team for the Small Cap Value and Mid Cap Value
Portfolios in 1996.
J. David Germany, Managing Director, MSDW, joined MAS in 1991. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the Multi-Market
Fixed Income Portfolio in 1997.
32
<PAGE>
FUND MANAGEMENT (Continued)
James J. Jolinger, Principal, MSDW, joined MAS in 1994. He served as an Equity
Analyst from 1994 to 1997, and has served as an Equity Portfolio Manager and
Director of Research since 1997. He joined the management team for the Equity
Portfolio in 1997.
Vitaly V. Korchevsky, Vice President, MSDW, joined MAS as a Portfolio Manager in
1999. He served as an Analyst/Portfolio Manager for Gardner Lewis Asset
Management from 1998-1999, and as a Portfolio Manager for Crestar Asset
Management Co. from 1995-1998. He joined the management team for the Mid Cap
Value and Small Cap Value Portfolios in 2000.
Nicholas J. Kovich, Managing Director, MSDW, joined MAS as a Portfolio Manager
in 1988. He joined the management team for the Value Portfolio in 1997.
Brian Kramp, Principal, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
CoreStates Investment Advisors from 1985 to 1997. He joined the management team
for the Equity Portfolio in 1998.
Chris Leavy, Vice President, MSDW, joined MAS as a Portfolio Manager in 1997. He
served as a Portfolio Manager for Capitoline Investment Services from 1995 to
1997; a Portfolio Manager for Premier Trust Company from 1994 to 1995; and as a
Research Analyst for Leavy Investment Management from 1993 to 1994. He joined
the management team for the Equity Portfolio in 2000.
Gordon W. Loery, Principal, MSDW, joined MAS in 1996. He served as a Fixed
Income Analyst at Morgan Stanley Asset Management Inc. from 1990 to 1996. He
joined the management team for the High Yield Portfolio in 1999.
Deanna L. Loughnane, Principal, MSDW, joined MAS as a Financial Analyst in 1997.
She served as a Vice President and Senior Corporate Bond Analyst for Putnam
Investments from 1993-1997. She joined the management team for the High Yield
Portfolio in 2000.
Angelo G. Manioudakis, Principal, MSDW, joined MAS in 1993. He served as a Fixed
Income Analyst from 1993 to 1995. From 1995 to 1998, he served as a Fixed Income
Portfolio manager. He joined the management team for the Intermediate Duration
Portfolio in 1998 and the Domestic Fixed Income and Fixed Income II Portfolios
in 2000. Robert J. Marcin, Managing Director, MSDW, joined MAS in 1988. He
joined the management team for the Value Portfolio in 1990 and the Equity
Portfolio in 1994.
Scott F. Richard, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Limited Duration, Intermediate Duration and Advisory
Mortgage Portfolios in 1995, the Targeted Duration Portfolio in 1998 and the
Domestic Fixed Income and Fixed Income II Portfolios in 2000.
Eric F. Scharpf, Vice President, MSDW, joined MAS as a Financial Analyst in
1997. He attended the Wharton School, University of Pennsylvania, from 1995-
1997, receiving an MBA, and served as a Financial Analyst for Salomon Brothers
from 1993-1995. He joined the management team for the Equity Portfolio in 2000.
33
<PAGE>
FUND MANAGEMENT (Continued)
Gary G. Schlarbaum, Managing Director, MSDW; Director, MAS Fund Distribution,
Inc.; joined MAS in 1987. He joined the management team for the Equity and
Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992 and the
Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
Roberto M. Sella, Managing Director, MSDW, joined MAS in 1992. He served as a
Financial Analyst from 1992-1998, and as a Portfolio Manager beginning in 1998.
He joined the management team for the Fixed Income and Special Purpose Fixed
Income Portfolios in 2000.
Horacio A. Valeiras, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the International Equity Portfolio in 1992, the Emerging
Markets Value Portfolio in 1993, the Multi-Asset-Class Portfolio in 1994 and
the Balanced Portfolio in 1996.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
DISTRIBUTION PLAN
The Fund has adopted a Plan of Distribution for each Portfolio's Adviser Class
Shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
each Portfolio pays the Distributor a monthly distribution fee at an annual
rate of 0.25% of the Portfolio's average daily net assets attributable to
Adviser Class Shares. The Distributor may keep any or all of this fee as
compensation for its services in connection with distributing Adviser Class
Shares or providing shareholder or account maintenance services. The
Distributor also may use this fee to pay financial intermediaries, plan
fiduciaries, and investment professionals, including the Adviser, for providing
distribution support services, and/or account maintenance services to
shareholders (including, when applicable, any underlying beneficial owners) of
Adviser Class Shares.
34
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio or Class. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). This information has been extracted from the Fund's financial
statements which were audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are incorporated by reference into the
Fund's Statement of Additional Information and are included in the Fund's
September 30, 1999 Annual Report to Shareholders.
The Adviser Class Shares of the Multi-Asset-Class Portfolio had not commenced
operations as of September 30, 1999, therefore Institutional Class Share
information is provided to investors for informational purposes only and should
be referred to as a historical guide to a portfolio's operations and expenses.
Past performance does not indicate future results.
<TABLE>
<CAPTION>
Net Gains
or Losses
on Dividend Capital Gain Net
Net Asset Securities Distributions Distributions Asset
Value Net (realized Total from (net (realized net Value
Beginning Investment and Investment investment capital Other Total End of Total
of Period Income unrealized) Activities income) gains) Distributions Distributions Period Return**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Adviser Class Operations 1/16/98)
1999 $20.42 $ 0.11 $ 5.21 $ 5.32 ($0.12) ($5.83) -- ($5.95) $19.79 29.80%
1998 20.50 0.10 (0.09) 0.01 (0.09) -- -- (0.09) 20.42 (0.02)
Mid Cap Growth Portfolio (Commencement of Adviser Class Operations 1/31/97)
1999 $18.55 ($0.05) $10.58 $10.53 -- ($3.49) -- ($3.49) $25.59 63.87%
1998 21.81 (0.03) 0.20 0.17 -- (3.43) -- (3.43) 18.55 1.79
1997 17.04 (0.02) 4.79 4.77 -- -- -- -- 21.81 27.99
Mid Cap Value Portfolio (Commencement of Adviser Class Operations 7/17/98)
1999+++ $18.12 $ 0.07 $ 5.01 $ 5.08 ($0.03) ($1.31) -- ($1.34) $21.86 29.12%
1998+++ 21.82 0.01 (3.71) (3.70) -- -- -- -- 18.12 (16.96)
Small Cap Value Portfolio (Commencement of Adviser Class Operations 1/22/99)
1999+++ $17.32 $ 0.06 $ 1.24 $ 1.30 -- -- -- -- $18.62 7.51%
Value Portfolio (Commencement of Adviser Class Operations 07/17/96)
1999+++ $15.13 $ 0.17 $ 1.12 $ 1.29 ($0.24) ($2.61) -- ($2.85) $13.57 8.10%
1998 20.35 0.29 (3.38) (3.09) (0.32) (1.81) -- (2.13) 15.13 (16.66)
1997+++ 15.61 0.30 5.74 6.04 (0.27) (1.03) -- (1.30) 20.35 40.87
1996 14.11 0.01 1.49 1.50 -- -- -- -- 15.61 10.63
Domestic Fixed Income Portfolio (Commencement of Adviser Class Operations 3/01/99)
1999 $10.85 $ 0.39 ($0.43) ($0.04) ($0.28) -- -- ($0.28) $10.53 (0.40%)
<CAPTION>
Ratio of
Expenses
Net Assets to Ratio of
End of Average Net Income Portfolio
Period Net to Average Turnover
(thousands) Assets+ Net Assets Rate
<S> <C> <C> <C> <C>
Equity Portfolio (Commencement of Adviser Class Operations 1/16/98)
1999 $ 2,123 0.87% 0.34% 103%
1998 373 0.88* 0.65* 77
Mid Cap Growth Portfolio (Commencement of Adviser Class Operations 1/31/97)
1999 $263,312 0.88% (0.31%) 208%
1998 51,058 0.87 (0.25) 172
1997 1,200 0.88* (0.41)* 134
Mid Cap Value Portfolio (Commencement of Adviser Class Operations 7/17/98)
1999+++ $ 40,636 1.12% 0.33% 244%
1998+++ 4,919 1.24* 0.25* 213
Small Cap Value Portfolio (Commencement of Adviser Class Operations 1/22/99)
1999+++ $ 16,117 1.11%* 0.45%* 251%
Value Portfolio (Commencement of Adviser Class Operations 07/17/96)
1999+++ $254,483 0.88% 1.10% 53%
1998 325,272 0.85 1.52 56
1997+++ 201,253 0.90 1.63 46
1996 15,493 0.86* 1.66* 53
Domestic Fixed Income Portfolio (Commencement of Adviser Class Operations 3/01/99)
1999 $ 1,192 0.75%* 6.73%* 115%
</TABLE>
35
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
<TABLE>
<CAPTION>
Net Gains
or Losses
on Dividend Capital Gain Net
Net Asset Securities Distributions Distributions Asset
Value Net (realized Total from (net (realized net Value
Beginning Investment and Investment investment capital Other Total End of Total
of Period Income unrealized) Activities income) gains) Distributions Distributions Period Return**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Adviser Class Operations 11/07/96)
1999+++ $12.23 $0.74 ($0.72) $ 0.02 ($0.69) -- ($0.30) ($0.99) $11.26 0.07%
1998+++ 12.22 0.75 0.14 0.89 (0.71) (0.17) -- (0.88) 12.23 7.63
1997+++ 12.04 0.70 0.20 0.90 (0.59) (0.13) -- (0.72) 12.22 7.79
High Yield Portfolio (Commencement of Adviser Class Operations 1/31/97)
1999+++ $ 8.99 $0.84 ($0.11) $ 0.73 ($0.77) ($0.04) ($0.15) ($0.96) $ 8.76 8.44%
1998+++ 10.15 0.83 (0.93) (0.10) (0.80) (0.26) -- (1.06) 8.99 (1.37)
1997+++ 9.39 0.56 0.59 1.15 (0.39) -- -- (0.39) 10.15 12.63
Balanced Portfolio (Commencement of Adviser Class Operations 11/01/96)
1999+++ $13.43 $0.42 $ 1.71 $ 2.13 ($0.40) ($1.36) -- ($1.76) $13.80 16.76%
1998+++ 15.30 0.44 (0.12) 0.32 (0.47) (1.72) -- (2.19) 13.43 2.49
1997 14.05 0.42 2.60 3.02 (0.38) (1.39) -- (1.77) 15.30 23.82
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1999 $11.74 $0.37 $ 1.62 $ 1.99 ($0.34) ($0.96) -- ($1.30) $12.43 17.71%
1998+++ 13.64 0.38 (0.45) (0.07) (0.34) (1.49) -- (1.83) 11.74 (0.46)
1997+++ 12.28 0.38 2.57 2.95 (0.51) (1.08) -- (1.59) 13.64 26.50
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) -- (0.57) 12.28 13.75
1995 9.97 0.44 1.33 1.77 (0.40) -- -- (0.40) 11.34 18.28
<CAPTION>
Ratio of
Expenses
Net Assets to Ratio of
End of Average Net Income Portfolio
Period Net to Average Turnover
(thousands) Assets+ Net Assets Rate
<S> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Adviser Class Operations 11/07/96)
1999+++ $141,709 0.73% 6.38% 103%
1998+++ 131,303 0.73 6.22 121
1997+++ 76,683 0.77*++ 6.50* 179
High Yield Portfolio (Commencement of Adviser Class Operations 1/31/97)
1999+++ $ 13,701 0.74% 9.29% 45%
1998+++ 10,236 0.75 8.55 75
1997+++ 4,327 0.78* 8.68* 96
Balanced Portfolio (Commencement of Adviser Class Operations 11/01/96)
1999+++ $ 29,210 0.83% 2.97% 111%
1998+++ 24,654 0.84 3.11 100
1997 27,366 0.85*++ 3.24* 145
Multi-Asset-Class Portfolio (Commencement of Institutional Class Operations 7/29/94)
1999 $152,862 0.78%++ 2.86% 101%
1998+++ 165,039 0.78++ 2.98 107
1997+++ 173,155 0.74++ 3.07 141
1996 129,558 0.58++ 3.82 122
1995 96,839 0.58++ 4.56 112
</TABLE>
36
<PAGE>
FINANCIAL HIGHLIGHTS (Continued)
Notes to the Financial Highlights
* Annualized
** Total return figures for partial years are not annualized.
# Represents distribution in excess of net realized gains.
+ For the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
<TABLE>
<CAPTION>
Portfolio 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Equity 0.82* 0.85
Mid Cap Growth 0.86* 0.84 0.86
Mid Cap Value 1.17* 1.11
Small Cap Value 1.10*
Value 0.85* 0.89 0.84 0.87
Domestic Fixed Income 0.74*
Fixed Income 0.76* 0.72 0.72
High Yield 0.76* 0.73 0.73
Balanced 0.84* 0.82 0.82
Multi-Asset-Class 0.58 0.58 0.74 0.78 0.78
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and reimbursed expenses totaled the below listed amounts.
<TABLE>
<CAPTION>
Voluntarily waived and/or reimbursed expenses for:
Portfolio 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Domestic Fixed Income... --
Fixed Income............ 0.01%* -- --
Balanced................ 0.03* -- --
Multi-Asset-Class....... 0.14 0.08 0.08 0.04 0.02
</TABLE>
+++ Per share amounts for the year are based on average shares outstanding.
37
<PAGE>
[LOGO OF MAS FUNDS]
ADVISER CLASS PROSPECTUS
January 31, 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.
James H. Scott
Officers of the Fund
--------------------
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, Vice President & John H. Grady, Jr.,
Treasurer Assistant Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January 31, 2000, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number below. If you purchased shares through a financial
intermediary, you may also obtain these documents, without charge, by
contacting your financial intermediary.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (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. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address:
[email protected]. To aid you in obtaining this information, the Fund's
Investment Company Act registration number is 811-03980.
MAS Funds
One Tower Bridge, West Conshohocken, PA 19428-0868.
For shareholder inquiries, call Client Services at 1-800-354-8185.
Prices and Investment Results are available at 1-800-522-1525.
MORGAN STANLEY DEAN WITTER
--------------------------
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST
CONSHOHOCKEN, PA 19428
<PAGE>
[LOGO OF MAS FUNDS]
-------------------------------
ADVISER CLASS PROSPECTUS
JANUARY 31, 2000
-------------------------------
MORGAN STANLEY DEAN WITTER
--------------------------
INVESTMENT MANAGEMENT
0005-538-prosmasadv-0100
ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA
19428 . 800-354-8185
<PAGE>
ADVISORY PORTFOLIOS PROSPECTUS
[LOGO OF MAS FUNDS]
JANUARY 31, 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, 3 of which are described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers shares of the following portfolios (each a "Portfolio" and collectively
the "Portfolios"):
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO
ADVISORY MORTGAGE PORTFOLIO
These Portfolios are available only to private advisory clients of the Adviser
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, PAN 19428
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY.......................................................... 1
PORTFOLIOS
ADVISORY FOREIGN FIXED INCOME PORTFOLIO................................... 2
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO................................ 3
ADVISORY MORTGAGE PORTFOLIO............................................... 4
FEES AND EXPENSES OF THE PORTFOLIOS......................................... 5
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 5
PURCHASING SHARES........................................................... 9
REDEEMING SHARES............................................................ 9
VALUATION OF SHARES......................................................... 9
GENERAL SHAREHOLDER INFORMATION............................................. 10
FUND MANAGEMENT............................................................. 10
FINANCIAL HIGHLIGHTS........................................................ 12
</TABLE>
<PAGE>
INVESTOR SUITABILITY
INVESTMENT SUMMARY
This section explains each Portfolio's:
[_] Investment]Objective
[_] Principal]Investment Strategy
[_] Principal]Risks
INVESTOR SUITABILITY
[_] The Portfolios may be suitable for long-term investors who can accept the
risks of investing in the stock and bond markets.
[_] The Portfolios are designed principally for investment by fiduciary
investors who are entrusted with the responsibility of investing assets
held for the benefit of others.
[_] While the Portfolios consider whether their securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<PAGE>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
OBJECTIVE
The Advisory Foreign Fixed Income Portfolio seeks above-average total return
over a market cycle of three to five years.
APPROACH
The Portfolio invests in high grade fixed income securities of government and
corporate issuers primarily in countries other than the U.S., including, to a
limited degree, issuers located in emerging markets. A substantial portion of
these securities may be asset-backed and, to a lesser extent, mortgage
securities. The securities held by the Portfolio ordinarily will be denominated
in foreign currencies, including the Euro. The Portfolio ordinarily will
maintain an average weighted maturity in excess of five years, although there
is no minimum or maximum maturity for any individual security. The Adviser uses
futures, forwards and other types of derivatives in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES OF
ISSUERS IN AT LEAST 3 COUNTRIES OTHER THAN
THE U.S.
- ----------------------------------------------
100% OF SECURITIES RATED A OR HIGHER AT TIME
OF PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------------
CUSIP NO.: 552-913-626
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F.
O'BRIEN AND CHRISTIAN G. ROTH
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams determine the relative attractiveness of foreign
government, corporate and mortgage securities. The Adviser relies upon value
measures, particularly the relative attractiveness of securities issued by
foreign governments against those of corporations and other private entities.
The Adviser also measures various types of risk, focusing on the level of real
interest rates, currency valuations, credit risk, country risk and the shape of
the yield curve. The Adviser's management team builds an investment portfolio
designed to take advantage of the firm's judgment on these factors, while
balancing the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Prices of fixed income securities generally move in correlation to changes in
an issuer's credit rating.
Asset-backed and mortgage securities are subject to the risk that changes in
interest rates and other factors may affect the prepayment of the receivable,
mortgage, loan or other assets underlying the security. The Portfolio's return
may be reduced if prepayments occur and the Portfolio has to reinvest at lower
rates. Prepayment rates also can shorten or extend the average life of the
Portfolio's asset-backed or mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Changes in the values
of foreign currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. The Portfolio therefore may be more
susceptible to an adverse event affecting a portfolio investment than a
diversified portfolio.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on October 7, 1994
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
17.50% 14.98% 9.83% 10.74% 1.81%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 12/31/95 QUARTER ENDED 6/30/99
6.58% -0.26%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
<TABLE>
<CAPTION>
ADVISORY FOREIGN SALOMON BROAD
FIXED INCOME INVESTMENT
PORTFOLIO GRADE INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 1.81 -0.85
- --------------------------------------------------------------------------------------------
FIVE YEARS 10.84 7.74
- --------------------------------------------------------------------------------------------
SINCE INCEPTION
10/7/94 10.69 7.53
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 and 5 year periods and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
2
<PAGE>
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.
APPROACH
The Portfolio invests in investment grade fixed income securities of government
and corporate issuers primarily in countries other than the U.S., including, to
a limited degree, issuers located in emerging markets. A substantial portion of
these securities may be asset-backed and, to a lesser extent, mortgage
securities. The securities held by the Portfolio ordinarily will be denominated
in foreign currencies, including the Euro. The Portfolio ordinarily will
maintain an average weighted maturity in excess of five years, although there
is no minimum or maximum maturity for any individual security. The Adviser uses
futures, forwards and other types of derivatives in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN FIXED INCOME SECURITIES OF
ISSUERS IN COUNTRIES OTHER THAN THE U.S.
- ----------------------------------------------
100% OF SECURITIES RATED BBB OR HIGHER AT
TIME OF PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 5 YEARS
- ----------------------------------------------
BENCHMARK: SALOMON BROAD
INVESTMENT
GRADE INDEX
- ----------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------------
CUSIP NO.: NOT AVAILABLE
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
J. DAVID GERMANY, MICHAEL KUSHMA, PAUL F.
O'BRIEN AND CHRISTIAN G. ROTH
PROCESS
The Adviser employs a value approach toward fixed income investing. The
Adviser's research teams determine the relative attractiveness of foreign
government, corporate and mortgage securities. The Adviser relies upon value
measures, particularly the relative attractiveness of securities issued by
foreign governments against those of corporations and other private entities.
The Adviser also measures various types of risk, focusing on the level of real
interest rates, currency valuations, credit risk, country risk and the shape of
the yield curve. The Adviser's management team builds an investment portfolio
designed to take advantage of the firm's judgment on these factors, while
balancing the overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer of the fixed income security. Securities with
longer durations are likely to be more sensitive to changes in interest rates,
generally making them more volatile than securities with shorter durations.
Lower rated fixed income securities have greater volatility because there is
less certainty that principal and interest payments will be made as scheduled.
Prices of fixed income securities generally move in correlation to changes in
an issuer's credit rating.
Asset-backed and mortgage securities are subject to the risk that changes in
interest rates and other factors may affect the prepayment of the receivable,
mortgage, loan or other assets underlying the security. The Portfolio's return
may be reduced if prepayments occur and the Portfolio has to reinvest at lower
rates. Prepayment rates also can shorten or extend the average life of the
Portfolio's asset-backed or mortgage securities.
Foreign fixed income securities may involve greater risks than those issued by
U.S. companies or the U.S. government. Economic, political and other events
unique to a country or region will affect those markets and their issuers, but
may not affect the U.S. market or similar U.S. issuers. Changes in the values
of foreign currencies compared to the U.S. dollar may affect the value of the
Portfolio's investments. These risks are greater in emerging market countries.
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. The Portfolio therefore may be more
susceptible to an adverse event affecting a portfolio investment than a
diversified portfolio.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing directly in the underlying asset. A derivative instrument may be
illiquid and changes in its value may not correlate to changes in the value of
its underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
PERFORMANCE INFORMATION
No performance information is provided because the Advisory Foreign Fixed
Income II Portfolio had not commenced operations as of 12/31/99.
3
<PAGE>
ADVISORY MORTGAGE PORTFOLIO
OBJECTIVE
The Advisory Mortgage Portfolio seeks returns consistent with returns generated
by the market for mortgage securities.
APPROACH
The Portfolio invests in investment grade mortgage securities of the U.S.
Government and private issuers, and in mortgage derivatives. The Portfolio also
invests in other U.S. Government securities and investment grade fixed income
securities. The Portfolio ordinarily will maintain an average weighted maturity
in excess of seven years, although there is no minimum or maximum maturity for
any individual security. The Adviser uses futures, swaps and other derivatives
in managing the Portfolio.
GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
ASSETS INVESTED IN MORTGAGE SECURITIES
- ----------------------------------------------
100% INVESTMENT GRADE SECURITIES AT TIME OF
PURCHASE
- ----------------------------------------------
AVERAGE WEIGHTED MATURITY GENERALLY GREATER
THAN 7 YEARS
- ----------------------------------------------
AVERAGE DURATION GENERALLY 2-7 YEARS
- ----------------------------------------------
BENCHMARK: LEHMAN MORTGAGE INDEX
- ----------------------------------------------
TICKER SYMBOL: NOT AVAILABLE
- ----------------------------------------------
CUSIP NO.: 552-913-592
- ----------------------------------------------
PORTFOLIO MANAGERS
- ----------------------------------------------
KENNETH B. DUNN, SCOTT F. RICHARD AND ROBERTO
M. SELLA
PROCESS
The Adviser employs a value approach toward mortgage investing. The Adviser's
research teams determine the relative attractiveness of mortgage securities,
mortgage derivatives, and other U.S. Government and fixed income securities.
The Adviser measures returns generated by the market for mortgage securities by
reference to the Portfolio's benchmark index. The Adviser also measures various
types of risk, focusing on the level of real interest rates, sensitivity to
interest rate changes, credit risk, prepayment rates and the shape of the yield
curve. The Adviser's management team builds an investment portfolio designed to
take advantage of the firm's judgment on these factors, while balancing the
overall risk of the Portfolio. 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 various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities.
The prices of fixed income securities respond to economic developments,
particularly interest rate changes and changes in the actual or perceived
creditworthiness of the issuer. Securities with longer durations are likely to
be more sensitive to changes in interest rates, generally making them more
volatile than securities with shorter durations. Lower rated fixed income
securities have greater volatility because there is less certainty that
principal and interest payments will be made as scheduled. Prices of fixed
income securities generally move in correlation to changes in an issuer's
credit rating.
Mortgage securities are also subject to the risk that if interest rates
decline, borrowers may pay off their mortgages sooner than expected. The
Portfolio's return may be reduced if prepayments occur and the Portfolio has to
reinvest at lower rates. Prepayment rates also can shorten or extend the
average life of the Portfolio's mortgage securities.
The Portfolio is subject to the risks of using derivatives. A derivative
instrument may involve risks different from, or greater than, the risks of
investing in the underlying asset. A derivative instrument may be illiquid and
changes in its value may not correlate to changes in the value of its
underlying asset, which may magnify losses.
Please see "Investment Strategies and Related Risks" for further information
about these and other risks of investing in the Portfolio.
[CHART]
- -------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
- -------------------------------------------------------------------------------
Commenced operations on April 12, 1995
1996 1997 1998 1999
------- ------- ------- -------
6.52% 10.43% 7.60% -0.49%
- -------------------------------------------------------------------------------
HIGH (QUARTER) LOW (QUARTER)
- -------------------------------------------------------------------------------
QUARTER ENDED 6/30/97 QUARTER ENDED 6/30/99
3.76% -1.36%
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/99)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY LEHMAN
MORTGAGE MORTGAGE
PORTFOLIO INDEX
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR -0.49 1.86
- --------------------------------------------------------------------------------------------------
SINCE INCEPTION
4/12/95 7.07 7.09
</TABLE>
The bar chart and table above show the Portfolio's performance year-by-year,
best and worst performance for a quarter, and average annual total return for
the past 1 year period and since inception. The table also shows the
corresponding returns of the Portfolio's benchmark index. The variability of
performance over time provides an indication of the risks of investing in the
Portfolio. How the Portfolio has performed in the past does not necessarily
indicate how the Portfolio will perform in the future.
4
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right the fees and expenses that you may pay if
you buy and hold shares of the Portfolios. The Portfolios do not charge any
sales loads or other fees when you purchase or redeem shares.
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME
PORTFOLIO .375% NONE .165% .540%**
- -----------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME
II PORTFOLIO .375% NONE .122%* .497%**
- -----------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO .375% NONE .105% .480%**
</TABLE>
Total Annual Fund Operating Expenses reflected in the table above may be
higher than the expenses actually deducted from portfolio assets because of
the effect of expense offset arrangements and/or voluntary waivers.
* 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 Portfolios so that total expenses will not exceed .150%, .150% and .080%
for the Advisory Foreign Fixed Income, Advisory Foreign Fixed Income II and
Advisory Mortgage Portfolios, respectively. Fee waivers and/or expense
reimbursements are voluntary and the Adviser reserves the right to terminate
any waiver and/or reimbursement at any time and without notice.
<TABLE>
<CAPTION>
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
----------------------------------------------------------------------------------
<S> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO .150%
----------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME II PORTFOLIO .122%
----------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO .080%
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in each
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. For portfolios that
have been in operation for 6 months or less, the example is limited to 3 years.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO $55 $173 $302 $677
- ------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO $51 $159 $ -- $ --
- ------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO $49 $154 $269 $604
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES AND RELATED RISKS
- --------------------------------------------------------------------------------
FIXED INCOME SECURITIES
Fixed income securities are securities that pay a fixed rate of interest until
a stated maturity date. Fixed income securities include U.S. Government
securities, securities issued by federal or federally sponsored agencies
("agencies"), corporate bonds and notes, asset-backed securities, mortgage
securities, high yield securities, municipal bonds, loan participations and
assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds,
repurchase agreements, commercial paper and cash equivalents.
These securities are subject to risks related to changes in interest rates and
in the financial health or credit rating of the issuers. 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
5
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
shorter term securities because they are more sensitive to changes in interest
rates or in the credit ratings of the issuers.
Adjustable rate 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. 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. Fixed income
securities include inverse floaters, which are designed to respond in a
targeted fashion to changes in interest rates.
Fixed income securities may be called (redeemed by the issuer) prior to final
maturity. If a callable security is called, a Portfolio may have to reinvest
the proceeds at a lower rate of interest.
DURATION
The average duration of a portfolio of fixed income securities represents its
exposure to changing interest rates. A portfolio with a lower average duration
generally will experience less price volatility in response to changes in
interest rates than a portfolio with a higher average duration.
MORTGAGE AND ASSET-BACKED SECURITIES
Mortgage and asset-backed securities are fixed income securities representing
an interest in a pool of underlying mortgage loans or assets such as truck and
auto loans, leases and credit card receivables. Due to the possibility of
prepayment of the assets underlying these securities, it may not be possible to
determine in advance the actual maturity date or average life of the security.
Rising interest rates tend to discourage refinancings, and, as a result, the
average life and volatility of the security will increase. When interest rates
fall, the underlying asset must be reinvested at lower rates.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as junk bonds or high yield, high risk securities. These securities offer a
higher yield than other higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high
yield securities are influenced more by changes in the financial and business
position of the issuing company than by changes in interest rates when compared
to investment grade securities.
EUROBONDS
Eurobonds 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.
BRADY BONDS
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).
FOREIGN SECURITIES
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. In some foreign
countries, there is also the risk of government expropriation,
6
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
excessive taxation, political or social instability, the imposition of currency
controls, or diplomatic developments that could affect an investing portfolio's
investment. There also can be difficulty obtaining and enforcing judgments
against issuers in foreign countries. 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.
FOREIGN CURRENCY
Foreign securities are denominated in foreign currencies. The value of foreign
currencies fluctuates relative to the value of the U.S. dollar. Since investing
portfolios must convert the value of foreign securities into dollars, changes
in currency exchange rates can increase or decrease the U.S. dollar value of
the portfolios' assets. The Adviser may use derivatives to offset this risk.
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. In addition, 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, the market may be dominated by
a few issuers or sectors. 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 by foreign investors.
DERIVATIVES AND OTHER INVESTMENTS
Derivatives are financial instruments whose value and performance are based on
the value and performance of another security or financial instrument.
Derivatives sometimes offer the most economical way of pursuing an investment
strategy, limiting risks or enhancing returns, although there is no guarantee
of success. Hedging strategies or instruments may not be available or practical
in all circumstances.
Derivative instruments may be publicly traded or privately negotiated.
Derivatives used by the Adviser include futures contracts, options contracts,
forward contracts, swaps, collateralized mortgage obligations ("CMOs"),
stripped mortgage-backed securities ("SMBS"), and structured notes.
A forward 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. Forward contracts are used to protect against uncertainty in the
level of future foreign currency exchange rates. A futures contract provides
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. The Portfolios may use futures contracts to gain exposure to an entire
market (e.g., stock index futures) or to control their exposure to changing
foreign currency exchange rates.
If a Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an agreed-
upon price. If a Portfolio "writes" an option, it sells to another person the
right to buy from or sell to the Portfolio a specific amount of a security or
futures contract at an agreed-upon price. The Portfolios may enter into swap
transactions which are contracts in which a Portfolio agrees to exchange the
return or interest rate on one instrument for the return or interest rate on
another instrument. Payments may be based on currencies, interest rates,
securities indices or commodity indices. Swaps may be used to manage the
maturity and duration of a fixed income portfolio, or to gain exposure to a
market without directly investing in securities traded in that market.
Structured investments are units representing an interest in assets held in a
trust that is not an investment company as defined in the 1940 Act. The trust
may pay a return based on the income it receives from those assets, or it may
pay a return based on a specified index.
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-
7
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
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").
A 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. A Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. A Portfolio will not use derivatives as an indirect way
of investing in assets that it cannot, as a matter of policy, invest in
directly.
The amount that a Portfolio may invest in futures and options depends on the
type of portfolio. The limitations are as follows:
Each Portfolio may enter into futures contracts and options on futures
contracts for bona fide hedging purposes to an unlimited extent. It also can
enter into futures contracts and options thereon for other purposes, provided
that no more than 5% of the Portfolio's total assets at the time of the
transaction are required as margin and option premiums to secure the
Portfolio's obligations under such contracts.
An investment in derivatives may require a Portfolio to segregate some or all
of its cash or liquid securities to cover its obligations under those
instruments. This can cause a Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. A Portfolio in that position could be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
RISKS OF DERIVATIVES
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by a Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for a Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
Hedging the Portfolio's currency risks involves the risks of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
Mortgage derivatives are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMO or SMBS that a Portfolio holds, these price
movements may be significantly greater than those experienced by mortgage
securities generally, depending on whether the payments are predominantly based
on the principal or interest paid on the underlying mortgages. In addition, the
yield to maturity of IOs and POs is extremely sensitive to prepayment levels.
As a result, a high rate of prepayments can have a material effect on a
Portfolio's yield to maturity and could cause a Portfolio to suffer losses.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, each Portfolio may invest without limit in securities of
U.S. issuers for temporary defensive purposes, as described in the Statement of
Additional Information. If the Adviser incorrectly predicts the effects of
these changes, the defensive investments may adversely affect the Portfolio's
performance.
PORTFOLIO TURNOVER
Consistent with their investment policies, the Portfolios 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. Nonetheless, short-term trading activities that result
in high turnover rates are not incompatible with a stated objective of long-
term capital growth or other long-term goals, and can lead to gains that may
increase share value.
8
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
- --------------------------------------------------------------------------------
NON-DIVERSIFICATION OF INVESTMENTS
A Portfolio of investments in a small number of issuers or industries or in
securities denominated in only a few foreign currencies increases risk. A non-
diversified Portfolio may invest a greater percentage of its assets in the
securities of a single issuer than a diversified Portfolio. Portfolios that
invest in a relatively small number of issuers are more susceptible to risks
associated with a single economic, political or regulatory occurrence than a
more diversified portfolio might be. Some of those issuers also may present
substantial credit, currency or other risks.
- --------------------------------------------------------------------------------
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares of each Portfolio may be purchased at the net asset value per share
(NAV) next determined after we receive your purchase order. Institutional Class
shares are available to clients of the Adviser with combined investments of
$5,000,000 (minimum additional investment $1,000).
OTHER PURCHASE INFORMATION
We may suspend the offering of shares of any Portfolio or reject any purchase
orders when we think it is in the best interest of the Fund. We may waive the
minimum initial and additional investment amounts in certain cases.
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places. Certificates for shares will
not be issued except if you request them in writing. Certificates for
fractional shares, however, will not be issued.
- --------------------------------------------------------------------------------
REDEEMING SHARES
- --------------------------------------------------------------------------------
You may redeem shares of each Portfolio at no charge by writing to Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 or
by calling 1-800-762-1155. The value of shares redeemed may be more or less
than the purchase price, depending on the NAV at the time of redemption. Shares
of each Portfolio will be redeemed at the net asset value (NAV) next determined
after we receive your redemption request.
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
payment of redemption proceeds at times when the New York Stock Exchange
("NYSE") is closed, the Fund is closed or under other circumstances in
accordance with interpretations or orders of the U.S. Securities and Exchange
Commission.
If we determine that it is in the best interest of other shareholders not to
pay redemption proceeds in cash, we may pay you partly or entirely by
distributing to you readily marketable securities held by the Portfolio from
which you are redeeming. You may incur brokerage charges when you sell those
securities.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
- --------------------------------------------------------------------------------
We determine the NAV of the Portfolios as of one hour after the close of normal
trading in the U.S. bond markets (typically 4:00 p.m. Eastern Time).
Each Portfolio values its securities at market value. When no quotations are
readily available for securities or when the value of securities has been
materially affected by events occurring after the close of the primary market
for the securities, we will determine the value for those securities in good
faith at fair value using methods approved by the Board of Trustees.
The Fund is closed for business on weekends and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The value
of portfolio securities may change on a day when you cannot purchase or redeem
shares if a Portfolio invests in foreign securities that trade on days when the
Fund is closed.
9
<PAGE>
- --------------------------------------------------------------------------------
GENERAL SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Portfolios normally distribute substantially all of their net investment
income to shareholders as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO MONTHLY QUARTERLY
- --------------------------------------------------------------------------------
<S> <C> <C>
ADVISORY FOREIGN FIXED INCOME X
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME II X
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE X
</TABLE>
If any net gains are realized from the sale of underlying securities, the
Portfolios normally distribute the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
TAXES
Income dividends you receive will be taxable as ordinary income, whether you
receive them in cash or in additional shares. Corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such portfolios from
U.S. corporations. Capital gains distributions may be taxable at different
rates depending on the length of time the Fund holds its assets.
Investment income received by the Advisory Foreign Fixed Income and Advisory
Foreign Fixed Income II Portfolios from sources within foreign countries may be
subject to foreign income taxes. These Portfolios may be able to pass through
to you for foreign tax credit purposes the amount of foreign income taxes that
they paid.
Distributions paid in January but declared by a Portfolio in October, November
or December of the previous year are taxable to you in the previous year.
Exchanges and redemptions of shares in a Portfolio are taxable events.
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., and is a division of Morgan Stanley Dean Witter Investment
Management ("MSDW"). 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 November 30, 1999, Morgan Stanley Dean Witter Investment
Management had in excess of $177 billion in assets under management.
The Adviser makes investment decisions for the Fund's Portfolios and places
each Portfolio's purchase and sales orders. Each Portfolio, in turn, pays the
Adviser an annual advisory fee calculated by applying a quarterly rate. The
table below shows the Adviser's annual contractual and actual rates of
compensation for the Fund's 1999 fiscal year.
<TABLE>
<CAPTION>
FY 1999
CONTRACTUAL ACTUAL
COMPENSATION COMPENSATION
RATE RATE
- ------------------------------------------------------------------------
<S> <C> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO* .375 .000
- ------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME II PORTFOLIO* .375 --
- ------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO* .375 .000
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and reimbursing
certain expenses for the Advisory Foreign Fixed Income, Advisory Foreign
Fixed Income II and Advisory Mortgage Portfolios to keep Total Operating
Expenses from exceeding .150%, .150% and .080%, respectively.
10
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT (Continued)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Fund's Portfolios is as follows:
KENNETH B. DUNN, Managing Director, MSDW, joined MAS in 1987. He joined the
management team for the Fixed Income Portfolio in 1987, the Mortgage-Backed
Securities and Special Purpose Fixed Income Portfolios in 1992, the Advisory
Mortgage Portfolio in 1995 and the Multi-Market Fixed Income Portfolio in 1997.
J. DAVID GERMANY, Managing Director, MSDW, joined MAS in 1991. He joined the
management team for the Global Fixed Income and International Fixed Income
Portfolios in 1993, the Multi-Asset-Class 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 2000.
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
2000.
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 2000.
SCOTT F. RICHARD, Managing Director, MSDW, joined MAS in 1992. He joined the
management team for the Limited Duration, Intermediate Duration and Advisory
Mortgage Portfolios in 1995, the Targeted Duration Portfolio in 1998 and the
Domestic Fixed Income and Fixed Income II Portfolios in 2000.
ROBERTO M. SELLA, Managing Director, MSDW, joined MAS in 1992. He served as a
Financial Analyst from 1992-1998, and as a Portfolio Manager beginning in 1998.
He joined the management team for the Fixed Income, Special Purpose Fixed
Income and Advisory Mortgage Portfolios in 2000.
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
and International Fixed Income Portfolios in 1999 and the Advisory Foreign
Fixed Income and Advisory Foreign Fixed Income II Portfolios in 2000.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights tables are intended to help you understand
the financial performance of each Portfolio for the past five years or, if less
than five years, the life of the Portfolio. Certain information reflects
financial results for a single Portfolio share. The total returns in the tables
represent the rate that an investor would have earned (or lost) on an
investment in each Portfolio (assuming reinvestment of all dividends and
distributions). As of the fiscal year ended September 30, 1999, the Advisory
Foreign Fixed Income II Portfolio had not commenced operations. This
information has been extracted from the Fund's financial statements which were
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, are incorporated by reference into the Fund's Statement
of Additional Information and are included in the Fund's September 30, 1999
Annual Report to Shareholders.
<TABLE>
<CAPTION>
NET GAINS
OR LOSSES
ON DIVIDEND CAPITAL GAIN
NET ASSET SECURITIES DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE- NET (REALIZED TOTAL FROM (NET (REALIZED NET VALUE-
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL OTHER TOTAL END OF TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) GAINS) DISTRIBUTIONS DISTRIBUTIONS PERIOD RETURN**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO (COMMENCEMENT OF OPERATIONS 10/7/94)
1999+++ $10.18 $0.19 -- $ 0.19 ($5.52) $(1.00) -- ($6.52) $ 3.85 2.87%
1998+++ 10.32 0.48 0.48 0.96 (1.10) -- -- (1.10) 10.18 10.19
1997+++ 11.73 0.58 0.80 1.38 (1.88) (0.88) (0.03)# (2.79) 10.32 14.08
1996 10.80 0.68 1.02 1.70 (0.66) (0.11) -- (0.77) 11.73 16.47
1995 10.00 0.74 0.44 1.18 (0.38) -- -- (0.38) 10.80 12.12
ADVISORY MORTGAGE PORTFOLIO (COMMENCEMENT OF OPERATIONS 4/12/95)
1999 $10.86 $0.66 ($0.69) ($0.03) ($0.58) -- ($0.22)# ($0.80) $10.03 (0.32%)
1998 10.59 0.69 0.36 1.05 (0.67) (0.11) -- (0.78) 10.86 10.36
1997 10.29 0.75 0.34 1.09 (0.71) (0.08) -- (0.79) 10.59 11.03
1996 10.41 0.72 (0.06) 0.66 (0.72) (0.03) (0.03)# (0.78) 10.29 6.56
1995 10.00 0.25 0.35 0.60 (0.19) -- -- (0.19) 10.41 6.03
<CAPTION>
RATIO OF
EXPENSES
NET ASSETS- TO RATIO OF
END OF AVERAGE NET INCOME PORTFOLIO
PERIOD NET TO AVERAGE TURNOVER
(THOUSANDS) ASSETS++ NET ASSETS RATE
<S> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME PORTFOLIO (COMMENCEMENT OF OPERATIONS 10/7/94)
1999+++ $ 14,322 0.15% 4.24% 0%
1998+++ 17,683 0.12 4.84 318
1997+++ 93,939 0.14 5.68 208
1996 236,092 0.12 6.06 170
1995 537,133 0.16* 7.44* 96
ADVISORY MORTGAGE PORTFOLIO (COMMENCEMENT OF OPERATIONS 4/12/95)
1999 $8,463,568 0.09% 6.62% 94%
1998 6,396,764 0.09 6.83 126
1997 3,071,427 0.09 7.55 144
1996 1,974,592 0.09 7.17 139
1995 1,443,038 0.10* 6.72* 110
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
# Represents distribution in excess of net realized gains.
+ For the periods ended September 30, 1995, September 30, 1996, September 30,
1997, September 30, 1998 and September 30, 1999, the Ratio of Expenses to
Average Net Assets for the Advisory Foreign Fixed Income and Advisory
Mortgage Portfolios excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would be
0.15%* and 0.08%*, respectively, for 1995, 0.12% and 0.08%, respectively,
for 1996, 0.14% and 0.08%, respectively, for 1997, 0.12% and 0.08%,
respectively, for 1998 and 0.14% and 0.08%, respectively, for 1999.
++ The Adviser has voluntarily agreed to waive its advisory fees and/or
reimburse certain expenses to the extent necessary in order to keep Total
Operating Expenses actually deducted from portfolio assets for the Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios from exceeding 0.15%
and 0.08%, respectively. Voluntarily waived and/or reimbursed expenses
totaled 0.38%* and 0.49%*, respectively, for the period ended September 30,
1995, 0.38% and 0.39%, respectively, for the year ended September 30, 1996,
0.38% and 0.40%, respectively, for the year ended September 30, 1997,
0.38%, 0.40%, respectively, for the year ended September 30, 1998 and 0.39%
and 0.39%, respectively for the year ended September 30, 1999.
+++ Per share amounts for the year are based on average shares outstanding.
12
<PAGE>
[LOGO OF MAS FUNDS]
JANUARY 31, 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.
James H. Scott
OFFICERS OF THE FUND
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, John H. Grady, Jr.,
Vice President & Treasurer Assistant Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated January 31, 2000, which contains additional, more
detailed information about the Fund and the Portfolios. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year.
You may obtain the SAI and Shareholder Reports without charge by contacting the
Fund at the toll-free number below.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-800-SEC-0330);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (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. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address:
[email protected]. 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.
<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 31, 2000
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-eight
portfolios (each a "Portfolio" and collectively the "Portfolios") offering a
variety of investment alternatives. This Statement of Additional Information
(the "SAI") sets forth information about the Fund applicable to all twenty-eight
Portfolios.
This SAI is not a prospectus but should be read in conjunction with the Fund's
prospectuses dated January 31, 2000, each as revised from time to time. To
obtain any of these prospectuses, please call the Client Services Group.
The Fund's most recent annual report is a separate document supplied with this
SAI and includes the Fund's audited financial statements, which are incorporated
by reference into this SAI.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES 2
INVESTMENT STRATEGIES 7
INVESTMENTS 10
INVESTMENT LIMITATIONS 36
PURCHASE OF SHARES 38
REDEMPTION OF SHARES 38
TRANSACTIONS WITH BROKER/DEALERS 39
SHAREHOLDER SERVICES 39
VALUATION OF SHARES 40
MANAGEMENT OF THE FUND 41
INVESTMENT ADVISER 43
PRINCIPAL UNDERWRITER 47
DISTRIBUTION OF SHARES 47
FUND ADMINISTRATION 47
OTHER SERVICE PROVIDERS 49
LITIGATION 49
BROKERAGE TRANSACTIONS 49
GENERAL INFORMATION 53
TAX CONSIDERATIONS 55
PRINCIPAL HOLDERS OF SECURITIES 58
PERFORMANCE INFORMATION 70
COMPARATIVE INDICES 81
FINANCIAL STATEMENTS 86
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS 87
</TABLE>
<PAGE>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES
The prospectus describes the investment objectives, principal investment
strategies and principal risks associated with each Portfolio. The Portfolios
may engage in a variety of investment strategies and invest in a variety of
securities and other instruments. The following tables summarize the
permissible strategies and investments for each Portfolio (abbreviations are
explained following each table). The tables exclude strategies and investments
that Portfolios may make solely for temporary defensive purposes. More details
about each strategy and investment are provided in the discussion following the
tables.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY AND BALANCED PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------------
Balanced Mid Cap Mid Cap Small Cap
Balanced Plus Equity Growth Growth Value Multi-Asset-Class Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIES
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Management X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Core Equity Investing X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Investing X X
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and Asset Allocation X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income Investing X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Stock Investing X X
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
International Equity Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Maturity and Duration Management X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Value Stock Investing X
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
ADRs X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------
Small Cap
Value Value Value II
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STRATEGIES
- ----------------------------------------------------------------------------
Asset Allocation Management
- ----------------------------------------------------------------------------
Core Equity Investing
- ----------------------------------------------------------------------------
Emerging Markets Investing
- ----------------------------------------------------------------------------
Fixed Income and Asset Allocation
- ----------------------------------------------------------------------------
Foreign Fixed Income Investing
- ----------------------------------------------------------------------------
Foreign Investing
- ----------------------------------------------------------------------------
Growth Stock Investing X
- ----------------------------------------------------------------------------
High Yield Investing
- ----------------------------------------------------------------------------
International Equity Investing
- ----------------------------------------------------------------------------
Maturity and Duration Management
- ----------------------------------------------------------------------------
Mortgage Investing
- ----------------------------------------------------------------------------
Value Investing
- ----------------------------------------------------------------------------
Value Stock Investing X X X
- ----------------------------------------------------------------------------
INVESTMENTS
- ----------------------------------------------------------------------------
ADRs X X X
- ----------------------------------------------------------------------------
Agencies X X X
- ----------------------------------------------------------------------------
Asset-Backed Securities
- ----------------------------------------------------------------------------
Brady Bonds
- ----------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Balanced Mid Cap Mid Cap Multi-Asset- Small Cap
Balanced Plus Equity Growth Growth Growth Class Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
CMOs X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Depositary Receipt X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Securities X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Floaters X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income
Securities X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield Securities X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Inverse Floaters X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Funds X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Loan Participations and
Assignments X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Municipals X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Rights X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
SMBS X X X
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Small Cap
Value Value Value
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Cash Equivalents X X X
- -----------------------------------------------------------------------
CMOs
- -----------------------------------------------------------------------
Commercial Paper X X X
- -----------------------------------------------------------------------
Common Stock X X X
- -----------------------------------------------------------------------
Convertibles X X X
- -----------------------------------------------------------------------
Corporates X X X
- -----------------------------------------------------------------------
Depositary Receipt X X X
- -----------------------------------------------------------------------
Emerging Markets Securities
- -----------------------------------------------------------------------
Floaters
- -----------------------------------------------------------------------
Foreign Currency X X X
- -----------------------------------------------------------------------
Foreign Equity X X X
- -----------------------------------------------------------------------
Foreign Fixed Income
Securities X X X
- -----------------------------------------------------------------------
Forwards X X X
- -----------------------------------------------------------------------
Futures X X X
- -----------------------------------------------------------------------
High Yield Securities
- -----------------------------------------------------------------------
Inverse Floaters
- -----------------------------------------------------------------------
Investment Companies X X X
- -----------------------------------------------------------------------
Investment Funds
- -----------------------------------------------------------------------
Loan Participations and
Assignments
- -----------------------------------------------------------------------
Mortgage Securities
- -----------------------------------------------------------------------
Municipals
- -----------------------------------------------------------------------
Options X X X
- -----------------------------------------------------------------------
Preferred Stock X X X
- -----------------------------------------------------------------------
Repurchase Agreements X X X
- -----------------------------------------------------------------------
Reverse Repurchase Agreements X X X
- -----------------------------------------------------------------------
Rights X X X
- -----------------------------------------------------------------------
SMBS
- -----------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Balanced Mid Cap Mid Cap Multi-Asset- Small Cap
Balanced Plus Equity Growth Growth Growth Class Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Lending X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Investments X X
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Warrants X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
When-Issued Securities X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Yankees and Eurobonds X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Small Cap
Value Value Value
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Securities Lending X X X
- -----------------------------------------------------------------------
Short Sales X X X
- -----------------------------------------------------------------------
Structured Investments
- -----------------------------------------------------------------------
Structured Notes
- -----------------------------------------------------------------------
Swaps X X X
- -----------------------------------------------------------------------
U.S. Governments X X X
- -----------------------------------------------------------------------
Warrants X X X
- -----------------------------------------------------------------------
When-Issued Securities X X X
- -----------------------------------------------------------------------
Yankees and Eurobonds
- -----------------------------------------------------------------------
Zero Coupons X X X
- -----------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global International
Cash Fixed Fixed Income Fixed High Intermediate Fixed Limited
Reserves Income Income II Income Yield Duration Income Duration
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
STRATEGIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets
Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and
Asset Allocation
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Investing X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Multi-Market Special
Fixed NY Purpose Targeted Advisory Advisory Advisory
Income Municipal Municipal Income Fixed Duration Foreign Fixed Foreign Fixed Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio Income Portfolio Income II Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
STRATEGIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets
Investing X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and
Asset Allocation X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Investing X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global International
Cash Fixed Fixed Income Fixed High Intermediate Fixed Limited
Reserve Income Income II Income Yield Duration Income Duration
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Investing X X
- -----------------------------------------------------------------------------------------------------------------------------------
Maturity and
Duration Management X X X X X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X X X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market
Investing X
- -----------------------------------------------------------------------------------------------------------------------------------
Municipals
Management
- -----------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-Backed
Securities X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
CMOs X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Securities X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Floaters X X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Equity X
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Securities X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield
Securities X X
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Multi- Special Advisor Advisor
Market Purpose Foreign Foreign
Fixed NY Fixed Targeted Fixed Fixed Advisory
Income Municipal Municipal Income Duration Income Income II Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Investing X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity and
Duration Management X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market
Investing
- ------------------------------------------------------------------------------------------------------------------------------------
Municipals
Management X X
- ------------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-Backed
Securities X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
CMOs X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Securities X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Floaters X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Securities X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield
Securities X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global Intermediate
Cash Fixed Fixed Income Fixed High Intermediate Fixed Limited
Reserve Income Income II Income Yield Duration Income Duration
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Inverse Floaters X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Loan Participations and
Assignment X X
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Municipals X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
NY Municipals
- ----------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase
Agreements X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
SMBS X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Lending X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Structured
Investments
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Warrants X
- ----------------------------------------------------------------------------------------------------------------------------------
When-Issued
Securities X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Yankees and
Eurobonds X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Multi- Special Advisor Advisor
Market Purpose Foreign Foreign
Fixed NY Fixed Targeted Fixed Fixed Advisory
Income Municipal Municipal Income Duration Income Income II Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inverse Floaters X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Funds X X
- ----------------------------------------------------------------------------------------------------------------------------------
Loan Participations and
Assignment X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Municipals X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
NY Municipals X
- ----------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase
Agreements X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
SMBS X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Lending X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Structured
Investments X X
- ----------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Warrants X
- ----------------------------------------------------------------------------------------------------------------------------------
When-Issued
Securities X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Yankees and
Eurobonds X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
INVESTMENT STRATEGIES
ASSET ALLOCATION MANAGEMENT: The Adviser's approach to asset allocation
management is to determine investment strategies for each asset class in a
Portfolio separately, and then determine the mix of those strategies expected to
maximize the return potential within each market. Strategic judgments on the mix
among asset classes are based on valuation disciplines and tools for analysis
which have been developed over the Adviser's twenty-five year history of
managing balanced accounts.
Tactical asset-allocation shifts are based on comparisons of prospective risks,
potential returns, and the likely risk-reducing benefits derived from combining
different asset classes into a single portfolio. Experienced teams of equity,
fixed income, and international investment professionals manage the investments
in each asset class.
CORE EQUITY INVESTING: The Adviser's "core" or primary equity strategy
emphasizes common stocks of large companies, with targeted investments in small
company stocks that promise special growth opportunities. Depending on the
Adviser's outlook for the economy and different market sectors, the mix between
value stocks and growth stocks will change.
FIXED INCOME MANAGEMENT AND ASSET ALLOCATION: In selecting fixed income
securities for certain Portfolios, the Adviser considers the value offered by
various segments of the fixed income securities market relative to cash
equivalents and equity securities. The Adviser may find that certain segments of
the fixed income securities market offer more or less attractive relative value
when compared to equity securities or when compared to other fixed income
securities.
For example, in a given interest rate environment, equity securities may be
judged to be fairly valued when compared to intermediate duration fixed income
securities, but overvalued compared to long duration fixed income securities.
Consequently, while a Portfolio investing only in fixed income securities may
not emphasize long duration assets to the same extent, the fixed-income portion
of a balanced investment may invest a percentage of its assets in long duration
bonds on the basis of their valuation relative to equity securities.
EMERGING MARKET INVESTING: The Adviser's approach to emerging market 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, an emerging market 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 may include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging markets is either not feasible or very
costly, or may involve unacceptable political risks. Other special risks include
the possible increased likelihood of expropriation or the return to power of a
communist regime which would institute policies to expropriate, nationalize or
otherwise confiscate investments. A Portfolio will focus its investments on
those emerging market countries in which the Adviser believes the potential for
market appreciation outweighs these risks and the cost of investment. Investing
in emerging markets also involves an extra degree of custodial and/or market
risk, especially where the securities purchased are not traded on an official
exchange or where ownership records regarding the securities are maintained by
an unregulated entity (or even the issuer itself).
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
7
<PAGE>
currency risk exists, currency futures and 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.
Because foreign bonds and foreign equities may be denominated in foreign
currencies, and because a Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, a Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Although a Portfolio will endeavor to achieve the most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising the Portfolio's
investments.
GROWTH STOCK INVESTING: The Adviser focuses on common stocks that generally have
higher growth rates, betas, and price/earnings ratios, and lower yields than the
stock market in general as measured by an appropriate market index.
HIGH YIELD INVESTING: This strategy involves investments in high yield
securities based on the Adviser's analysis of economic and industry trends and
individual security characteristics. The Adviser conducts credit analysis for
each security considered for investment to evaluate its attractiveness relative
to its risk. A high level of diversification is also maintained to limit credit
exposure to individual issuers. See "High Yield Securities" below for further
discussion of these securities, including risks.
INTERNATIONAL EQUITY INVESTING: The Adviser's approach to international equity
investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S. equity
markets and individual securities.
The Adviser considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a Portfolio may also invest in regulated investment companies or
investment funds which invest in such countries to the extent allowed by
applicable law.
MATURITY AND DURATION MANAGEMENT: One of two main components of the Adviser's
fixed income investment strategy is maturity and duration management. The
maturity and duration structure of a
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Portfolio investing in fixed income securities is actively managed in
anticipation of cyclical interest rate changes. Adjustments are not made in an
effort to capture short-term, day-to-day movements in the market, but instead
are implemented in anticipation of longer term shifts in the levels of interest
rates. Adjustments made to shorten portfolio maturity and duration are made to
limit capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for maturity and duration strategy lies in analysis of the U.S. and
global economies, focusing on levels of real interest rates, monetary and fiscal
policy actions, and cyclical indicators. See "value investing" for a description
of the second main component of the Adviser's fixed income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations also
have call provisions. Depending on the relative magnitude of these payments and
the nature of the call provisions, the market values of debt obligations may
respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed income securities. Duration is a
measure of the expected life of a fixed income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a fixed
income security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter
the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities generally is thirty years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MONEY MARKET INVESTING: The Cash Reserves Portfolio invests in securities which
present minimal credit risk and may not yield as high a level of current income
as securities of lower quality or longer maturities which generally have less
liquidity, greater market risk and more price fluctuation. The Cash Reserves
Portfolio is designed to provide maximum stability of principal. However,
because the Cash Reserves Portfolio invests in the money market obligations of
private financial and non-financial corporations in addition to those of the
U.S. Government or its agencies and instrumentalities, it offers higher credit
risk and yield potential relative to money market funds which invest exclusively
in U.S. Government securities. The Cash Reserves Portfolio seeks to maintain,
but does not guarantee, a constant net asset value of $1.00 per share.
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS: Commercial paper rated A-1 by Standard
& Poor's Corporation ("Standard & Poor's") has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the
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issuer has a strong position within the industry; and (6) the reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is A-1, A-2, or A-
3. The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and the
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships that exist with the issuer; and (8) recognition by
the management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
MORTGAGE INVESTING: As described in the prospectus, certain Portfolios may
invest greater than 50% of their assets, and other Portfolios also may invest,
in mortgage-related securities. These include mortgage securities representing
interests in pools of mortgage loans made by lenders such as commercial banks,
savings and loan associations, mortgage bankers and others. The pools are
assembled by various organizations, including the Government National Mortgage
Association ("GNMA"), Freddie Mac, Fannie Mae, other government agencies, and
private issuers. It is expected that a Portfolio's primary emphasis will be in
mortgage securities issued by the various government-related organizations.
However, a Portfolio may invest, without limit, in mortgage securities issued by
private issuers when the Adviser deems that the quality of the investment, the
quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or Standard & Poor's or be deemed by the Adviser to be of comparable investment
quality.
MUNICIPALS MANAGEMENT: Municipals management emphasizes a diversified portfolio
of high grade municipal debt securities. These securities generally provide
interest income that is exempt from federal regular income tax. However, the
interest on certain types of municipal securities may be subject to the
alternative minimum tax.
The Adviser manages the Fund's municipal Portfolios with the goal of maximizing
their total return. This means that they may invest in taxable investments when
the prospective after-tax total return on such investments is attractive,
regardless of the taxable nature of income on the security. Municipal Portfolios
also may invest in taxable investments such as U.S. Governments, agencies,
corporates, cash equivalents, preferred stocks, mortgage securities, asset-
backed securities, floaters, and inverse floaters.
VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is value investing. The Adviser seeks to identify undervalued sectors
and securities through analysis of credit quality, option characteristics and
liquidity. Quantitative models are used in conjunction with judgment and
experience to evaluate and select securities with embedded put or call options
which are attractive on a risk- and option-adjusted basis. Successful value
investing will permit a Portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged.
VALUE STOCK INVESTING: The Adviser emphasizes common stocks that it believes are
undervalued relative to the stock market in general as measured by an
appropriate market index. The Adviser determines value using a variety of
measures, including price/earnings and price/book ratios. Value stocks generally
pay dividends, but the Adviser may select non-dividend paying stocks for their
value characteristics.
INVESTMENTS
ADRs: American Depositary Receipts ("ADRs") are dollar-denominated securities
which are listed and traded in the United States, but which represent claims to
shares of foreign stocks. They are treated as U.S. EQUITY SECURITIES for
purposes of the Portfolios' investment policies. ADRs may be either sponsored or
unsponsored. Unsponsored ADR facilities typically provide less information to
ADR holders. ADRs also include American Depositary Shares.
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AGENCIES: Agencies are FIXED INCOME SECURITIES issued or guaranteed by federal
agencies and U.S. Government sponsored instrumentalities. They may or may not be
backed by the full faith and credit of the U.S. Government. If they are not
backed by the full faith and credit of the 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 GNMA, 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 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 Freddie Mac, 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-BACKED SECURITIES: Asset-backed securities are securities secured by non-
mortgage assets such as company receivables, truck and auto loans, leases and
credit card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities also may be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt. Credit support for asset-
backed securities may be based on the underlying assets and/or provided by a
third party through credit enhancements. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees (which are generally
provided by the issuer), senior-subordinated structures and over-
collateralization.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts for a certain period by a letter of credit issued by a financial
institution (such as a bank or insurance company) unaffiliated with the issuers
of such securities. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, there is a risk that another party could acquire an
interest in the obligations superior to that of the holders of the asset-backed
securities. There also is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on those
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with the mortgage-backed securities. In addition, credit card
receivables are unsecured obligations of the card holders.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
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
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obligations for the purpose of restructuring the issuers' debts under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
Brady Plan). Brady Bonds have been issued fairly recently, and, accordingly, do
not have a long payment history. They may be collateralized or uncollateralized
and issued in various currencies (although most are dollar-denominated). They
are actively traded in the over-the-counter secondary market. Portfolios will
only invest in Brady Bonds consistent with quality specifications.
Dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds or
floating rate discount bonds. These Brady Bonds are generally collateralized in
full as to principal due at maturity by U.S. Treasury Zero Coupon Obligations
having the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury Zero Coupon
Obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments due on the Brady Bonds in the normal course. In light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds generally are viewed
as speculative.
CASH EQUIVALENTS: Cash equivalents are short-term FIXED INCOME SECURITIES
comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank or
savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
Each Portfolio may invest in obligations of U.S. banks, and, except for the
Domestic Fixed Income Portfolio, in foreign branches of U.S. banks (Eurodollars)
and U.S. branches of foreign banks (Yankee dollars). Euro and Yankee dollar
investments will involve some of the same risks of investing in international
securities that are discussed in the foreign investing section of this SAI.
The Portfolios will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
the Adviser to be of an investment quality comparable with other debt securities
which the Portfolio may purchase.
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(2) Each Portfolio (except the Cash Reserves Portfolio) may invest in commercial
paper rated at time of purchase by one or more Nationally Recognized Statistical
Rating Organizations ("NRSRO") in one of their two highest categories, (e.g.,
A-l or A-2 by Standard & Poor's or Prime 1 or Prime 2 by Moody's), or, if not
rated, issued by a corporation having an outstanding unsecured debt issue rated
high-grade by a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch
IBCA ("Fitch") ). The Cash Reserves Portfolio invests only in commercial paper
rated in the highest category;
(3) Short-term corporate obligations rated high-grade at the time of purchase by
a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) repurchase agreements collateralized by securities listed above; and
(7) The Cash Reserves Portfolio's investments in Cash Equivalents are limited by
the quality, maturity and diversification requirements adopted under Rule 2a-7
of the Investment Company Act of 1940 ("1940 Act").
Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They are primarily issued by corporations needing to
finance large amounts of receivables, but may be issued by banks and other
borrowers. Commercial paper is issued either directly or through broker-dealers,
and may be discounted or interest-bearing. Commercial paper is unsecured, but is
almost always backed by bank lines of credit. Virtually all commercial paper is
rated by Moody's or Standard & Poor's.
CMOs: Collateralized mortgage obligations ("CMOs") are DERIVATIVES structured as
debt obligations or multiclass pass-through certificates. CMOs are issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated for federal income tax purposes as a Real
Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after
1991 must elect to be treated as a REMIC or it will be taxable as a corporation
under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash flows
on Mortgage Assets to the various classes of a CMO is to create certain tranches
on which the expected cash flows have a higher degree of predictability than do
the underlying Mortgage Assets. As a general matter, the more predictable the
cash flow is on a particular CMO tranche, the lower the anticipated yield on
that tranche at the time of issue will be relative to
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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.
Like bonds in general, mortgage securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage refinancings
of home mortgages with the result that the average life of mortgage securities
that a Portfolio holds may be lengthened. This extension of average life causes
the market price of the securities to decrease further than if their average
lives were fixed. In part to compensate for these risks, mortgages will
generally offer higher yields than comparable bonds. However, when interest
rates fall, mortgages may not enjoy as large a gain in market value due to
prepayment risk because additional mortgage prepayments must be reinvested at
lower interest rates.
COMMON STOCK: Common stocks are EQUITY SECURITIES representing an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
CONVERTIBLES: Convertibles may be considered either EQUITY SECURITIES or FIXED
INCOME SECURITIES. They are commonly corporates or preferred stocks which may be
exchanged for a fixed number of shares of common stock at the purchaser's
option. Convertibles may be viewed as an investment in the convertible security
or the security into which it may be exchanged. Therefore, the Fund's equity,
fixed income and balanced Portfolios may all purchase convertibles.
CORPORATES: Corporate bonds ("Corporates") are FIXED INCOME SECURITIES issued by
private corporations. Bondholders, as creditors, have a prior legal claim over
common and preferred stockholders of the corporation as to both income and
assets for the principal and interest due to the bondholder. A Portfolio will
buy corporates subject to any quality constraints. If a Portfolio holds a
security that is down-graded, the Portfolio may retain the security if the
Adviser deems retention of the security to be in the best interests of the
Portfolio.
DEPOSITARY RECEIPTS: Depositary receipts are FOREIGN EQUITY SECURITIES,
including Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs"), and other similar types of depositary shares. Depositary receipts are
securities that can be traded in U.S. or foreign securities markets but which
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represent ownership interests in a security or pool of securities by a foreign
or U.S. corporation. Depositary receipts may be sponsored or unsponsored. The
depositary of unsponsored depositary receipts may provide less information to
receipt holders.
Holders of unsponsored GDRs and EDRs generally bear all the costs associated
with establishing the unsponsored GDRs and EDRs. The depositary of unsponsored
GDRs and EDRs is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored GDRs and EDRs voting rights with respect to the deposited securities
or pool of securities. GDRs and EDRs are not necessarily denominated in the same
currency as the underlying securities to which they may be connected. Generally,
GDRs or EDRs in registered form are designed for use in the U.S. securities
market and GDRs or EDRs in bearer form are designed for use in securities
markets outside the United States. Portfolios may invest in sponsored and
unsponsored GDRs and EDRs. For purposes of the Fund's investment policies, a
Portfolio's investments in GDRs or EDRs will be deemed to be investments in the
underlying securities.
DERIVATIVES: Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include the following instruments, each of which is
described in this Statement of Additional Information: CMOS, FORWARDS, FUTURES,
OPTIONS, SMBS, STRUCTURED INVESTMENTS, STRUCTURED NOTES, and SWAPS.
Each Portfolio (except the Cash Reserves Portfolio) may use derivatives for
various purposes. A Portfolio will use derivatives only in circumstances where
they offer the most economic means of improving its risk/reward profile. A
Portfolio will not use derivatives to increase its risk above the level that it
could achieve using only traditional investment securities. A Portfolio also
will not use derivatives to acquire exposure to changes in the value of assets
or indexes of assets that it could not acquire and hold directly. Any applicable
limitations are described under each investment definition. The Portfolios may
enter into over-the-counter Derivatives transactions with counterparties
approved by the Adviser in accordance with guidelines established by the Board
of Trustees ("Board"). These guidelines provide for a minimum credit rating for
each counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA. Derivatives include, but are not limited
to, CMOs, forwards, futures, options, SMBS, structured investments, structured
notes and swaps.
When a Portfolio engages in certain types of derivatives transactions, including
certain forwards, futures, options and mortgage derivatives, it will have to
segregate cash and/or liquid securities to cover its obligations. At certain
levels, this can cause a Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. A Portfolio in that position could be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
EMERGING 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 in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud. With
respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value of
a Portfolio's investments in those countries. It may be difficult to obtain and
enforce a judgment in a court
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outside the United States. Portfolios that invest in emerging markets may also
be exposed to an extra degree of custodial and/or market risk, especially where
the securities purchased are not traded on an official exchange or where
ownership records regarding the securities are maintained by an unregulated
entity (or even the issuer itself).
EQUITY SECURITIES: Equity securities generally represent an ownership interest
in an issuer, or may be convertible into or represent a right to acquire an
ownership interest in an issuer. While there are many types of equity
securities, prices of all equity securities will fluctuate. Economic, political
and other events may affect the prices of broad equity markets. For example,
changes in inflation or consumer demand may affect the prices of equity
securities generally in the United States. Similar events also may affect the
prices of particular equity securities. For example, news about the success or
failure of a new product may affect the price of a particular issuer's equity
securities. Equity securities include the following types of instruments, each
of which is described in this Statement of Additional Information: ADRs, COMMON
STOCK, CONVERTIBLES, INVESTMENT COMPANIES, PREFERRED STOCK, RIGHTS AND WARRANTS.
FIXED INCOME SECURITIES: Fixed income securities generally represent an issuer's
obligation to repay money that it has borrowed together with interest on the
amount borrowed. Fixed income securities come in many varieties and may differ
in the way that interest is calculated, the amount and frequency of payments,
and the type of collateral, if any. Some fixed income securities may have other
novel features such as conversion rights. Fixed income securities include the
following types of instruments, each of which is described in this Statement of
Additional Information: AGENCIES, ASSET-BACKED SECURITIES, CASH EQUIVALENTS,
CONVERTIBLES, CORPORATES, FLOATERS, HIGH YIELD SECURITIES, INVERSE FLOATERS,
LOAN PARTICIPATIONS AND ASSIGNMENTS, MORTGAGE SECURITIES, MUNICIPALS, NY
MUNICIPALS, PREFERRED STOCK, REPURCHASE AGREEMENTS, U.S. GOVERNMENTS, WHEN-
ISSUED SECURITIES, YANKEE AND EURODOLLAR OBLIGATIONS AND ZERO COUPONS.
Prices of fixed income securities fluctuate and, in particular, are subject to
credit risk and market risk. Credit risk is the possibility that an issuer may
be unable to meet scheduled interest and principal payments. Market risk is the
possibility that a change in interest rates or the market's perception of the
issuer's prospects may adversely affect the value of a fixed income security.
Economic, political and other events also may affect the prices of broad fixed-
income markets. The duration and maturity of a fixed income security also affect
its price volatility. These concepts are described above in Maturity and
Duration Management. Generally, securities with longer maturities or durations
will experience greater price volatility.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. Prepayments and
call provisions also will affect the maturity and value of some fixed income
securities. The occurrence of prepayments and calls generally increases in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, a Portfolio may
be forced to reinvest in lower yielding fixed income securities.
FLOATERS: Floaters are FIXED INCOME SECURITIES with a floating or variable rate
of interest, i.e., the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
floating or variable rate obligations may carry a demand feature that permits
the holder to tender them back to the issuer of the underlying instrument, or to
a third party, at par value prior to maturity. When the demand feature of
certain floating or variable rate obligations represents an obligation of a
foreign entity, the demand feature will be subject to certain risks discussed
under foreign investing.
FOREIGN CURRENCY: Portfolios investing in FOREIGN SECURITIES will regularly
transact security purchases and sales in foreign currencies. These Portfolios
may hold foreign currency or purchase or sell currencies on a forward basis.
See FORWARDS, below.
Foreign currency warrants. Portfolios may invest in foreign currency warrants,
- -------------------------
which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the United States, in U.S.
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dollars) which is calculated pursuant to a predetermined formula and based on
the exchange rate between a specified foreign currency and the U.S. dollar as of
the exercise date of the warrant. Foreign currency warrants generally are
exercisable upon their issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S. dollar-
denominated debt offerings by major corporate issuers in an attempt to reduce
the foreign currency exchange risk which, from the point of view of prospective
purchasers of the securities, is inherent in the international fixed income
marketplace. Foreign currency warrants may attempt to reduce the foreign
exchange risk assumed by purchasers of a security by, for example, providing for
a supplemental payment in the event that the U.S. dollar depreciates against the
value of a major foreign currency such as the Japanese Yen or the Euro. The
formula used to determine the amount payable upon exercise of a foreign currency
warrant may make the warrant worthless unless the applicable foreign currency
exchange rate moves in a particular direction (e.g., unless the U.S. dollar
appreciates or depreciates against the particular foreign currency to which the
warrant is linked or indexed). Foreign currency warrants are severable from the
debt obligations with which they may be offered, and may be listed on exchanges.
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
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(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
FOREIGN EQUITY SECURITIES: Foreign equity securities are EQUITY SECURITIES of
foreign issuers denominated in foreign currency and traded primarily in non-U.S.
markets, including depositary receipts. See also FOREIGN SECURITIES, below.
FOREIGN FIXED INCOME SECURITIES: Foreign fixed income securities are FIXED
INCOME SECURITIES denominated in foreign currency and issued and traded
primarily outside of the U.S., including: (1) obligations issued or guaranteed
by foreign national governments, their agencies, instrumentalities, or political
subdivisions; (2) debt securities issued, guaranteed or sponsored by
supranational organizations established or supported by several national
governments, including the World Bank, the European Community, the Asian
Development Bank and others; (3) non-government foreign corporate debt
securities; and (4) foreign mortgage securities and various other mortgages and
asset-backed securities. See also FOREIGN SECURITIES, below.
FOREIGN SECURITIES: Foreign Securities include BRADY BONDS, DEPOSITARY RECEIPTS,
EMERGING MARKET SECURITIES, FOREIGN CURRENCY, FOREIGN EQUITY SECURITIES, FOREIGN
FIXED INCOME SECURITIES, AND INVESTMENT FUNDS. Investing in foreign securities
involves certain special risks not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios will
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies. Certain Portfolios may enter into forward foreign
currency exchange contracts to hedge their respective holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to domestic issuers, there may be less publicly available information about
certain foreign securities than about domestic securities. Securities of some
foreign issuers are generally less liquid and more volatile than securities of
comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers and listed issuers than in the 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 Portfolios will endeavor to achieve most favorable execution costs
in their 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 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
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countries are now denominated in Euros. Monetary policy for participating
countries is 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 worldwide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the Euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets worldwide.
FORWARDS: Forward Foreign Currency Exchange Contracts ("Forwards") are
DERIVATIVES which are used to protect against uncertainty in the level of future
foreign exchange rates. A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Such contracts do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date. Also,
although such contracts can minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they limit any potential gain
that might be realized.
A Portfolio may use currency exchange contracts in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies (transaction hedge) or to lock in the U.S.
dollar value of portfolio positions (position hedge). In addition, the
Portfolios may cross hedge currencies by entering into a transaction to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which a Portfolio has or expects to have portfolio exposure.
Portfolios may also engage in proxy hedging which is defined as entering into
positions in one currency to hedge investments denominated in another currency,
where the two currencies are economically linked. A Portfolio's entry into
forward contracts, as well as any use of cross or proxy hedging techniques will
generally require the Portfolio to hold liquid securities or cash equal to the
Portfolio's obligations in a segregated account throughout the duration of the
contract.
A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the foreign currency value of the security and adopt a synthetic
investment position reflecting the credit quality of the U.S. dollar-denominated
security.
Risks. Forward contracts are not traded on contract markets regulated by the
Securities and Exchange Commission ("SEC") or the Commodity Futures Trading
Commission ("CFTC"). They are traded through financial institutions acting as
market-makers. Portfolios that trade forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with them.
Forward contracts may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio's ability to act upon economic
events occurring in foreign markets during non business hours in the 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 a
Portfolio's obligation under the forward contract. On the date of maturity, a
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Portfolio may be exposed to some risk of loss from fluctuations in that
currency. Although the Adviser will attempt to hold such mismatching to a
minimum, there can be no assurance that the Adviser will be able to do so. For
proxy hedges, cross hedges or a synthetic position, there is an additional risk
in that these transactions create residual foreign currency exposure. When a
Portfolio enters into a forward contract for purposes of creating a position
hedge, transaction hedge, cross hedge or a synthetic security, it will generally
be required to hold liquid securities or cash in a segregated account with a
daily value at least equal to its obligation under the forward contract.
FUTURES: Futures contracts and options on futures contracts ("Futures") are
DERIVATIVES. Each Portfolio, except the Cash Reserves Portfolio, may invest in
Futures. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the 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. A Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's custodian or with a futures
commission merchant as approved by the Board.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Risks. Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue to
be required to make daily cash payments to maintain its required margin. In such
situations, if the Portfolio has insufficient cash, it may
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have to sell portfolio securities to meet daily margin requirements at a time
when it may be disadvantageous to do so. In addition, the Portfolio may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on a Portfolio's ability to effectively hedge. A
Portfolio will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. A Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
A Portfolio's use of futures involves the risk of imperfect or no correlation
where the securities underlying futures contracts have different maturities than
the Portfolio securities being hedged. It is also possible that a Portfolio
could both lose money on futures contracts and also experience a decline in
value of its portfolio securities. There is also the risk that a Portfolio could
lose margin deposits in the event of bankruptcy of a broker with whom the
Portfolio has an open position in a futures contract or related option. Most
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
HIGH YIELD SECURITIES: High yield securities are FIXED INCOME SECURITIES,
generally corporates, preferred stocks, and convertibles, rated Ba through C by
Moody's or BB through D by Standard & Poor's, and unrated fixed income
securities considered to be of equivalent quality. Securities rated less than
Baa by Moody's or BBB by Standard & Poor's are classified as non-investment
grade securities and are commonly referred to as junk bonds or high yield, high
risk securities. Such securities carry a high degree of risk and are considered
speculative by the major credit rating agencies. See the Appendix for more
information about fixed income security ratings. Investment grade securities
that Portfolios hold may be downgraded to below investment grade by the rating
agencies. If a Portfolio holds a security that is downgraded, the Portfolio may
choose to retain the security.
While fixed income securities rated below investment grade offer high yields,
they also normally carry with them a greater degree of risk than securities with
higher ratings. Lower-rated bonds are considered speculative by traditional
investment standards. High yield securities may be issued as a consequence of
corporate restructuring or similar events. Also, high yield securities are often
issued by smaller, less credit worthy companies, or by highly leveraged
(indebted) firms, which are generally less able than more established or less
leveraged firms to make scheduled payments of interest and principal. High yield
securities issued under these circumstances pose substantial risks. The price
movement of high yield securities is influenced less by changes in interest
rates and more by the financial and business position of the issuing corporation
when compared to investment grade bonds. Compared with investment grade
securities, the values of high yield securities tend to be more volatile and may
react with greater sensitivity to changes in interest rates.
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The High Yield market is subject to credit risk. Default rates and recoveries
fluctuate, driven by numerous factors including the general economy. From 1970-
1999, Moody's estimates an average annual default rate for speculative-grade
issuers of 3.45%. In addition, the secondary market for high yield securities is
generally less liquid than that for investment grade corporate securities. In
periods of reduced market liquidity, high yield bond prices may become more
volatile, and both the high yield market and a Portfolio may experience sudden
and substantial price declines.
A lower level of liquidity might have an effect on a Portfolio's ability to
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for high yield securities by various dealers. Under such
conditions, a Portfolio may find it difficult to value its securities
accurately. A Portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in high yield securities.
High yield bonds may also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors.
Certain types of high yield bonds are non-income paying securities. For example,
zero coupons pay interest only at maturity and payment-in-kind bonds pay
interest in the form of additional securities. Payment in the form of additional
securities, or interest income recognized through discount accretion, will,
however, be treated as ordinary income which will be distributed to shareholders
even though the Portfolio does not receive periodic cash flow from these
investments.
INVERSE FLOATERS: Inverse floating rate obligations ("inverse floaters") are
FIXED INCOME SECURITIES which have coupon rates that vary inversely to another
specified floating rate, such as LIBOR (London Inter-Bank Offered Rate). If the
specified reference rate rises, the coupon rate of the inverse floater falls,
while a decrease in the reference rate causes an increase in the inverse
floater's coupon rate. Inverse floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality, redemption
provisions and maturity. Inverse floater CMOs exhibit greater price volatility
than the majority of mortgage pass-through securities or CMOs. Some inverse
floater CMOs are extremely sensitive to changes in prepayments. As a result, the
yield to maturity of an inverse floater CMO is sensitive not only to changes in
interest rates but also to changes in prepayment rates on the related underlying
mortgage assets.
INVESTMENT COMPANIES: Investment companies are EQUITY SECURITIES and include
open-end or closed-end investment companies. The 1940 Act generally prohibits
the Portfolios from acquiring more than 3% of the outstanding voting shares of
an investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any one investment company and no more than 10% in
any combination of investment companies. The 1940 Act also prohibits the
Portfolios from acquiring in the aggregate more than 10% of the outstanding
voting shares of any registered closed-end investment company.
To the extent a Portfolio invests a portion of its assets in investment
companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the Portfolio itself. The Portfolios may
not purchase shares of any affiliated investment company except as permitted by
SEC rule or order.
INVESTMENT FUNDS: Investment funds are EMERGING MARKET SECURITIES. Some
emerging market countries have laws and regulations that currently preclude or
limit direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging market
countries through investment funds. Portfolios that may invest in these
Investment Funds are subject to applicable law as discussed under Investment
Restrictions and will invest in such Investment Funds only where appropriate
given that the Portfolio's shareholders will bear indirectly the layer of
expenses of the underlying investment funds in addition to their proportionate
share of the expenses of the Portfolio. Under certain circumstances, an
investment in an investment fund will be subject to the additional limitations
that apply to investments in investment companies.
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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 obligations and those in which the speculative element
begins to predominate. Securities rated A or higher are considered to be "high
grade." Any 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. A Portfolio may invest in fixed rate and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders"). A
Portfolio's investments in Loans are expected in most instances to be in the
form of participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In the case of a
Participation, a Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. If a Lender selling a Participation becomes insolvent, a Portfolio may
be treated as a general creditor of the Lender and may not benefit from any set-
off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation. Even
under such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. A Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. The
lack of a liquid secondary market for Assignments and Participations also may
make it more difficult for the Portfolio to assign a value to those securities
for purposes of valuing the Portfolio's holdings and calculating its net asset
value.
Participations and Assignments involve a risk of loss in case of default or
insolvency of the borrower. In addition, they may offer less legal protection
to a Portfolio in the event of fraud or misrepresentation and may involve a risk
of insolvency of the Lender. Certain Participations and Assignments may also
include standby financing commitments that obligate the investing Portfolio to
supply additional cash to the borrower on demand. Participations involving
emerging market country issuers may relate to Loans as to which there has been
or currently exists an event of default or other failure to make payment when
due, and may represent amounts owed to Lenders that are themselves subject to
political and economic risks, including the risk of currency devaluation,
expropriation, or failure. Those Participations and Assignments present
additional risk of default or loss.
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MORTGAGE SECURITIES: Mortgage-backed securities ("Mortgage Securities") are
FIXED INCOME SECURITIES representing an ownership interest in a pool of
residential and commercial mortgage loans. Generally, these securities are
designed to provide monthly payments of interest and principal to the investor.
The mortgagee's monthly payments to his/her lending institution are passed
through to investors such as the Portfolio. Most issuers or poolers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
Portfolios may invest in securities issued or guaranteed by GNMA, FHLMC, Fannie
Mae, private issuers and other government agencies. There can be no assurance
that the private insurers can meet their obligations under the policies.
Mortgage securities issued by non-agency issuers, whether or not such securities
are subject to guarantees, may entail greater risk. If a Portfolio purchases a
mortgage security that does not have an issuer-provided guarantee, the security
will be rated investment grade at the time of purchase by one or more NRSROs,
or, if unrated, deemed by the 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 Portfolios. The
compounding effect from reinvestment of monthly payments received by each
Portfolio will increase its return to shareholders, compared to bonds that pay
interest semi-annually.
About Mortgage Securities. Interests in pools of mortgage securities differ
from other forms of debt securities, which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the borrowers on their mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments resulting from the sale of the underlying
property, refinancing or foreclosure net of fees or costs which may be incurred.
Some mortgage securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make payment.
Residential Mortgage-Backed Securities. Pools consist of whole mortgage loans
or participation in loans. The majority of these loans are made to purchasers of
1-4 family homes. The terms and characteristics of the mortgage instruments are
generally uniform within a pool but may vary among pools. For example, in
addition to fixed-rate fixed-term mortgages, the Portfolios may purchase pools
of adjustable rate mortgages ("ARM"), growing equity mortgages ("GEM"),
graduated payment mortgages ("GPM") and other types where the principal and
interest payment procedures vary. ARM's are mortgages which reset the mortgage's
interest rate with changes in open market interest rates. The Portfolios'
interest income will vary with changes in the applicable interest rate on pools
of ARM's. GPM and GEM pools maintain
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constant interest rates, with varying levels of principal repayment over the
life of the mortgage. These different interest and principal payment procedures
should not impact the Portfolios' net asset values since the prices at which
these securities are valued each day will reflect the payment procedures.
All poolers apply standards for qualifications to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
Residential mortgage loans are pooled by FHLMC. FHLMC is a corporate
instrumentality of the U.S. Government and was created by Congress in 1970 for
the purpose of increasing the availability of mortgage credit for residential
housing. FHLMC issues Participation Certificates ("PC's") which represent
interests in mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal.
Fannie Mae is a Government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae purchases residential mortgages from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, banks, commercial banks, credit unions, mortgage bankers,
state and local housing finance agencies and other financial institutions. Pass-
through securities issued by Fannie Mae are guaranteed as to timely payment of
principal and interest by Fannie Mae.
The principal Government guarantor of mortgage-backed securities is GNMA. GNMA
is a wholly-owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by approved institutions and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
Government and Government-related pools because there are no direct or indirect
Government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance purchased by the issuer. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can be
no assurance that the private insurers can meet their obligations under the
policies. The Portfolios will purchase mortgage securities that are rated
investment grade quality by Moody's and/or Standard & Poor's or, if unrated,
deemed by the Adviser to be of investment grade quality.
It is expected that Governmental or private entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payment
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Portfolios will, consistent with their investment objective and policies,
consider making investments in such new types of securities.
There are two methods of trading mortgage securities. A specified pool
transaction is a trade in which the pool number of the security to be delivered
on the settlement date is known at the time the trade is made. This is in
contrast with the typical mortgage security transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be delivered
is specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. The pool numbers
of the pools to be delivered at settlement will be announced shortly before
settlement takes place. The terms of the TBA trade may be made more specific if
desired. Generally, agency pass-through mortgage securities are traded on a TBA
basis.
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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
a Portfolio may be lengthened. This extension of average life causes the market
price of the securities to decrease further than if their average lives were
fixed. However, when interest rates fall, mortgages may not enjoy as large a
gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to calculate
the effect that it will have on the price of the security. Prepayments at a time
when interest rates are falling generally means that a Portfolio may have to
invest the principal payments it receives at lower interest rates. In selecting
mortgage securities, the Adviser will look for those securities that offer a
higher yield to compensate for any variation in average maturity.
Commercial Mortgage-Backed Securities ("CMBS"): CMBS are generally multi-class
or pass-through securities backed by a mortgage loan or a pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments. The commercial mortgage loans that underlie CMBS have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. That is, at their maturity date, repayment
of the remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or 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 Portfolios will meet the quality
criteria set out in the prospectus for the Portfolios.
The yields of municipal bonds depend on, among other things, general money
market conditions, conditions in the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and Standard & Poor's represent their opinions of
the quality of the municipal bonds rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields, while municipal bonds of the same maturity and coupon, but
with different ratings may have the same yield. It will be the responsibility of
the investment management staff to appraise independently the fundamental
quality of the bonds held by the Portfolios.
Municipal bonds are sometimes purchased on a "when-issued" basis, meaning the
Portfolio has committed to purchase certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the federal income tax exemption for interest on municipal bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Portfolios to achieve
their investment objectives. In that event, the Fund's Trustees and officers
would reevaluate investment objectives and policies and consider recommending to
shareholders changes in such objectives and policies.
Similarly, from time to time proposals have been introduced before state and
local legislatures to restrict or eliminate the state and local income tax
exemption for interest on municipal bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of a Portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate investment objectives and
policies and consider recommending to shareholders changes in such objectives
and policies.
The Portfolios eligible to purchase municipal bonds may also purchase bonds the
income on which is subject to the alternative minimum tax ("AMT bonds"). AMT
bonds are tax-exempt private activity bonds issued after August 7, 1986, the
proceeds of which are directed, at least in part, to private, for-profit
organizations. While the income from AMT bonds is exempt from regular federal
income tax, it is a tax preference item in the calculation of the alternative
minimum tax. The alternative minimum tax is a special
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separate tax that applies to some taxpayers who have certain adjustments to
income or tax preference items.
NY MUNICIPALS: NY Municipals are FIXED INCOME SECURITIES issued by the New York
State government, state agencies and various local governments, including
counties, cities, municipalities, townships, special districts and authorities.
In general, the credit quality and credit risk of any issuer's debt is
contingent upon the state and local economy, the health of the issuer's
finances, the amount of the issuer's debt, the quality of management and the
strength of legal provisions in the debt document that protects debt holders.
Credit risk is usually lower wherever the economy is strong, growing and
diversified, where financial operations are sound and the debt burden is
reasonable.
Concentration of investment in the securities of one state exposes the NY
Municipal Portfolio to greater credit risks than would be present in a
nationally diversified portfolio of municipal securities. The risks associated
with investment in the securities of a single state include possible tax changes
or a deterioration in economic conditions and differing levels of supply and
demand for the municipal securities of that state.
Certain state-created agencies have statutory authority to incur debt for which
legislation providing for state appropriations to pay debt service thereon is
not required. The debt of these agencies is supported by assets of, or revenues
derived from, the various projects financed; it is not an obligation of the
State. Some of these agencies, however, are indirectly dependent on State funds
through various state-assisted programs.
The NY Municipal Portfolio will make significant investments in NY Municipal
Bonds. The Portfolio's performance will depend in part upon the ability of the
issuers of these Bonds to meet their obligations for the payment of principal
and interest. The Portfolio may acquire Bonds whose issuers are affected by the
financial circumstances facing New York generally. While the overall wealth of
New York, as reflected by its per capita income, is among the highest in the
nation, New York has a large accumulated deficit and the per capita debt is
among the highest in the country. Additionally, New York City, which represents
a significant part of the state's economy, has struggled at times to maintain
fiscal stability. Financial difficulties affecting New York's economy generally
may also affect municipal securities issuers, by jeopardizing their credit
standing, impairing their borrowing abilities, and affording fewer markets for
their outstanding debt obligations. In recent years, Standard & Poor's and
Moody's have downgraded several different issues of municipal securities of New
York City and New York State and their agencies and instrumentalities.
Historically, there has been a strong demand for New York Municipal Bonds, and
as a consequence, New York Municipal Bonds are often issued with relatively
lower yields, and traded in the marketplace at relatively higher prices than
comparably rated municipal bonds issued in other jurisdictions.
OPTIONS: Options are DERIVATIVES. An option is a legal contract that gives the
holder the right to buy or sell a specified amount of the underlying security or
futures contract at a fixed or determinable price upon the exercise of the
option. A call option conveys the right to buy and a put option conveys the
right to sell a specified quantity of the underlying security.
Portfolios may purchase over-the-counter options ("OTC Options") from, or sell
them to, securities dealers, financial institutions or other parties
("Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC Option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Portfolios expect generally to enter
into OTC Options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
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credit to determine the likelihood that the terms of the OTC Option will be
satisfied. The staff of the SEC currently takes the position that OTC Options
purchased by the Portfolios or sold by them (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to each Portfolio's
limitation on investing in illiquid securities.
The Portfolios may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-
hedging purposes if it is designed to protect against a decline in the U.S.
dollar value of a currency due to the changes of exchange rates vis a vis the
U.S. dollar and the option is written for a currency other than the currency in
which the security is denominated. In such circumstances, the Portfolios will
follow the coverage requirements as described in the preceding paragraph.
Risks of Options. Investments in options involve some of the same risks that
are involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased. Those
price changes also can result in a Portfolio holding an option that will expire
worthless. For example, if a Portfolio purchases a call option and the price of
the underlying security falls to rise above the option's strike price, the
Portfolio would not exercise the option. As a result, the option will expire
worthless and the Portfolio will lose the price it paid for the option. By
contrast, if a Portfolio writes a call option on a security and the price of the
underlying security rises above the strike price, the purchaser of the option
may exercise the option, so that the Portfolio will not benefit from the
increase in value of the underlying security.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. The market prices of options generally
can be more volatile than the market prices on the underlying futures contract
or securities. Another risk is that the Counterparty to an over-the-counter
option will be unable to fulfill its obligation to the Portfolio due to
bankruptcy or other circumstances.
Options on Currencies. All Portfolios, except the Cash Reserves, Domestic Fixed
Income, Limited Duration and Advisory Mortgage Portfolios, may purchase and
write options on foreign currencies in a manner similar to that in which they
would use futures contracts on foreign currencies, or forward contracts. For
example, a decline in the dollar value of a foreign currency in which Portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. To protect against such
diminution in the value of portfolio securities, a Portfolio may purchase put
options on the foreign currency. If the value of the currency falls, a Portfolio
will have the right to sell the currency for a fixed amount in dollars and
thereby offset, in whole or in part, the adverse effect that the foreign
currency's fall would have had on the Portfolio's holdings.
Conversely, a Portfolio may buy call options on a foreign currency when the
Adviser wants to purchase securities denominated in that currency and believes
that the dollar value of that foreign currency will increase, thereby increasing
the cost of acquiring those securities. Purchasing such options may offset, at
least partially, the effects of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to a Portfolio derived
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Portfolios
lose money on transactions in foreign currency options, which could reduce the
gain the Portfolio might have achieved from advantageous changes in the exchange
rates.
The Portfolios may write options on foreign currencies for the same purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
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Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolios may only write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or liquid securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars, marked-to-market
daily.
The Portfolios may also write call options on foreign currencies for cross-
hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which a Portfolio owns or has the right to acquire
due to an adverse change in the exchange rate and which is denominated in the
currency underlying the option. In such circumstances, the Portfolio will either
"cover" the transaction as described above or collateralize the option by
maintaining in a segregated account with the Custodian, cash or liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
Combined Transactions. The Portfolios may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and foreign currency
transactions, instead of a single transaction, as part of a single hedging
strategy when, in the opinion of the Adviser, it is in the best interest of the
Portfolio to do so. A combined transaction, while part of a single strategy, may
contain elements of risk that are present in each of its component transactions
and will be structured in accordance with applicable SEC regulations and SEC
staff guidelines.
Risks of options on futures contracts and on foreign currencies. Options on
foreign currencies are traded over-the-counter through financial institutions
acting as market-makers, although they are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, a Portfolio that writes options could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will 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,
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potentially permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in a Portfolio's
ability to act upon economic events occurring in foreign markets during non
business hours in the 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 Fund's equity, fixed
income and balanced Portfolios may all purchase preferred stocks.
REPURCHASE AGREEMENTS: Repurchase agreements are FIXED INCOME SECURITIES in the
form of an agreement backed by collateral. Each of the Fund's Portfolios may
invest in repurchase agreements collateralized by U.S. Government securities,
certificates of deposit and certain bankers' acceptances. Repurchase agreements
are transactions by which a Portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. In these transactions, the securities
purchased by a Portfolio have a total value in excess of the value of the
repurchase agreement and are held by the Portfolio's custodian bank until
repurchased. Such agreements permit a Portfolio to keep all its assets at work
while retaining "overnight" flexibility in pursuit of investments of a longer-
term nature. The Adviser and the Fund's Administrator will continually monitor
the value of the underlying securities to ensure that their value always equals
or exceeds the repurchase price.
Pursuant to an SEC order, the Fund's Portfolios may pool their daily uninvested
cash balances in order to invest in repurchase agreements on a joint basis. By
entering into repurchase agreements on a joint basis, it is expected that the
Portfolios will incur lower transaction costs and potentially obtain higher
rates of interest on such repurchase agreements. Each Portfolio's participation
in the income from jointly purchased repurchase agreements will be based on that
Portfolio's percentage share in the total repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, a
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of a Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that a Portfolio
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may not be able to substantiate its interest in the underlying securities. While
the Fund's management acknowledges these risks, it is expected that they can be
controlled through stringent security and counterparty selection criteria and
careful monitoring procedures.
REVERSE REPURCHASE AGREEMENTS: Under a Reverse Repurchase Agreement, a Portfolio
sells a security and promises to repurchase that security at an agreed upon
future date and price. The price paid to repurchase the security reflects
interest accrued during the term of the agreement. The Portfolio will establish
a separate custodial account holding cash and other liquid assets in an amount
not less than the purchase obligations of the agreement. Reverse Repurchase
Agreements may be viewed as a speculative form of borrowing called leveraging.
A Portfolio may invest in reverse repurchase agreements if (i) interest earned
from leveraging exceeds the interest expense of the original reverse repurchase
transaction and (ii) proceeds from the transaction are not invested for longer
than the term of the Reverse Repurchase Agreement.
RIGHTS: Rights are EQUITY SECURITIES representing a preemptive right of
stockholders to purchase additional shares of a stock at the time of a new
issuance, before the stock is offered to the general public. A stockholder who
purchases rights may be able to retain the same ownership percentage after the
new stock offering. A right usually enables the stockholder to purchase common
stock at a price below the initial offering price. A Portfolio that purchases a
right takes the risk that the right might expire worthless because the market
value of the common stock falls below the price fixed by the right.
SECURITIES LENDING: Each Portfolio may lend its investment securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, a Portfolio attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Portfolio. Each Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the 1940 Act or the rules and regulations
or interpretations of the SEC thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of cash,
an irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Portfolio at any time, and (d) the Portfolio receives
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Trustees.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Trustees. In addition, voting rights may pass with the
loaned securities, but if a material event were to occur affecting an investment
on loan, the loan must be called and the securities voted.
SHORT SELLING: A short sale is a transaction in which a Portfolio sells
securities that it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. To deliver the securities to the buyer,
the Portfolio arranges through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement. When selling short, the
Portfolio intends to replace the securities at a lower price and therefore,
profit from the difference between the cost to replace the securities and the
proceeds received from the sale of the securities. When the Portfolio makes a
short sale, the proceeds it receives from the sale will be held on behalf of a
broker until the Portfolio replaces the borrowed securities. The Portfolio may
have to pay a premium to borrow the securities and must pay any dividends or
interest payable on the securities until they are replaced.
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A Portfolio secures its obligation to replace the borrowed securities by
depositing collateral with the broker, consisting of cash or other liquid
securities. The Portfolio also must place in a segregated account with its
custodian cash or other liquid securities equal in value to the difference, if
any, between (i) the current market value of the securities sold short, and (ii)
any cash or other liquid securities deposited as collateral with the broker in
connection with the short sale. This amount will be adjusted daily to reflect
changes in the value of the securities sold short. A Portfolio also can cover
its obligations by owning another security (such as a call option) giving it the
right to obtain the same kind and amount of the security it sold short.
Risks: Short sales by a Portfolio involve certain risks and special
considerations. If the Adviser incorrectly predicts that the price of a
borrowed security will decline, the Portfolio will have to replace the
securities by purchasing them at a higher price than it received from the sale.
Therefore, losses from short sales may be unlimited. By contrast, when a
Portfolio purchases a security and holds it, the Portfolio cannot lose more than
the amount it paid for the security.
SMBS: Stripped mortgage-backed securities ("SMBS") are DERIVATIVES in the form
of multiclass mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal payments may have a
material adverse effect on a Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
SMBS are generally purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers. Certain of these
securities may be deemed "illiquid" and subject to each Portfolio's limitation
on investing in illiquid securities.
STRUCTURED INVESTMENTS: Structured investments are DERIVATIVES in the form of a
unit or units representing an undivided interest(s) in assets held in a trust
that is not an investment company as defined in the 1940 Act. A trust unit pays
a return based on the total return of securities and other investments held by
the trust and the trust may enter into one or more swaps to achieve its
objective. For example, a trust may purchase a basket of securities and agree to
exchange the return generated by those securities for the return generated by
another basket or index of securities. A Portfolio will purchase Structured
Investments in trusts that engage in such swaps only where the counterparties
are approved by the Adviser in accordance with credit-risk guidelines
established by the Board.
STRUCTURED NOTES: Structured notes are DERIVATIVES on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows a Portfolio to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.
SWAPS: All Portfolios, except the Cash Reserves and Mid Cap Growth Portfolios,
may enter into swap contracts ("Swaps"). A swap is a DERIVATIVE in the form of
an agreement to exchange the return generated
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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 indices" includes currencies, fixed
interest rates, prices, total return on interest rate indices, fixed-income
indices, stock indices and commodity indices (as well as amounts derived from
arithmetic operations on these indices). For example, a Portfolio may agree to
swap the return generated by a fixed-income index for the return generated by a
second fixed-income index. The currency swaps in which the Portfolios may enter
will generally involve an agreement to pay interest streams in one currency
based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon national amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to a swap defaults, a Portfolio's risk of
loss consists of the net amount of payments that a Portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the Counterparty, the Portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap Counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities to avoid any potential leveraging of the Portfolio. To the
extent that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to a Portfolio's borrowing restrictions. All of the Portfolios, except
the Cash Reserves Portfolio, may enter into OTC Derivatives transactions (swaps,
caps, floors, puts, etc., but excluding foreign exchange contracts) with
Counterparties that are approved by the Adviser in accordance with guidelines
established by the Board. These guidelines provide for a minimum credit rating
for each Counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from Counterparties) to limit exposure to
Counterparties with ratings below AA.
Risks: Interest rate and total rate of return Swaps do not involve the delivery
of securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency swaps may involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap may be subject to the risk that
the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
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The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
U.S. GOVERNMENTS: The term "U.S. Government securities" ("U.S. Governments")
refers to a variety of FIXED INCOME SECURITIES issued or guaranteed by the U.S.
Government and various instrumentalities which have been established or
sponsored by the U.S. Government, on which the payment of principal and interest
is backed by the full faith and credit of the U.S. Government. For example,
U.S. Treasury securities are backed by the "full faith and credit" of the U.S.
WARRANTS: Warrants are EQUITY SECURITIES in the form of options issued by a
corporation which give the holder the right to purchase stock, usually at a
price that is higher than the market price at the time the warrant is issued. A
purchaser takes the risk that the warrant may expire worthless because the
market price of the common stock fails to rise above the price set by the
warrant.
WHEN-ISSUED SECURITIES: Certain FIXED INCOME SECURITIES are purchased on a
"when-issued" basis. This means that the securities are purchased at a certain
price, but may not be delivered for up to 90 days. No payment or delivery is
made until the Portfolio receives payment or delivery from the other party to
the transaction. Although a Portfolio receives no income from the above
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market price
of the securities at the time of delivery may be higher or lower than the
purchase price. A Portfolio will maintain with the custodian a segregated
account consisting of cash or liquid securities in an amount at least equal to
these commitments.
YANKEE AND EUROBOND OBLIGATIONS: Each Portfolio, except the Domestic Fixed
Income Portfolio, may invest in Eurobond and Yankee obligations, which are FIXED
INCOME SECURITIES. The Eurobonds that the Portfolios 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. Yankee
bank obligations are U.S. dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurobond and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk and liquidity risk. However,
Eurobond (and to a limited extent, Yankee) obligations also are subject to
certain sovereign risks. One such risk is the possibility that a sovereign
country might prevent capital from flowing across its borders. Other risks
include: adverse political and economic developments; the extent and quality of
government regulation of financial markets and institutions; the imposition of
foreign withholding taxes, and the expropriation or nationalization of foreign
issuers. The Cash Reserves Portfolio will perform the same credit analysis on
Eurobond and Yankee obligations that it purchases as it does on domestic issues,
and will seek to invest in obligations of issuers that have at least the same
financial strength as the domestic issuers whose securities it purchases.
ZERO COUPONS: Zero coupon bonds are FIXED INCOME SECURITIES that do not make
regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by zero coupon bondholders each year. The Fund, which expects to
qualify as a regulated investment company, intends to pass along such interest
as a component of the Portfolio's distributions of net investment income.
Zero Coupons may offer investors the opportunity to earn higher yields than
those available on ordinary interest-paying obligations of similar credit
quality and maturity. However, zero coupon obligation prices may also exhibit
greater price volatility than ordinary fixed income securities because of the
manner in which their principal and interest are returned to the investor. Zero
Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities ("CATS"), Treasury
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Receipts ("TRS"), Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. Each Portfolio of the Fund is subject to the following
restrictions which are fundamental policies and may not be changed without the
approval of the lesser of: (1) at least 67% of the voting securities of the
Portfolio present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the
Portfolio.
As a matter of fundamental policy, each Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subject to the limitations described in non-fundamental limitation (7), below,
(ii) by lending its portfolio securities, and (iii) by lending Portfolio assets
to other Portfolios of the Fund, so long as such loans are not inconsistent with
the 1940 Act, or the rules and regulations, or interpretations or orders of the
SEC thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a result, it
would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer (this restriction is not applicable
to the Global Fixed Income, International Fixed Income, Advisory Foreign Fixed
Income or the Advisory Foreign Fixed Income II Portfolios);
(5) with respect to 75% of its assets, purchase securities of any issuer if, as
a result, more than 5% of the Portfolio's total assets, taken at market value at
the time of such investment, would be invested in the securities of such issuer
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (this restriction
does not apply to the Global Fixed Income, International Fixed Income, Advisory
Foreign Fixed Income or Advisory Foreign Fixed Income II Portfolios);
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes, and (ii) in connection with reverse repurchase agreements,
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 ("1933 Act") in connection with the disposition of restricted
securities); and
(8) acquire any securities of companies within one industry, if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
however that (i) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(ii) the Cash Reserves Portfolio may invest without limitation in certificates
of deposit or bankers' acceptances of domestic banks; (iii) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iv)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; (v) asset-backed securities
will be classified according
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to the underlying assets securing such securities; and (vi) the Advisory
Mortgage Portfolio will concentrate in mortgage-backed securities.
NON-FUNDAMENTAL LIMITATIONS. Each Portfolio is also subject to the following
restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, no Portfolio will:
(1) in the case of any equity or balanced Portfolio
(a) enter into futures contracts to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of each Portfolio's total assets, and will
maintain assets sufficient to meet its obligations under such contracts in a
segregated account with the custodian bank or will otherwise comply with the
SEC's position on asset coverage; or
(b) write put or call options except to the extent described above in (a);
(2) in the case of any fixed income Portfolio, enter into futures contracts or
options on futures contracts for purposes other than bona fide hedging if more
than 5% of the Portfolio's total assets at the time of the transaction would be
required as margin and option premiums to secure the Portfolio's obligations
under such contracts;
(3) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, provided that each
Portfolio may make margin deposits in connection with transactions in options,
futures, and options on futures;
(4) sell short unless the Portfolio (i) by virtue of its ownership of other
securities, has the right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, or (ii) maintains in a segregated account on the books of the
Fund's custodian an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short or such other amount as the SEC or its
staff may permit by rule, regulation, order or interpretation (transactions in
futures contracts and options, however, are not deemed to constitute selling
securities short);
(5) borrow money other than from banks or other Portfolios of MAS Funds,
provided that a Portfolio may borrow from banks or other Portfolios of MAS Funds
so long as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or
purchase additional securities when borrowings exceed 5% of total (gross)
assets;
(6) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that each Portfolio may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(7) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board;
(8) invest for the purpose of exercising control over management of any
company; and
(9) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes
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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.
Pursuant to an order from the SEC, the Portfolios may enter into interfund
lending arrangements. Interfund loans and borrowings permit each Portfolio to
lend money directly to and borrow from other Portfolios of the Fund for
temporary purposes. Such loans and borrowings normally extend overnight but may
have a maximum duration of seven days. A Portfolio will borrow through the
interfund lending facility only when the costs are lower than the costs of bank
loans, and will lend through the facility only when the returns are higher than
those available from an investment in repurchase agreements. In addition, a
Portfolio will borrow and lend money through interfund lending arrangements only
if, and to the extent that, such practice is consistent with the Portfolio's
investment objective and other investments. Any delay in repayment to a lending
Portfolio could result in a lost investment opportunity or additional borrowing
costs.
PURCHASE OF SHARES
The Portfolios requested should be designated on the Account Registration Form.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders, and (iii) to reduce or
waive the minimum for initial and subsequent investments. The officers of the
Fund may from time to time waive the minimum initial and subsequent investment
requirements in connection with investments in the Fund by employees of the
Adviser and its affiliates.
The Cash Reserves Portfolio declares dividends daily and, therefore, at the time
of a purchase must have funds immediately available for investment. As a
result, you must pay for shares of the Cash Reserves Portfolio with Federal
Funds (monies credited to the Portfolio's Custodian by a Federal Reserve Bank).
Payment for shares of the other Portfolios need not be converted into Federal
Funds before acceptance by the Fund.
Investors purchasing and redeeming shares of the Portfolios through a
Shareholder Organization may be charged a transaction-based fee or other fee for
the Shareholder Organization's services. Each Shareholder Organization is
responsible for sending you a schedule of fees and information regarding any
additional or different conditions regarding purchases and redemptions.
Customers of Shareholder Organizations should read this SAI in light of the
terms governing accounts with their organization. The Fund does not pay
compensation to or receive compensation from Shareholder Organizations for the
sale of Institutional Class Shares.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order to
confirm that telephone instructions in connection with redemptions are genuine,
the Fund and Distributor will provide written confirmation of transactions
initiated by telephone.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit. The Fund has made an
election with the SEC pursuant to Rule 18f-1 under the 1940 Act to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Portfolio at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above limits
may be paid in whole or in part in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Fund. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Fund's prospectuses under
38
<PAGE>
"Valuation of Shares" and a redeeming shareholder would normally incur brokerage
expenses in converting these securities to cash.
No charge is made by a Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, accepts the order. In
other words, orders will be priced at the net asset value next computed after
such orders are accepted by an authorized broker or the broker's authorized
designee.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
The exchange privilege is only available with respect to the Fund's Portfolios
that are qualified for sale in a shareholder's state. Exchange requests should
be sent to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge,
West Conshohocken, PA 19428-0868. Any such exchange will be based on the
respective net asset values of the shares involved. Before making an exchange, a
shareholder should consider the investment objectives of the Portfolio to be
purchased. Exchange requests may be made either by mail or telephone. Telephone
exchanges (referred to as "expedited exchanges") will be accepted only if the
certificates for the shares to be exchanged are held by the Fund for the account
of the shareholder and the registration of the two accounts are identical.
Requests for expedited exchanges received prior to the time at which each
Portfolio determines its net asset value, as described in the prospectus will be
processed as of the close of business on the same day. Requests received after
these times will be processed on the next business day. Expedited exchanges may
also be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board to assure that such exchanges do not
disadvantage the Fund and its shareholders. The officers of the Fund reserve the
right not to accept any request for an exchange when, in their opinion, the
exchange privilege is being used as a tool for market timing.
Because an exchange of shares amounts to a redemption from one Portfolio and
purchase of shares of another Portfolio, the information regarding purchase and
redemption of shares applies to exchanges. For federal income tax purposes, an
exchange between Portfolios of the Fund is a taxable event, and, accordingly, a
capital gain or loss may be realized. It is likely, therefore, that a capital
gain or loss would be realized on an exchange between Portfolios; you may want
to consult your tax adviser for further information in this regard. The exchange
privilege may be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person by
written request to the Client Services Group at the address noted above. If
shares are being transferred to a new account, requests for transfer must be
accompanied by a completed Account Registration Form for the receiving party.
If shares are being transferred to an existing account, the request should
clearly identify the account and number of shares to be transferred and include
the signature of all registered owners and all share certificates, if any, which
are subject to the transfer. The signature on the letter of request, the share
certificate or any stock power must be guaranteed in the same manner as
described under "Redemption of Shares." As in the case of redemptions, the
written request must be received in good order before any transfer can be made.
39
<PAGE>
VALUATION OF SHARES
Net asset value per share ("NAV") is determined by dividing the total market
value of each Portfolio's investments and other assets, less any liabilities,
by the total outstanding shares of that Portfolio. NAV for Investment Class
Shares, Institutional Class Shares and Adviser Class Shares may differ due to
class-specific expenses paid by each class, and the shareholder servicing fees
charged to Investment Class Shares and distribution fees charged to Adviser
Class Shares.
Equity securities listed on a U.S. securities exchange or Nasdaq for which
market quotations are available are valued at the last quoted sale price on the
day of valuation. Price information on listed equity securities is taken from
the exchange where the security is primarily traded. Equity securities listed
on a foreign exchange are valued at the latest quoted sales price available
before the time when assets are valued. For purposes of NAV, all assets and
liabilities initially expressed in foreign currencies are converted into U.S.
dollars at the bid price of the foreign currencies against U.S. dollars.
Unlisted equity securities and listed U.S. equity securities not traded on the
valuation date for which market quotations are readily available are valued at
the mean of the most recent quoted bid and asked price.
Bonds and other fixed income securities listed on a foreign exchange are valued
at the latest quoted sales price available before the time when assets are
valued. NAV includes interest on bonds and other fixed income securities which
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.
CASH RESERVES PORTFOLIO: For the purpose of calculating the Cash Reserves
Portfolio's NAV, securities are valued by the amortized cost method of
valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value based on amortized cost is higher or lower than the price the Portfolio
would receive if it sold the instrument.
The use of amortized cost and the maintenance of the Portfolio's per share NAV
at $1.00 is based on its election to operate under the provisions of Rule 2a-7
under the 1940 Act. As conditions of operating under Rule 2a-7, the Portfolio
must maintain a dollar-weighted average Portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of thirteen months or less
and invest only in U.S. dollar-denominated securities which are determined by
the Trustees to present minimal credit risks and which are of eligible quality
as determined under the rule.
The Board has established procedures reasonably designed, taking into account
current market conditions and the Portfolio's investment objective, to stabilize
the net asset value per share as computed for the purposes of sales and
redemptions at $1.00. These procedures include periodic review, as the Trustees
deem appropriate and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized cost value per
share and a net asset value per share based upon
40
<PAGE>
available indications of market value. In such a review, investments for which
market quotations are readily available are valued at the most recent bid price
or quoted yield equivalent for such securities or for securities of comparable
maturity, quality and type as obtained from one or more of the major market
makers for the securities to be valued. Other investments and assets are valued
at fair value, as determined in good faith by the Board.
In the event of a deviation of over 1/2 of 1% between a Portfolio's NAV based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost, the Trustees will promptly consider what action, if any,
should be taken. The Board will also take any action they deem appropriate to
eliminate or to reduce to the extent reasonably practicable any material
dilution or other unfair results which might arise from differences between the
two. This action may include redeeming shares in kind, selling instruments prior
to maturity to realize capital gains or losses or to shorten average maturity,
withholding dividends, paying distributions from capital gains or losses, or
utilizing a NAV not equal to $1.00 based upon available market quotations.
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 Investment Management; Member of the Morgan
Stanley Dean Witter Investment Management 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, Purchasing Solutions, Inc; Sunoco; Fannie
Mae; Reliance Group Holdings; CVS Corporation; Knight-Ridder, Inc.; Internet
Capital Group; formerly Director, IKON Office Solutions, Inc., Fiserv, 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.
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).
41
<PAGE>
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.
JAMES H. SCOTT,* 12/22/42, Trustee; Principal, Morgan Stanley Dean Witter
Investment Management; Equity Product Specialist, Miller Anderson & Sherrerd,
LLP; Director, Aid Association for Lutherans; Treasurer-Board of Directors,
Lutheran Theological Seminary at Philadelphia; Member, Engineering Foundation
Advisory Council, University of Texas at Austin; formerly, Trustee, New England
Funds.
* Trustees Bennett and Scott are deemed to be "interested persons" 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 Investment Management; 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; Vice
President, Morgan Stanley Dean Witter Investment Management; Head of Fund
Administration, Miller Anderson & Sherrerd, LLP; formerly Manager, Internal
Accounting and then Vice President and Director of Investment Accounting, PFPC,
Inc.
RICHARD J. SHOCH, 10/28/66, Secretary, MAS Funds; Vice President, Morgan Stanley
Dean Witter Investment Management; Fund Compliance Officer, Miller Anderson &
Sherrerd, LLP; formerly Fund Legal Administrator and then 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 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 YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999.
42
<PAGE>
As of the fiscal year ended September 30, 1999, 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, 1999 is set forth below.
<TABLE>
<CAPTION>
AGGREGATE PENSION OR BENEFITS
COMPENSATION FROM ACCRUED AS PART OF TOTAL COMPENSATION
NAME OF TRUSTEE THE FUND# FUND EXPENSES FROM THE FUND
--------------- --------- ------------- -------------
<S> <C> <C> <C>
THOMAS L. BENNETT* -0- -0- -0-
THOMAS P. GERRITY 70,000 -0- 70,000
JOSEPH P. HEALEY 70,000 -0- 70,000
JOSEPH J. KEARNS 70,000 -0- 70,000
C. OSCAR MORONG, JR. 70,000 -0- 70,000
VINCENT R. MCLEAN 70,000 -0- 70,000
JAMES H. SCOTT* -0- -0- -0-
</TABLE>
* Trustees Bennett and Scott are deemed to be "interested persons" 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 $18,000 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 November 30, 1999, Morgan
Stanley Dean Witter Investment Management had in excess of $177 billion in
assets under management.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors") serves as Sub-Adviser
to the Cash Reserves Portfolio. MSDW Advisors, located at Two World Trade
Center, New York, New York 10048, is a wholly-owned subsidiary of MSDW. Under
an Investment Sub-Advisory Agreement with the Adviser, MSDW Advisors, subject to
the control and supervision of the Fund, its officers and Trustees and the
Adviser, and in accordance with the investment objectives, policies and
restrictions of the Cash Reserves Portfolio, makes day-to-day investment
decisions for the Cash Reserves Portfolio and places the Portfolio's purchase
and sales orders. The Adviser pays MSDW Advisors 40% of the fee the Adviser
receives from the Cash Reserves Portfolio as compensation for sub-advisory
services. The Investment Sub-Advisory Agreement will continue in effect for an
initial term of two years, and thereafter for successive annual periods as long
as such continuance is approved in accordance with the 1940 Act. MSDW ADVISORS
RECEIVED $85,750 AS COMPENSATION FOR ITS SUB-ADVISORY SERVICES FOR THE CASH
RESERVES PORTFOLIO.
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board and in conformance
with the stated investment objectives and policies of each Portfolio of the
Fund, manages the investment and reinvestment of the assets of each Portfolio of
the Fund. In this regard, it is the responsibility of the Adviser to make
investment decisions for the Fund's Portfolios and to place each Portfolio's
purchase and sales orders for investment securities.
43
<PAGE>
As compensation for the services rendered by the Adviser under the Agreement and
the assumption by the Adviser of the expenses related thereto (other than the
cost of securities purchased for the Portfolios and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of such
securities), each Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Portfolio's average daily net assets for the quarter:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PORTFOLIO RATE (%)
- --------- --------
- --------------------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 0.500
- --------------------------------------------------------------------------------------------------------
Growth Portfolio 0.500
- --------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 0.500
- --------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 0.750
- --------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 1.000
- --------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 0.750
- --------------------------------------------------------------------------------------------------------
Value Portfolio 0.500
- --------------------------------------------------------------------------------------------------------
Value II Portfolio 0.500
- --------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 0.250
- --------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 0.450
- --------------------------------------------------------------------------------------------------------
High Yield Portfolio 0.450
- --------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 0.300
- --------------------------------------------------------------------------------------------------------
Municipal Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
NY Municipal Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio 0.450
- --------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio 0.550
- --------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 0.650
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 0.375
- --------------------------------------------------------------------------------------------------------
</TABLE>
In cases where a shareholder of any of the Portfolios has an investment
counseling relationship with the Adviser, the Adviser may, at its discretion,
reduce the shareholder's investment counseling fees by an amount equal to the
pro-rata advisory fees paid by the Fund. This procedure will be utilized with
clients having contractual relationships based on total assets managed by Miller
Anderson & Sherrerd, LLP to avoid situations where excess advisory fees might be
paid to the Adviser. In no event will a client pay higher total advisory fees as
a result of the client's investment in the Fund. In addition, the Adviser has
voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to the extent necessary, if any, to keep total annual operating expenses
actually deducted from Portfolio assets for the Institutional Class of the Cash
Reserves, Domestic Fixed Income, Multi-Market Fixed Income, Municipal, Multi-
Asset-Class, Small Cap Growth, Advisory Foreign Fixed Income, Advisory Foreign
Fixed Income II and Advisory Mortgage Portfolios from exceeding .320%, .500%,
.580%, .500%, .780%, 1.150%, .150%, .150% and .080% of their average daily net
assets, respectively. The Adviser also has voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary, if any,
to keep total annual operating expenses actually deducted from Portfolio assets
for the Investment Class of the Cash Reserves and Multi-Asset-Class Portfolios
from exceeding .470% and .930% of their average daily net assets, respectively,
and for the Adviser Class of the Domestic Fixed Income and Multi-Asset-Class
Portfolios from exceeding .750% and 1.030% of their average daily net assets,
respectively.
For the fiscal years ended September 30, 1997, 1998 and 1999 the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID ADVISORY FEES WAIVED
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1998 1999 1997 1998 1999
(000) (000) (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Portfolio 6,928 5,809 4,147 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Growth Portfolio * * * * * *
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 1,961 2,551 3,801 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 896 2,700 4,636 28 0 0
- --------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio * 0 260 * 8 47
- --------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 5,161 6,499 6,359 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Value Portfolio 14,010 18,304 10,356 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Value II Portfolio * * * * * *
- --------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 166 252 368 65 68 66
- --------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 372 300 570 11 7 0
- --------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 9,431 15,592 17,842 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 776 1,213 1,502 0 0 0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ADVISORY FEES PAID ADVISORY FEES WAIVED
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1998 1999 1997 1998 1999
(000) (000) (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Fixed Income Portfolio 289 264 251 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio * 255 441 * 28 0
- --------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 1,558 2,363 3,425 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 144 405 350 23 0 0
- --------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 549 551 488 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 404 647 632 4 0 0
- --------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 211 282 318 30 34 96
- --------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * * * * * *
- --------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 1,816 2,045 1,870 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * * * * * *
- --------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1,527 1,781 1,971 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * * * * * *
- --------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 797 1,125 1,108 126 78 40
- --------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 0 0 0 713 699 56
- --------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II * * * * * *
Portfolio
- --------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 0 0 0 9,155 16,638 26,671
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
The Agreement continues for successive one year periods, only if each renewal is
specifically approved by an in-person 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
at a meeting called for the purpose of considering such approval. In addition,
the question of continuance of the Agreement may be presented to the
shareholders of the Fund; in such event, continuance shall be effected only if
approved by the affirmative vote of a majority of the outstanding voting
securities of each Portfolio of the Fund. If the holders of any Portfolio fail
to approve the Agreement, the Adviser may continue to serve as investment
adviser to each Portfolio which approved the Agreement, and to any Portfolio
which did not approve the Agreement until new arrangements have been made. The
Agreement is automatically terminated if assigned, and may be terminated by any
Portfolio without penalty, at any time, (1) by vote of the Board or by vote of
the outstanding voting securities of the Portfolio or (2) on sixty (60) days'
written notice to the Adviser, or (3) by the Adviser upon ninety (90) days'
written notice to the Fund.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated to
each Portfolio, based on their relative net assets. Each Portfolio bears its own
advisory fees and brokerage commissions and transfer taxes in connection with
the acquisition and disposition of its investment securities.
46
<PAGE>
PRINCIPAL UNDERWRITER
MAS Fund Distribution, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Adviser, with its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428, distributes the shares of the Fund. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. The Distribution Agreement continues
in effect so long as such continuance is approved at least annually by the
Fund's Board, including a majority of those Trustees who are not parties to such
Distribution Agreement nor interested persons of any such party. The
Distribution Agreement provides that the Fund will bear the costs of the
registration of its shares with the SEC and various states and the printing of
its prospectuses, statements of additional information and reports to
shareholders.
SHAREHOLDER SERVICE AGREEMENT. The Fund has entered into a Shareholder Service
Agreement with the Distributor whereby the Distributor will compensate service
providers who provide certain services to clients who beneficially own
Investment Class shares of the Portfolios described in the Investment Class
prospectus. Each Portfolio will pay to the Distributor a fee at the annual rate
of .15% of the average daily net assets of such Portfolio attributable to the
shares serviced by the service provider, which fee will be computed daily and
paid monthly. During the fiscal year ended September 30, 1999, the Fund paid
$149,058 to compensate the Distributor under this Shareholder Service Agreement.
DISTRIBUTION OF SHARES
The Fund's Distribution Plan provides that the Adviser Class Shares will pay the
Distributor an annualized fee of .25% of the average daily net assets of each
Portfolio attributable to Adviser Class Shares, which the Distributor can use to
compensate broker/dealers and service providers which provide distribution
services to Adviser Class Shareholders or their customers who beneficially own
Adviser Class Shares.
The Fund has adopted the Distribution Plan in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of the Plan must be approved annually by
a majority of the Trustees of the Fund and the Trustees who are not "interested
persons" of the Fund within the meaning of the 1940 Act. The Plan requires that
quarterly written reports of amounts spent under the Plan and the purposes of
such expenditures be furnished to and reviewed by the Trustees. The Plan may not
be amended to increase materially the amount which may be spent thereunder
without approval by a majority of the outstanding Adviser Class Shares of the
Fund. All material amendments of the Plan will require approval by a majority of
the Trustees of the Fund and of the Trustees who are not "interested persons" of
the Fund. For the fiscal year ended September 30, 1999, the Equity, Mid Cap
Growth, Mid Cap Value, Small Cap Value, Value, Domestic Fixed Income, Fixed
Income, High Yield, and Balanced Portfolios paid $2,924, $398,723, $53,032,
$8,052, $773,781, $1,222, $340,526, $34,776, and $70,808, respectively, in
distribution fees pursuant to the Distribution Plan. Other than $194,993 of fees
retained by the Distributor, fees paid to the Distributor during the fiscal year
were used to reimburse third-parties for distribution-related services performed
on behalf of the Fund.
FUND ADMINISTRATION
MAS also serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Under its Administration Agreement with
the Fund, MAS receives an annual fee, accrued daily and payable monthly, of
0.08% of the Fund's average daily net assets, and is responsible for all fees
payable under any sub-administration agreements. Chase Global Funds Services
Company, an affiliate of The Chase Manhattan Bank, serves as transfer agent and
provides fund accounting and other services pursuant to a sub-administration
agreement.
For the fiscal years ended September 30, 1997, 1998 and 1999, the Fund paid the
following administrative fees (no administrative fees were waived):
47
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE FEES PAID
------------------------
----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1998 1999
(000) (000) (000)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio 1,136 931 664
----------------------------------------------------------------------------------------------------------------------
Growth Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 314 408 608
----------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 123 288 494
----------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio * 1 24
----------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 550 694 678
----------------------------------------------------------------------------------------------------------------------
Value Portfolio 2,285 2,930 1,655
----------------------------------------------------------------------------------------------------------------------
Value II Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 74 102 139
----------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 82 66 122
----------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 2,030 3,327 3,805
----------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 165 259 320
----------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 62 57 56
----------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio * 50 79
----------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 356 504 731
----------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 36 86 75
----------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 117 118 108
----------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 109 173 169
----------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 51 67 88
----------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 414 436 399
----------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 280 317 350
----------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 143 148 141
----------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 152 149 6
----------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * * *
----------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 1,954 3,549 5,688
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
48
<PAGE>
OTHER SERVICE PROVIDERS
CUSTODIAN. The Chase Manhattan Bank, New York, NY serves as Custodian for the
Fund. The Custodian holds cash, securities, and other assets of the Fund as
required by the 1940 Act.
TRANSFER AND DIVIDEND DISBURSING AGENT. Chase Global Funds Services Company, a
subsidiary of The Chase Manhattan Bank, 73 Tremont Street, Boston, MA
02108-3913, serves as the Funds' Transfer Agent and Dividend Disbursing Agent.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, located at 160 Federal
Street, Boston, MA 02110, serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
FUND COUNSEL. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
LITIGATION
The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs the Adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
Portfolios. In so doing, the Adviser will consider all matters it deems
relevant, including the following: the Adviser's knowledge of negotiated
commission rates and spreads currently available; the nature of the security or
instrument being traded; the size and type of the transaction; the nature and
character of the markets for the security or instrument to be purchased or sold;
the desired timing of the transaction; the activity existing and expected in the
market for the particular security or instrument; confidentiality; the
execution, clearance, and settlement capabilities of the broker or dealer
selected and other brokers or dealers considered; the reputation and perceived
soundness of the broker or dealer selected and other brokers or dealers
considered; the Adviser's knowledge of any actual or apparent operational
problems of a broker or dealer; and the reasonableness of the commission or its
equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, a Portfolio will not necessarily pay the lowest available commission on
brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be the case with other
transactions requiring more routine services. In addition, a Portfolio may pay
higher commission rates or markups than the lowest available when the Adviser
believes it is reasonable to do so in light of the value of the research,
statistical, pricing, and execution services provided by the broker or dealer
effecting the transaction. The Adviser does not attempt to put a specific dollar
value on the research services rendered or to allocate the relative costs or
benefits of those services among its clients, believing that the research it
receives will help the Adviser to fulfill its overall duty to its clients. The
Adviser uses research services obtained in this manner for the benefit of all of
its clients, though each particular research service may not be used to service
each client. As a result, the Fund may pay brokerage commissions or markups that
are used, in part, to purchase research services that are not used to benefit
the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place Portfolio orders with qualified broker-
dealers who recommend the Fund's Portfolios or who act as agents in the purchase
of shares of the Portfolios for their clients.
49
<PAGE>
Some securities considered for investment by each of the Fund's Portfolios may
also be appropriate for other clients serviced by the Adviser. The Adviser may
place a combined order for two or more accounts or Portfolios for the purchase
or sale of the same security if, in its judgment, joint execution is in the best
interest of each participant and will result in best price execution.
Transactions involving commingled orders are allocated in a manner deemed to be
equitable to each account or Portfolio. Although it is recognized that, in some
cases, joint execution of orders could adversely affect the price or volume of
the security that a particular account or fund may obtain, it is the opinion of
the Adviser and the Fund's Board that combining such orders generally will be
more advantageous to the Fund than effecting such transactions separately.
If purchases or sales of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and reasonable
by the Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees.
As an indirect subsidiary of Morgan Stanley Dean Witter & Co., the Adviser is
affiliated with certain U.S.-registered broker-dealers and foreign broker-
dealers (collectively, the :Affiliated Brokers"). The Adviser may, in the
exercise of its discretion under its investment management agreement, effect
transactions in securities or other instruments for the Fund through the
Affiliated Brokers. THE FUND DID NOT PAY ANY BROKERAGE COMMISSIONS TO ANY
AFFILIATES FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999.
ANNUAL TURNOVER
The annual turnover rate for each Portfolio for the past two fiscal years ended
September 30 was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PORTFOLIO 1998 1999
--------- ---- ----
--------------------------------------------------------------------
<S> <C> <C>
Equity Portfolio 77% 103%
--------------------------------------------------------------------
Growth Portfolio N/A N/A
--------------------------------------------------------------------
Mid Cap Growth Portfolio 172 208
--------------------------------------------------------------------
Mid Cap Value Portfolio 213 244
--------------------------------------------------------------------
Small Cap Growth Portfolio 67 300
--------------------------------------------------------------------
Small Cap Value Portfolio 163 251
--------------------------------------------------------------------
Value Portfolio 56 53
--------------------------------------------------------------------
Value II Portfolio N/A N/A
--------------------------------------------------------------------
Domestic Fixed Income Portfolio 145 115
--------------------------------------------------------------------
Fixed Income Portfolio 121 103
--------------------------------------------------------------------
Fixed Income II Portfolio 92 106
--------------------------------------------------------------------
Global Fixed Income Portfolio 88 56
--------------------------------------------------------------------
High Yield Portfolio 75 45
--------------------------------------------------------------------
Intermediate Duration Portfolio 131 97
--------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------
PORTFOLIO 1998 1999
--------- ---- ----
------------------------------------------------------------------------
<S> <C> <C>
International Fixed Income Portfolio 75 64
------------------------------------------------------------------------
Limited Duration Portfolio 107 102
------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 163 86
------------------------------------------------------------------------
Municipal Portfolio 140 88
------------------------------------------------------------------------
NY Municipal Portfolio N/A N/A
------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 105 124
------------------------------------------------------------------------
Targeted Duration Portfolio N/A N/A
------------------------------------------------------------------------
Balanced Portfolio 100 111
------------------------------------------------------------------------
Balanced Plus Portfolio N/A N/A
------------------------------------------------------------------------
Multi-Asset-Class Portfolio 107 101
------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 318 0
------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio N/A N/A
------------------------------------------------------------------------
Advisory Mortgage Portfolio 126 94
------------------------------------------------------------------------
</TABLE>
N/A -- Portfolio had not commenced operations as of September 30 of the
applicable year.
COMMISSIONS PAID
For the fiscal years ended September 30, 1997, 1998, and 1999, the Fund paid
brokerage commissions of approximately $19,134,219, $26,885,547, and
$34,111,732, respectively. For the fiscal years ended September 30, 1997, 1998
and 1999, the Fund paid in the aggregate $3,693, $0, and $0, respectively, as
brokerage commissions to Morgan Stanley & Co. Incorporated ("Morgan Stanley"),
an affiliated broker-dealer, which represented .02%, 0%, and 0% of the total
amount of brokerage commissions paid in each respective period. For the fiscal
years ended September 30, 1997, 1998 and 1999, the Fund paid in the aggregate
$118,000, $0, and $0, respectively, as brokerage commissions to Dean Witter
Reynolds, Inc., an affiliated broker-dealer, which represented .67%, 0%, and 0%
of the total amount of brokerage commissions paid in each respective period.
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999, THE FUND
DID NOT PAY ANY BROKERAGE COMMISSIONS TO ANY AFFILIATED BROKER-DEALER.
For the fiscal year ended September 30, 1999, the Fund paid brokerage
commissions of $2,895,719, $5,508,686, $6,176,281, $181,492, $12,117,949,
$5,869,544, $897,000, and $465,060 for the Equity, Mid Cap Growth, Mid Cap
Value, Small Cap Growth, Small Cap Value, Value, Balanced and Multi-Asset-Class
Portfolios, respectively.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
TOTAL PERCENT OF TOTAL PERCENT OF TOTAL
PORTFOLIO ($) COMMISSIONS TO COMMISSIONS TO DWR
MORGAN STANLEY
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity 3,869,410 .17 N/A
- -------------------------------------------------------------------------------
Growth N/A N/A N/A
- -------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------
TOTAL PERCENT OF TOTAL PERCENT OF TOTAL
PORTFOLIO ($) COMMISSIONS TO COMMISSIONS TO DWR
MORGAN STANLEY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Growth 3,051,138 .11 N/A
- ----------------------------------------------------------------------------------------------------
Mid Cap Value 1,249,687 N/A 2.9
- ----------------------------------------------------------------------------------------------------
Small Cap Growth N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Small Cap Value 3,954,424 N/A 1.94
- ----------------------------------------------------------------------------------------------------
Value 3,391,575 N/A .24
- ----------------------------------------------------------------------------------------------------
Value II N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Cash Reserves N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Domestic Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Fixed Income II N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Global Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
High Yield N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Intermediate Duration N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
International Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Limited Duration N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Multi-Market Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Municipal N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
NY Municipal N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Special Purpose Fixed Income N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Targeted Duration N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Balanced 573,940 N/A .03
- ----------------------------------------------------------------------------------------------------
Balanced Plus N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
Multi-Asset-Class 333,188 .08 .07
- ----------------------------------------------------------------------------------------------------
Advisory Foreign Fixed N/A N/A N/A
Income
- ----------------------------------------------------------------------------------------------------
Advisory Foreign Fixed N/A N/A N/A
Income II
- ----------------------------------------------------------------------------------------------------
Advisory Mortgage N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
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 consists 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:
1) Subject to the majority vote of the holders of shares of any Portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such Portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
Portfolio and distribute such assets ratably among the shareholders of such
Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
Portfolios into a single Portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), and 3) above, that
Portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that Portfolio.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income
53
<PAGE>
(including capital gains) taxes on it and the imposition of the federal excise
tax on undistributed income and capital gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution,
except for the Cash Reserves Portfolio. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes.
Unless the shareholder elects otherwise in writing, all dividends and
distributions are automatically received in additional shares of that Portfolio
of the Fund at net asset value (as of the business day following the record
date). This will remain in effect until the Fund is notified by the shareholder
in writing at least three days prior to the record date that either the Income
Option (income dividends in cash and capital gains distributions in additional
shares at net asset value) or the Cash Option (both income dividends and capital
gain distributions in cash) has been elected. An account statement is sent to
shareholders whenever a dividend or distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence, as a
separate "regulated investment company") for federal tax purposes. Any net
capital gains recognized by a Portfolio are distributed to its investors without
need to offset (for federal income tax purposes) such gains against any net
capital losses of another Portfolio.
In all Portfolios except the Cash Reserves Portfolio, undistributed net
investment income is included in the Portfolio's net assets for the purpose of
calculating NAV. Therefore, on the ex-dividend date, the NAV excludes the
dividend (i.e., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable as ordinary income.
Certain mortgage securities may provide for periodic or unscheduled payments of
principal and interest as the mortgages underlying the securities are paid or
prepaid. However, such principal payments (not otherwise characterized as
ordinary discount income or bond premium expense) will not normally be
considered as income to the Portfolio and therefore will not be distributed as
dividends. Rather, these payments on mortgage-backed securities will be
reinvested on your behalf by the Portfolio.
SPECIAL CONSIDERATIONS FOR THE CASH RESERVES PORTFOLIO: Net investment income is
computed and dividends declared as of 12:00 noon (Eastern Time), on each day.
Such dividends are payable to Cash Reserves Portfolio shareholders of record as
of 12:00 noon (Eastern Time) on that day, if the Portfolio is open for business.
Shareholders who redeem prior to 12:00 noon (Eastern Time) are not entitled to
dividends for that day. Dividends declared for Saturdays, Sundays and holidays
are payable to shareholders of record as of 12:00 noon (Eastern Time) on the
preceding business day on which the Portfolio was open for business. Net
realized short-term capital gains, if any, of the Cash Reserves Portfolio will
be distributed whenever the Trustees determine that such distributions would be
in the best interest of shareholders, but at least once a year. The Portfolio
does not expect to realize any long-term capital gains. Should any such gains be
realized, they will be distributed annually.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Fund's
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
54
<PAGE>
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 TRANSITION
The Fund and its service providers do not appear to have been adversely affected
by computer problems related to the transition to the year 2000. However, there
remains a risk that such problems could arise or be discovered in the future.
Year 2000 related problems also may negatively affect issuers whose securities
the Fund purchases, which could have an impact on the value of your investment.
TAX CONSIDERATIONS
Each Portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the federal excise tax. To do so,
each Portfolio expects to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year. In order for a
Portfolio to continue to qualify for federal income tax treatment as a regulated
investment company, at least 90% of its gross income for a taxable year must be
derived from qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or foreign
currencies, or other income derived with respect to its business of investing in
such securities or currencies. It is anticipated that any net gain realized from
the closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In addition, (i) a Portfolio must distribute annually to its
shareholders at least the sum of 90% of its net interest income excludable from
gross income and 90% of its investment company taxable income; (ii) at the close
of each quarter of a Portfolio's taxable year, at least 50% of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies and such other securities
with limitations; and (iii) at the close of each quarter of a Portfolio's
taxable year, not more than 25% of the value of its assets may be invested in
securities of any one issuer, or of two or more issuers engaged in same or
similar businesses if the Portfolio owns at least 20% of the voting power of
such issuers.
Each Portfolio of the Fund will distribute to shareholders annually any net
capital gains which have been recognized for federal income tax purposes
including unrealized gains at the end of the Portfolio's fiscal year on certain
futures transactions. Such distributions will be combined with distributions of
capital gains realized on the Portfolio's other investments and shareholders
will be advised of the nature of the payments.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolios may be "Section 1256 contracts." Section 1256
contracts held by a Portfolio at the end of its taxable year (and, for purposes
of the 4% excise tax, on certain other dates as prescribed under the Internal
Revenue Code (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
55
<PAGE>
("60/40") although all foreign currency gains and losses from such contracts may
be treated as ordinary in character absent a special election.
Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap contracts undertaken by a Portfolio, may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by a Portfolio. In addition,
losses realized by a Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
a Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
A Portfolio may make one or more of the elections available under the Code which
are applicable to straddles. If a Portfolio makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a Portfolio that did not engage in such hedging transactions.
The Code provides constructive sales treatment for appreciated financial
positions such as stock which has increased in value in the hands of a
Portfolio. Under this constructive sales treatment, the Portfolio may be treated
as having sold such stock and be required to recognize gain if it enters into a
short sale, an offsetting notional principal contract, a futures or forward
contract, or a similar transaction with respect to such stock or substantially
identical property.
Each Portfolio of the Fund is treated as a separate entity for federal income
tax purposes and intends to qualify for the special tax treatment afforded
regulated investment companies. As such, each Portfolio will not be subject to
federal income tax to the extent it distributes net investment company taxable
income and net capital gains to shareholders. The Fund will notify you annually
as to the tax classification of all distributions.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, you must certify
on your Account Registration Form that your Social Security Number or Taxpayer
Identification Number is correct, and that you are not subject to backup
withholding.
Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. Each Portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the Portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of a Portfolio by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than twelve
months and short-term if for twelve months or less. Generally, long-term capital
gains are currently taxed at a maximum rate of 20% and short-term gains are
currently taxed at ordinary income tax rates. If shares held for six months or
less are sold or redeemed for a loss, two special rules apply: First, if shares
on which a net capital gain distribution has been received are subsequently sold
or
56
<PAGE>
redeemed, and such shares have been held for six months or less, any loss
recognized will be treated as long-term capital loss to the extent of the long-
term capital gain distributions. Second, any loss recognized by a shareholder
upon the sale or redemption of shares of a municipal Portfolio fund held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received by the Shareholder with respect to such shares.
FOREIGN INCOME TAXES: Investment income received by the Portfolios from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Portfolios to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolios' assets to be
invested within various countries is not known. The Portfolios intend to operate
so as to qualify for treaty-reduced rates of tax where applicable.
If at the end of a Portfolio's year, more than 50% of a Portfolio's assets are
represented by foreign securities, then such Portfolio may file an election with
the Internal Revenue Service to pass through to shareholders the amount of
foreign income taxes paid by such Portfolio. A Portfolio will make such an
election only if it is deemed to be in the best interests of such shareholders.
If a Portfolio makes the above-described election, the Portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the Portfolio. The shareholders of
the Portfolios will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
Portfolio; (ii) treat their pro rata share of foreign taxes as paid by them;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the Portfolio
which represents income from sources within foreign countries; and (iv) either
deduct their pro rata share of foreign taxes in computing their taxable income
or use it within the limitations set forth in the Code as a foreign tax credit
against U.S. income taxes (but not both). In no event shall a shareholder be
allowed a foreign tax credit if the shareholder holds shares in a Portfolio for
15 days or less during the 30-day period beginning on the date which is 15 days
before the date on which such shares become ex-dividend with respect to such
dividends.
Each shareholder of a Portfolio will be notified within 60 days after the close
of each taxable (fiscal) year of the Fund if the foreign taxes paid by the
Portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the Portfolio's gross income from foreign sources. The notice from the
Portfolio to shareholders will also include the amount of foreign taxes paid by
the Portfolio which are not allowable as a foreign tax credit because the
Portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because, and to the extent that, the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
STATE AND LOCAL INCOME TAXES: The Fund is not liable for any corporate income or
franchise tax in the Commonwealth of Pennsylvania. Shareholders should consult
their tax advisers for the state and local income tax consequences of
distributions from the Portfolios.
SPECIAL TAX CONSIDERATIONS FOR THE MUNICIPAL AND NY MUNICIPAL PORTFOLIOS: Each
of the Municipal and NY Municipal Portfolios intends that at the close of each
quarter of its taxable year, at least 50% of the value of the Portfolio's total
assets will consist of obligations the interest on which is excludable from
gross income (i.e., municipal bonds and notes), so that it may pay "exempt-
interest" dividends to shareholders. Exempt-interest dividends, which are
defined in the Code, are excluded from a shareholder's gross income for federal
income tax purposes, but may nevertheless be subject to the alternative minimum
tax (imposed at a rate of 26%-28% in the case of non-corporate taxpayers and at
the rate of 20% in the case of corporate taxpayers). A shareholder may, however,
lose the federal tax-exempt status of the accrued income of the Portfolio if the
shareholder redeems its shares before a dividend has been declared. Exempt-
interest
57
<PAGE>
dividends received by shareholders from these Portfolios may be subject to state
and local taxes, although some states allow a shareholder to exclude that
portion of a portfolio's tax-exempt income which is accountable to municipal
securities issued within the shareholder's state of residence.
These Portfolios may invest in private activity municipal securities, the
interest on which is subject to the federal alternative minimum tax for
corporations and individuals. These Portfolios may not be an appropriate
investment for persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds. A "substantial user" is defined generally to include
certain persons who regularly use in a trade or business or facility financed
from the proceeds of industrial development bonds or private activity bonds.
Such persons should consult their tax advisors before purchasing shares.
Any distributions paid to shareholders of either Portfolio that are derived from
taxable interest or capital gains will be subject to federal income tax.
Additionally, such distributions are not eligible for the dividends received
deduction for corporations.
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of these Portfolios is not deductible for federal
income tax purposes to the extent that it relates to exempt-interest dividends
distributed to the shareholder during the taxable year.
PRINCIPAL HOLDERS OF SECURITIES
As of January 5, 2000, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of any Class of the
following Portfolios' outstanding shares:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- ---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF
SHARES % OF CLASS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY PORTFOLIO First Union National Bank 3,319,619.151 7.92
FBO Diocese of Camden
CMG3C4 NC 1151
1525 W WT Harris Blvd
Charlotte, NC 28288
- ---------------------------------------------------------------------------------------------------------------------------
MAC & Co. A/C VCBF 1770012 2,527,380.284 6.03
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- ---------------------------------------------------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO Charles Schwab & Co. Inc. 8,924,144.165 21.19
Special Custody Account for the
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 6,816,264.472 16.18
Operations FFIIOC as Agent for
100 Magellan Way KWIC
Covington, KY 41015
- ---------------------------------------------------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO Charles Schwab & Co. Inc. 4,749,815.997 10.90
Special Custody for the
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- ---------------------------------------------------------------------------------------------------------------------------
MAS Funds Omnibus Account 2,224,144.683 5.10
For TFM and Merged Shareholders C/O CGFSC
8th Floor T/A
73 Tremont Street
Boston, MA 02108
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF % OF
SHARES CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fishnet & Company 2,569,201.914 5.90
FBO The Hearst Foundation
C/O State Street Bank & Trust
P.O. Box 1992
Boston, MA 02105
- --------------------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank 2,981,030.921 6.84
FAO Hearst Corporation
Global Securities Services
6/th/ Floor
New York, NY 11245
- --------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company 4,771,919.442 10.95
FBO Ameren Corp
Defined Cont Plan
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH PORTFOLIO Charles Schwab & Co. Inc. 1,602,272.607 27.75
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 323,123.560 5.60
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- --------------------------------------------------------------------------------------------------------------------------
National Financial Services FBO Their Customers 501,050.232 8.68
Church Street Station
New York, NY 10008-3908
- --------------------------------------------------------------------------------------------------------------------------
The Duke Endowment 683,028.188 11.83
Suite 3500
100 N. Tyron
Charlotte, NC 28202-4012
- --------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO Charles Schwab & Co. Inc. 3,742,392.626 7.05
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------------------------
American Red Cross Retirement System 2,951,959.744 5.56
Attn: Christina Samson
8111 Gatehouse Rd., 5/th/ Floor
Falls Church, VA 22042-1203
- --------------------------------------------------------------------------------------------------------------------------
The Northern Trust Co. as TTEE 2,793,808.394 5.26
FBO Silicon Graphics
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
The Northern Trust Co. as TTEE 3,341,714.745 6.30
FBO Potomac Electric Power Co. Gen R PL
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO Charles Schwab & Co. Inc. 16,093,855.213 21.87
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF % OF
SHARES CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Financial Services Corp FBO Their 3,755,546.598 5.10
Customers
Church Street Station
New York, NY 10008-3908
- --------------------------------------------------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO California Bank & Trust As TTEE OOCL 10,824,869.860 8.11
USA Inc Pension TR
Attn: Robin Ropolo-Trust Dept
300 Lakeside Dr., 8/th/ Floor
Oakland, CA 94612
- --------------------------------------------------------------------------------------------------------------------------
Salkeld & Co. 14,096,664.680 10.56
C/O Bankers Trust Company
Church Street Station
New York, NY 10008
- --------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company as TTEE 27,366,724.060 20.50
FBO Morgan Stanley Plan 8504
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
Bankers Trust Co. FBO CNMC 174351 16,744,953.770 12.54
Attn: M. Bloebaum
P.O. Box 9014
Church Street Station
New York, NY 10008
- --------------------------------------------------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO Saxon & Company 850,883.719 5.01
FBO 78 Weirton Med Ctr MAS
A/C 20-10-002-1033668
P.O. Box 7780-1888
Philadelphia, PA 19182
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 5,533,017.710 32.56
Operations FIIOC as Agent for
100 Magellan Way KWIC
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
Fleet National Bank Custodian for 991,891.929 5.84
Attn: 0006813110
P.O. Box 92800
Rochester, NY 14692-8900
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Management Trust Co. as Trustee for US 2,304,541.703 13.56
Airways Inc- Cap Growth
Attn: Trust Operations- H10C
82 Devonshire St.
Boston, MA 02109
- --------------------------------------------------------------------------------------------------------------------------
HSBC Bank USA TTEE for 1,080,265.810 6.36
Highland Hospital Ret Plan
P.O. Box 1329
Buffalo, NY 14240
- --------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO The Northern Trust Co. as TTEE 22,378,207.258 5.72
FBO Morgan Stanley Plan 8504
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
FIXED INCOME II PORTFOLIO First Union National Bank 3,780,912.174 11.12
FBO Diocese of Camden
CMG 3C4 NC 1151
1525 W. WT Harris Blvd
Charlotte, NC 28288
- --------------------------------------------------------------------------------------------------------------------------
Regions Bank as TTEE for Infirmary 4,144,490.087 12.19
Health Systems Pension
P.O. Box 2527
Mobile, AL 36622-0001
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF % OF
SHARES CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FIXED INCOME PORTFOLIO Rockefeller Family Fund Inc 348,912.244 6.54
437 Madison Avenue 37/th/ Floor
New York, NY 10022
- --------------------------------------------------------------------------------------------------------------------------
State Street Bank & Trust Trustee 582,378.968 10.91
Attn: Dorothy G McNeil
P.O. Box 1992
Boston, MA 02105
- --------------------------------------------------------------------------------------------------------------------------
All for Her Fund 957,859.645 17.94
Attn: Mary Borthwick Controller
4 Pine West Plaza
Albany, NY 12205-5520
- --------------------------------------------------------------------------------------------------------------------------
The Charles A. Dana Foundation Inc. 2,214,278.110 41.48
Attn: Herbert Vine
745 Fifth Ave Suite 700
New York, NY 10151
- --------------------------------------------------------------------------------------------------------------------------
Hudson-Webber Foundation 927,576.719 17.37
Attn: Leslie R. Malcolmson
333 West Fort St. Suite 1310
Detroit, MI 48226-3134
- --------------------------------------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO KPMG Peat Marwick 9,102,924.727 7.55
Attn: Michael Lynskey
Three Chestnut Ridge Road
Montvale, NJ 07645
- --------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 6,065,607.298 5.03
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- --------------------------------------------------------------------------------------------------------------------------
Minnesota Life Insurance Co. 6,459,528.602 5.36
C/O Advantus Capital Management Inc
Station 16-4202
400 Robert St.
St. Paul, MN 55101
- --------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO FNB Nominee Co 427,040.869 8.53
C/O First Commonwealth Co
614 Philadelphia St.
Indiana, PA 15701
- --------------------------------------------------------------------------------------------------------------------------
Union Bank of California TR Nominee 1,543,322.837 30.84
FBO Los Angeles Hotel Restaurant
610001264 00
P.O. Box 85484
San Diego, CA 92186
- --------------------------------------------------------------------------------------------------------------------------
Mariposa Foundation 323,747.551 6.47
C/O Morgan Stanley
1251 Ave of the Americas 23/rd/ Floor
New York, NY 10020
- --------------------------------------------------------------------------------------------------------------------------
NYACK Hospital 647,552.197 12.94
Attn: Ms. Susan Popowick Controller
160 North Midland Ave.
NYACK, NY 10960
- --------------------------------------------------------------------------------------------------------------------------
Curtis L Carlson Family Foundation 269,711.973 5.39
Attn: Brenda Sallstrom
P.O. Box 59159
Minneapolis, MN 55459-8215
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL FIXED INCOME Charles Schwab & Co. Inc 1,206,966.232 9.09
PORTFOLIO Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------------------------
Syntex USA Inc 2,028,720.071 15.27
Pension Trust
Attn: Sue Griswold
P.O. Box 10850
Palo Alto, CA 94303
- --------------------------------------------------------------------------------------------------------------------------
ARMCO Master Pension Trust 1,893,381.799 14.26
Mr. Christopher Motley
Treasurer
703 Curtis St.
Middletown, OH 45044-3999
- --------------------------------------------------------------------------------------------------------------------------
Chemical Bank as Custodian For 1,045,584.672 7.87
Smithsonian Institution
Attn: Hazel Drinkard
4 New York Plaza 4/th/ Floor
New York, NY 10004
- --------------------------------------------------------------------------------------------------------------------------
Western Metal Industry Pension Fund 2,221,685.984 16.73
C/O Miller Anderson & Sherrard
One Tower Bridge
West Conshohocken, PA 19428
- --------------------------------------------------------------------------------------------------------------------------
MAC & Co. CFZF5031172 2,537,835.653 19.11
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------------
Wellesley College 1,157,008.575 8.71
Attn: Robert Bower Controller
106 Central St.
Wellesley, MA 02481
- --------------------------------------------------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO Citibank NA TTEE for Fieldcrest 1,783,365.702 11.78
Cannon Hourly Retirement Plan
Acct Unit Building B Floor 3 Zone 8
3800 Citibank Center Tampa
Tampa, FL 33610-9122
- --------------------------------------------------------------------------------------------------------------------------
Northern California Bakery Drivers 1,660,622.049 10.97
Security Fund c/o ATPA
1640 South Loop Rd
Alameda, CA 94502
- --------------------------------------------------------------------------------------------------------------------------
Union Bank of California TR 2,221,748.332 14.67
FBO Los Angeles Hotel Restaurant
610001264 00
P.O. Box 85484
San Diego, CA 92186
- --------------------------------------------------------------------------------------------------------------------------
MULTI-MARKET FIXED INCOME Y & H Soda Foundation 556,737.004 5.49
PORTFOLIO Attn: Judy Murphy
2 Theatre Sq Suite 211
Orinda, CA 94563-3346
- --------------------------------------------------------------------------------------------------------------------------
Connelly Foundation 5,563,274.766 54.87
Attn: Lawrence Mangan
One Tower Bridge Suite 1450
West Conshohocken, PA 19428
- --------------------------------------------------------------------------------------------------------------------------
The Greenwall Foundation 1,034,479.755 10.20
Attn: William C. Stubing
Two Park Avenue
New York, NY 10016-5603
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National City Bank FBO 695,775.960 6.86
Jeannette Memorial Hospital
Attn: Mutual Funds
46 PO9258016
P.O. Box 94984
Cleveland, OH 44101-4984
- --------------------------------------------------------------------------------------------------------------------------
The Healthcare Fund of New Jersey 1,717,143.711 16.94
Attn: Dr. Mark S. Hockberg
75 Livingston Ave.
Roseland, NJ 07068
- --------------------------------------------------------------------------------------------------------------------------
MUNICIPAL PORTFOLIO Charles Schwab Co. Inc 1,119,506.296 10.55
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------------------------------
Robert A Fox 637,713.457 6.01
C/o RAF Industries
165 Township Line Rd
Suite 2100
Jenkintown, PA 19046
- --------------------------------------------------------------------------------------------------------------------------
Wachovia Bank NA 635,853.908 5.99
TTEE U/A 6/20/95
P.O. Box 3073
301 N. Main St MC NC31057
Winston-Salem, NC 27150
- --------------------------------------------------------------------------------------------------------------------------
JR Trueman Qualified Subchapter S Trust 1,446,430.129 13.63
Attn: Barbara Trueman
5490 Hayden Rd
Amlin, OH 43002
- --------------------------------------------------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME Robertson Research Fund 3,048,977.788 8.20
PORTFOLIO Cold Spring Harbor Laboratory
Attn: Alison McDermott
P.O. Box 100
Cold Springs Harbor, NY 11724-0100
- --------------------------------------------------------------------------------------------------------------------------
The Cold Spring Harbor Fund 1,907,372.882 5.13
Attn: Alison McDermott
P.O. Box 100 Burgtown Rd
Cold Springs Harbor, NY 11724
- --------------------------------------------------------------------------------------------------------------------------
Key Trust Co. as Custodian for Taft Hart/PL 1,965,218.957 5.29
P.O. Box 94871
Cleveland, OH 44101-4871
- --------------------------------------------------------------------------------------------------------------------------
Fleet National Bank 2,723,288.523 7.33
FBO Hartford Hospital
P.O. Box 92800
Rochester, NY 14692-8900
- --------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO Scholle Corporation Employees 1,509,226.077 5.35
Retirement Trust
Attn: William Borkett VP FIN
200 W North Ave
Northlake, IL 60164-2490
- --------------------------------------------------------------------------------------------------------------------------
Northern Trust Co. as TTEE 10,063,219.958 35.66
FBO Allianz Defined Cont Plan
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
Wendel & Co 507415 3,279,123.978 11.62
Trustee for A&P Savings Plan
C/O The Bank of New York
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
P.O. Box 1066 Wall Street Station
New York, NY 10268
- --------------------------------------------------------------------------------------------------------------------------
Wendel & Co A/C 018768 2,878,844.264 10.20
P.O. Box 1066
Wall Street Station
New York, NY 10268
- --------------------------------------------------------------------------------------------------------------------------
Wendel & Co A/C 017735 2,443,683.795 8.66
P.O.Box 1066
Wall Street Station
New York, NY 10268
- --------------------------------------------------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO Albany Medical College A-29 3,684,312.617 25.81
Combined Funds
Attn: Paul Pennell
47 New Scotland Ave.
Albany, NY 12208
- --------------------------------------------------------------------------------------------------------------------------
Albany Medical Center Hospital 734,316.294 5.15
Combined Funds
Attn: Controller
New Scotland Ave.
Albany, NY 12208
- --------------------------------------------------------------------------------------------------------------------------
The National Center for State Courts 959,008.368 6.72
Attn: Gwen W. Williams CPA CIA Controller
300 Newport Ave.
Williamsburg, VA 23185
- --------------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank as Trustee for Milbank 1,674,831.857 11.73
Tweed Hadley & McCloy
Attn: Jeff Salazar 5/th/ Floor
3 Chase Metrotech Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------------------------------------------------
Northern Trust as TTEE FBO 1,003,007.680 7.03
Scotsman Industries
P.O Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
Fifth Third Bank Custodian 858,029.729 6.01
Indianapolis Symphony Orchestra
P.O. Box 630074
Cincinnati, OH 45263
- --------------------------------------------------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO Northern Trust Company Trustee FBO Ford Motor Co. 56,334,816.148 6.70
A/C 22-01854
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
Pacific Gas & Electric Company 48,098,290.543 5.72
Attn: Carolyn Margiotti
Mail Code B24K
San Francisco, CA 94177
- --------------------------------------------------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME Kaiser Foundation DB Plan 218,865.727 5.65
PORTFOLIO Attn: Ms. Janice Murphy
One Kaiser Plaza
Oakland, CA 94612
- --------------------------------------------------------------------------------------------------------------------------
Chemical Bank as Custodian for Smithsonian 325,487.507 8.40
Institution
Attn: Hazel Drinkard
4 New York Plaza 4/th/ Floor
New York, NY 10004
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minnesota State Board of Investments 293,096.261 7.56
Attn: Jason Matz
Suite 105 MEA Building
55 Sherburne Ave.
St. Paul, MN 55155
- --------------------------------------------------------------------------------------------------------------------------
Northern Trust Company Trustee FBO Ford Motor Co. 263,003.074 6.78
A/C 22-01854
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
Bost & Co.A/C LCRF0391002 346,948.468 8.95
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY PORTFOLIO Shadyside Presbyterian Church 50,981.079 82.52
William E Saul Endowment Fund
Attn: Ms. Nancy M. Shaytar
5121 Westminster Pl
Pittsburgh, PA 15232
- --------------------------------------------------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO Northern Trust Trustee 253,878.158 23.75
A/C 22-00012
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
First National Bank of Shelby Custodian for 296,367.702 27.72
Gardner Webb University
P.O. Box 168
Shelby, NC 28151-0168
- --------------------------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. 55,848.435 5.22
Specialized Trust Services Division
Acct IX1A-FDN
Attn: Jack McCorkle
200 Newport Ave- JQB7
North Quincy, MA 02171
- --------------------------------------------------------------------------------------------------------------------------
BMMSA P&PS 85,369.675 7.99
Attn: Lawrence M. Werner
933 Haverford Rd
Bryn Mawr, PA 19010
- --------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO Doctors Community Hospital 115,037.472 15.55
Cash Balance Pension Plan
Attn: Dennis P. Scanlon
8118 Good Luck Rd
Lanham, MD 20706-3596
- --------------------------------------------------------------------------------------------------------------------------
IBEW Local 223 Deferred Income Fund 78,458.055 10.61
111 Rhode Island Rd
P.O. Box 1238
Lakeville, MA 02347
- --------------------------------------------------------------------------------------------------------------------------
Southwest Guaranty Trust Co. 39,937.745 5.40
Attn: Fiduciary-Cash-Mutual Funds
2121 Sage Rd Suite 150
Houston, TX 77056
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employees Pension Plan of United Conveyor 51,805.860 7.00
Corporation
Attn: DS Hoyem
2100 Norman Dr. West
Waukegan, IL 60085
- --------------------------------------------------------------------------------------------------------------------------
First Union National Bank 82,326.517 11.13
Attn: Funds Group- Rich Sapienza
1525 West WT Harris Blvd
Charlotte, NC 28288-1151
- --------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co Custodian 40,626.695 5.49
U/A 5/22/97 AC 42102-0 C/O Mutual Funds
P.O. Box 8882
Wilmington, DE 19898-8882
- --------------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank TTEE For NY State Deferred 252,584.840 34.15
Comp Plan
Attn: Gladstone Stephenson
2/nd/ Floor
New York, NY 10004
- --------------------------------------------------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO MSDW Stable Value Plan- SEI Trustee 1,057,584.730 100.00
Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
- --------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO Lasalle National Bank TTEE 246,820.739 6.18
FBO Woodlawn Cemetary Care Fund
P.O. Box 1443
Chicago, IL 60690
- --------------------------------------------------------------------------------------------------------------------------
Pennsylvania League of Cities and 272,833.901 6.84
Municipalities- Penn Prime Workers
Attn: Mr. Allen L. Loomis, Jr
414 North Second St.
Harrisburg, PA 17101
- --------------------------------------------------------------------------------------------------------------------------
Testa and Co. 447,820.574 11.22
Attn: Patty Genesky
P.O. Box 1412
Rochester, NY 14603-1412
- --------------------------------------------------------------------------------------------------------------------------
Zoological Society of Philadelphia Endowment 310,347.321 7.78
Attn: Anita Primo
3400 West Girard Ave.
Philadelphia, PA 19104-1196
- --------------------------------------------------------------------------------------------------------------------------
MSDW Stable Value Plan- SEI Trustee 1,024,337.078 25.67
Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
- --------------------------------------------------------------------------------------------------------------------------
ACMP Foundation 295,398.841 7.40
5 Riverfield Dr.
Westport, CT 068800
- --------------------------------------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO Attn 14723100 283,794.347 32.61
P.O. Box 92800
Rochester, NY 14692-8900
- --------------------------------------------------------------------------------------------------------------------------
Northern Trust Co. as Custodian for Noblehouse 92,999.719 10.69
International Ltd.
P.O. Box 92956
Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------------
The Philadelphia Foundation 166,405.935 19.12
Attn: Julia R. Dutton
1234 Market St.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Suite 1900
Philadelphia, PA 19102
- --------------------------------------------------------------------------------------------------------------------------
Byrd & Co. 294,163.190 33.80
C/O First Union National Bank
530 Walnut St.
Philadelphia, PA 19101
- --------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO Anne Laura Marcoux 3,909.803 22.18
P.O. Box 3898
Incline Village, NV 89450
- --------------------------------------------------------------------------------------------------------------------------
Nabank & Co./ DRK 13,716.672 77.82
Attn: Trust Securities
P.O. Box 2180
Tulsa, OK 74101-2180
- --------------------------------------------------------------------------------------------------------------------------
MULTI-ASSET-CLASS PORTFOLIO English Speaking Union 254,234.109 48.63
Central Florida Branch
Attn: Robert Hostetter Jr.
1330 Mayfield Ave.
Winter Park, FL 32789
- --------------------------------------------------------------------------------------------------------------------------
Kano-Zimmerman Profit Sharing Plan 233,166.186 44.60
Attn: Rhoads Zimmerman
P.O. Box 110098
Nashville, TN 37222
- --------------------------------------------------------------------------------------------------------------------------
Noble Inc. DBA Noble of Indiana 33,107.026 6.33
Attn: Paul J. Lang
201 S. Capitol Suite 800
Indianapolis, IN 46225
- --------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE DURATION PORTFOLIO MSDW Stable Value Plan- SEI Trustee 1,171,220.576 100.00
Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY PORTFOLIO Nationwide Asset Allocation Trust 11,319.312 7.65
Moderate Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
- --------------------------------------------------------------------------------------------------------------------------
Nationwide Asset Allocation Trust 17,669.215 11.95
Moderately Aggressive Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
- --------------------------------------------------------------------------------------------------------------------------
Nationwide Asset Allocation Trust 25,570.716 17.29
Aggressive Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
- --------------------------------------------------------------------------------------------------------------------------
United States Equestrian Team, Inc. 17,803.608 12.04
Attn: Robert C. Standish
Pottersville Road
Gladstone, NJ 07934
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF % OF
SHARES CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Resources Trust Co. For the Exclusive Benefit of 68,190.441 46.10
Various IMS Customers
P.O. Box 3865
Englewood, CO 80155-3865
- --------------------------------------------------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO Fidelity Investments Institutional 8,056,050.906 52.11
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
Merrill Lynch Trust Co TTEE 3,967,768.876 25.66
FBO Qualified Retirement Plans
Attn: Jerry Stone
265 Davidson Ave.
Somerset, NJ 08873
- --------------------------------------------------------------------------------------------------------------------------
MID CAP VALUE PORTFOLIO Mellon Bank as Agent/Omnibus Account 1,393,442.339 58.03
Omnibus AIM 0027
135 Santilli Highway
Everett, MA 02149-1950
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 167,026.066 6.96
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
MAS Funds Omnibus Acct for TFM and Merged 172,980.650 7.20
Shareholders
C/O CGFSC 8/th/ Floor T/A
73 Tremont St.
Boston, MA 02108
- --------------------------------------------------------------------------------------------------------------------------
Memphis Commerce Square 240,084.273 10.00
Attn: Ramona COE/Trust Division
One Commerce Square
Memphis, TN 38150
- --------------------------------------------------------------------------------------------------------------------------
The Union Central Life Insurance Company 266,672.933 11.11
Group Separate Account
Attn: Roberta Ujuary
1876 Waycorss Rd
Cincinnati, OH 45240
- --------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE PORTFOLIO Fidelity Investments Institutional 135,107.803 10.15
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
UMB Bank NA 678,166.297 50.97
Attn: Employee Benefits Division
1010 Grand Avenue
Kansas City, MO 64141-6692
- --------------------------------------------------------------------------------------------------------------------------
Wachovia Bank NA Custodian for The Community 99,278.170 7.46
Foundation of Western North Carolina
301 N Main St.
P.O. Box 3073
Winston-Salem, NC 27150
- --------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO Fidelity Investments Institutional 6,723,196.161 37.86
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
State Street Bank TTEE FBO 7,131,808.392 40.16
200 Newport Avenue
JQ6N
North Quincy, MA 02171
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF % OF
SHARES CLASS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC FIXED INCOME PORTFOLIO American Express Trust Company 116,424.880 100.00
FBO American Express Retirement Services
Attn: Chris Hunt N10/996
P.O. Box 534
Minneapolis, MN 55440-0534
- --------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO Fidelity Investments Institutional 3,991,986.255 30.91
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Management Trust Company 1,027,415.455 7.96
Attn: Ben Branham
Mail Zone H10C
82 Devonshire St.
Boston, MA 02109
- --------------------------------------------------------------------------------------------------------------------------
The Queen's Health Systems 1,116,813.573 8.65
Attn: Robert H. Ozaki
1099 Alakea St. 1100
Honolulu, HI 96813
- --------------------------------------------------------------------------------------------------------------------------
Transco & Co. 2,470,899.938 19.13
Attn: Wealth Management 10/th/ Floor
P.O. Box 48698
Wichita, KS 67201
- --------------------------------------------------------------------------------------------------------------------------
Transco & Co. 2,586,544.882 20.03
Attn: Wealth Management 10/th/ Floor
P.O. Box 48698
Wichita, KS 67201
- --------------------------------------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO Fidelity Investments Institutional 1,041,946.039 42.58
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 251,519.478 10.28
SECS Corp
Attn: Mutual Fund Trading
P.O. Box 2052
Jersey City, NJ 07303
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 214,158.829 8.75
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015-1987
- --------------------------------------------------------------------------------------------------------------------------
HUD & Co. 126,184.056 5.16
Attn: Trust Operations
40 Court St.
Boston, MA 02108
- --------------------------------------------------------------------------------------------------------------------------
National Investors Service Corp. 496,673.295 20.30
55 Water St. 32/nd/ Floor
New York, NY 10041-3299
- --------------------------------------------------------------------------------------------------------------------------
Resources Trust Co. 187,907.302 7.68
For the Exclusive Benefit of Various IMS
Customers
P.O. Box 3865
Englewood, CO 80155-3865
- --------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO Fidelity Investments Institutional 2,357,452.033 97.79
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
The persons listed above as owning 25% or more of the outstanding shares of each
Portfolio may be presumed to "control" (as that term is defined in the 1940 Act)
such Portfolios. As a result, those persons would have the ability to vote a
majority of the shares of the Portfolios on any matter requiring the approval of
shareholders of such Portfolios.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of its Portfolios. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods for computing performance follows.
TOTAL RETURN
A Portfolio's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5, and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5, and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
When considering average total return figures for periods longer than one year,
it is important to note that a Portfolio's annual total return for any one
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
P (1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the stated period
The average annual total return of the Institutional Class Shares of each
Portfolio for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS 10 YEARS INCEPTION TO INCEPTION
9/30/99 ENDED 9/30/99 ENDED 9/30/99 9/30/99 DATE
------- ------- ------- ------- ----
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 30.15 20.85 15.20 16.87 11/14/84
- ------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio * N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 64.27 29.26 N/A 23.08 3/30/90
- ------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.44 N/A N/A 27.73 12/30/94
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 276.66 N/A N/A 154.96 6/30/98
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 23.83 17.33 16.12 13.06 7/1/86
- ------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.30 14.96 13.01 15.13 11/5/84
- ------------------------------------------------------------------------------------------------------------------------------
Value II Portfolio * N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS 10 YEARS INCEPTION INCEPTION
9/30/99 ENDED 9/30/99 ENDED 9/30/99 9/30/99 DATE
------- ------------- ------------- ------- ----
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 4.93 5.33 N/A 4.85 8/29/90
- -------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio -1.12 7.39 8.67 9.02 9/29/87
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .33 8.20 8.82 10.01 11/14/84
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio -.57 7.78 N/A 8.76 8/31/90
- -------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio -.05 6.88 N/A 6.45 4/30/93
- -------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.81 10.76 11.26 10.70 2/28/89
- -------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio .64 N/A N/A 7.11 10/3/94
- -------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio -.93 6.29 N/A 5.98 4/29/94
- -------------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 3.61 6.02 N/A 5.69 3/31/92
- -------------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio .11 7.64 N/A 6.69 10/1/92
- -------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 2.36 N/A N/A 2.54 10/1/97
- -------------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio .71 8.38 N/A 8.23 3/31/92
- -------------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.99 16.13 N/A 13.07 12/31/92
- -------------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 17.71 14.80 N/A 14.21 7/29/94
- -------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 2.87 N/A N/A 11.09 10/7/94
- -------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio -.32 N/A N/A 7.48 4/12/95
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Growth, Value II, NY Municipal, Targeted Duration, Balanced Plus and
Advisory Foreign Fixed Income II Portfolios had not commenced operations as of
September 30, 1999.
The average annual total return of the Investment Class shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INCEPTION TO INCEPTION
9/30/99 9/30/99 9/30/99 9/30/99 DATE
------- ------- ------- ------- ----
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 29.92 N/A N/A 19.37 4/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.30 N/A N/A 23.30 5/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.20 N/A N/A 8.84 5/6/96
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio N/A N/A N/A .60 8/16/99
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INCEPTION TO INCEPTION
9/30/99 9/30/99 9/30/99 9/30/99 DATE
------- ------- ------- ------- ----
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Fixed Income Portfolio * N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .24 N/A N/A 6.01 10/15/96
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.67 N/A N/A 9.39 5/21/96
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio N/A N/A N/A 1.49 8/16/99
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.84 N/A N/A 15.06 4/4/97
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 17.53 N/A N/A 13.08 6/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Domestic Fixed Income Portfolio had not commenced operations as of
September 30, 1999.
The average annual total return of the Adviser Class Shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INCEPTION TO INCEPTION
9/30/99 9/30/99 9/30/99 9/30/99 DATE
------- ------- ------- ------- ----
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio 29.80 N/A N/A 16.53 1/16/98
- ------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 63.87 N/A N/A 32.95 1/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.12 N/A N/A 5.96 7/17/98
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio N/A N/A N/A 7.51 1/22/99
- ------------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.10 N/A N/A 11.17 7/17/96
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio N/A N/A N/A -.40 3/1/99
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .07 N/A N/A 5.29 11/7/96
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.44 N/A N/A 7.24 1/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.76 N/A N/A 14.45 11/1/96
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio * N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Multi-Asset-Class Portfolio had not commenced operations as of September
30, 1999.
The Portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
Aggregate total returns may be shown by means of schedules, charts or graphs and
may include subtotals of the various components of total return (e.g., income
dividends or returns for specific types of securities such as industry or
country types). The formula for calculating aggregate total return can be
expressed as follows:
Aggregate Total Return = [ ( ERV ) - P ]
--------------------------------
P
72
<PAGE>
The aggregate total return of each Portfolio for the periods noted is set forth
below. One year aggregate total return figures and Portfolio inception dates are
reflected under the average annual total return figures provided above.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
PORTFOLIO 9/30/99 9/30/99 9/30/99
- --------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio 157.75 311.59 917.14
- ------------------------------------------------------------------------------------------------------------------------
Growth Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 260.80 N/A 619.55
- ------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio N/A N/A 219.88
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio N/A N/A 222.80
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 122.38 345.61 408.74
- ------------------------------------------------------------------------------------------------------------------------
Value Portfolio 100.75 239.62 716.59
- ------------------------------------------------------------------------------------------------------------------------
Value II Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 29.63 N/A 53.83
- ------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 42.86 129.65 182.06
- ------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 48.30 132.77 313.26
- ------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 45.45 N/A 114.46
- ------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 39.45 N/A 49.39
- ------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio N/A N/A 5.14
- ------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 66.68 190.75 193.40
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio N/A N/A 40.90
- ------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 35.65 N/A 37.02
- ------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 33.93 N/A 51.41
- ------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 44.47 N/A 57.33
- ------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 49.64 N/A 81.15
- ------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 111.17 N/A 129.14
- ------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 99.43 N/A 98.83
- ------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio N/A N/A 68.86
- ------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio ** N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
PORTFOLIO 9/30/99 * 9/30/99 * 9/30/99 *
- --------- --------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Mortgage Portfolio N/A N/A 38.01
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively.
** The Growth, Value II, NY Municipal, Targeted Duration, Balanced Plus and
Advisory Foreign Fixed Income II Portfolios had not commenced operations as of
September 30, 1999.
The Portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Institutional Class
-------------------
Portfolios are set forth below:
- ----------
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO TOTAL RETURN (%)
--------- ----------------
-------------------------------------------------------
<S> <C>
Equity Portfolio 17.58
-------------------------------------------------------
Growth Portfolio * N/A
-------------------------------------------------------
Mid Cap Growth Portfolio 23.80
-------------------------------------------------------
Mid Cap Value Portfolio 28.79
-------------------------------------------------------
Small Cap Growth Portfolio 157.47
-------------------------------------------------------
Small Cap Value Portfolio 14.03
-------------------------------------------------------
Value Portfolio 15.84
-------------------------------------------------------
Value II Portfolio * N/A
-------------------------------------------------------
Cash Reserves Portfolio 5.16
-------------------------------------------------------
Domestic Fixed Income Portfolio 9.57
-------------------------------------------------------
Fixed Income Portfolio 10.53
-------------------------------------------------------
Fixed Income II Portfolio 9.28
-------------------------------------------------------
Global Fixed Income Portfolio 7.07
-------------------------------------------------------
Multi-Market Fixed Income Portfolio 3.12
-------------------------------------------------------
High Yield Portfolio 11.33
-------------------------------------------------------
Intermediate Duration Portfolio 7.65
-------------------------------------------------------
International Fixed Income Portfolio 6.54
-------------------------------------------------------
Limited Duration Portfolio 6.12
-------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO TOTAL RETURN (%)
--------- ----------------
-------------------------------------------------------
<S> <C>
Municipal Portfolio 7.28
-------------------------------------------------------
NY Municipal Portfolio * N/A
-------------------------------------------------------
Special Purpose Fixed Income Portfolio 8.76
-------------------------------------------------------
Targeted Duration Portfolio * N/A
--------------------------------------------------------
Balanced Portfolio 13.71
-------------------------------------------------------
Balanced Plus Portfolio * N/A
-------------------------------------------------------
Multi-Asset-Class Portfolio 14.98
-------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 11.26
-------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A
-------------------------------------------------------
Advisory Mortgage Portfolio 7.56
-------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Growth, Value II, NY Municipal, Targeted
Duration, Balanced Plus and Advisory Foreign Fixed Income II Portfolios had not
commenced operations.
The annualized since inception gross of fees returns of the Investment Class
----------------
Portfolios are set forth below:
- ----------
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO TOTAL RETURN (%)
-------------------------------------------------------
<S> <C>
Equity Portfolio 20.27
-------------------------------------------------------
Mid Cap Value 24.04
-------------------------------------------------------
Value 9.63
-------------------------------------------------------
Cash Reserves * 0.65
-------------------------------------------------------
Domestic Fixed Income ** N/A
-------------------------------------------------------
Fixed Income 6.66
-------------------------------------------------------
High Yield 10.08
-------------------------------------------------------
Intermediate Duration 1.16
-------------------------------------------------------
Balanced 16.01
-------------------------------------------------------
Multi-Asset-Class 14.10
-------------------------------------------------------
</TABLE>
* Cumulative Return Since Inception (8/16/99)
** As of September 30, 1999, the Domestic Fixed Income Portfolio had not
commenced operations.
The annualized since inception gross of fees returns of the Adviser Class
-------------
Portfolios are set forth below:
- ----------
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO TOTAL RETURN (%)
-------------------------------------------------------
<S> <C>
Equity Portfolio 17.42
-------------------------------------------------------
Mid Cap Growth 33.98
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO TOTAL RETURN (%)
-------------------------------------------------------
<S> <C>
Mid Cap Value 10.53
-------------------------------------------------------
Small Cap Value 8.04
-------------------------------------------------------
Value 12.06
-------------------------------------------------------
Domestic Fixed Income -.44
-------------------------------------------------------
Fixed Income 6.03
-------------------------------------------------------
High Yield 8.00
-------------------------------------------------------
Balanced 15.36
-------------------------------------------------------
Multi-Asset-Class * N/A
-------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Multi-Asset Class Portfolio had not commenced
operations.
The Municipal and NY Municipal Portfolio may also calculate a total return which
reflects the cumulative percentage change in value over the measuring period
after the deduction of income taxes. The formula for calculating the total after
tax return can be expressed as follows:
Total After Tax Return = (((((ERV-M)/P) x T) + (M/P)) -1)
M = Portion of ending redeemable value which was derived from tax exempt income.
T = Applicable tax rate.
The after tax returns are as follows for the Municipal Portfolio for the period
10/1/92 (inception) through 9/30/99:
Pre-tax return Post-tax return
Municipal Portfolio 6.69 * / 57.33 ** 6.79 */ 58.34**
------- ------- ------ -----
*Annualized
**Cumulative
The federal tax rate used was 31%. All municipal interest was considered exempt
from federal taxes.
YIELD
In addition to total return, each Portfolio of the Fund (except the Cash
Reserves Portfolio) may quote performance in terms of a 30-day yield. The yield
formula provides for semiannual compounding, which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period. Methods used to calculate advertised yields are standardized
for all stock and bond mutual funds. However, these methods differ from the
accounting methods used by the Portfolio to maintain its books and records,
therefore the advertised 30-day yield may not reflect the income paid to your
own account or the yield reported in the Portfolio's reports to shareholders. A
Portfolio may also advertise or quote a yield which is gross of expenses. The
yield figures provided will be calculated according to a formula prescribed by
the SEC and can be expressed as follows:
Yield = 2 [ ( (a-b/cd) + 1) 6 - 1 ]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
76
<PAGE>
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Portfolio at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations. The 30-day yield figures for each of the Fund's
fixed income and equity Portfolios is set forth below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS PERIOD ENDING
------------------------------
9/30/99
--------------------------------------------------------------------------
<S> <C>
Equity Portfolio .54
--------------------------------------------------------------------------
Growth Portfolio * N/A
--------------------------------------------------------------------------
Mid Cap Growth Portfolio (.06)
--------------------------------------------------------------------------
Mid Cap Value Portfolio .45
--------------------------------------------------------------------------
Small Cap Growth Portfolio (.53)
--------------------------------------------------------------------------
Small Cap Value Portfolio .59
--------------------------------------------------------------------------
Value Portfolio 1.53
--------------------------------------------------------------------------
Value II Portfolio * N/A
--------------------------------------------------------------------------
Domestic Fixed Income Portfolio 6.20
--------------------------------------------------------------------------
Fixed Income Portfolio 6.58
--------------------------------------------------------------------------
Fixed Income II Portfolio 6.65
--------------------------------------------------------------------------
Global Fixed Income Portfolio 4.94
--------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 7.35
--------------------------------------------------------------------------
High Yield Portfolio 10.06
--------------------------------------------------------------------------
Intermediate Duration Portfolio 6.97
--------------------------------------------------------------------------
International Fixed Income Portfolio 4.08
--------------------------------------------------------------------------
Limited Duration Portfolio 6.18
--------------------------------------------------------------------------
Municipal Portfolio 5.36
--------------------------------------------------------------------------
NY Municipal Portfolio * N/A
--------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 6.85
--------------------------------------------------------------------------
Targeted Duration Portfolio * N/A
--------------------------------------------------------------------------
Balanced Portfolio 3.56
--------------------------------------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS PERIOD ENDING
------------------------------
9/30/99
--------------------------------------------------------------------------
<S> <C>
Balanced Plus Portfolio * N/A
--------------------------------------------------------------------------
Multi-Asset-Class Portfolio 3.24
--------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 4.53
--------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A
--------------------------------------------------------------------------
Advisory Mortgage Portfolio 6.38
--------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Growth, Value II, NY Municipal, Targeted
Duration, the Balanced Plus and the Advisory Foreign Fixed Income II Portfolios
had not commenced operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS PERIOD ENDING
---------------------------
9/30/99
--------------------------------------------------------------------------
<S> <C>
Equity Portfolio .39
--------------------------------------------------------------------------
Mid Cap Value Portfolio .29
--------------------------------------------------------------------------
Value Portfolio 1.37
--------------------------------------------------------------------------
Domestic Fixed Income * N/A
--------------------------------------------------------------------------
Fixed Income 6.43
--------------------------------------------------------------------------
High Yield 9.90
--------------------------------------------------------------------------
Intermediate Duration 6.83
--------------------------------------------------------------------------
Balanced 3.42
--------------------------------------------------------------------------
Multi-Asset-Class 3.09
--------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Domestic Fixed Income Portfolio had not
commenced operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS PERIOD ENDING
9/30/99
--------------------------------------------------------------------------
<S> <C>
Equity Portfolio .31
--------------------------------------------------------------------------
Mid Cap Growth Portfolio (.31)
--------------------------------------------------------------------------
Mid Cap Value Portfolio .19
--------------------------------------------------------------------------
Small Cap Value .34
--------------------------------------------------------------------------
Value Portfolio 1.27
--------------------------------------------------------------------------
Domestic Fixed Income 5.95
--------------------------------------------------------------------------
Fixed Income 6.33
--------------------------------------------------------------------------
High Yield 9.80
--------------------------------------------------------------------------
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS PERIOD ENDING
9/30/99
--------------------------------------------------------------------------
<S> <C>
Balanced 3.32
--------------------------------------------------------------------------
Multi-Asset-Class * N/A
--------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Multi-Asset-Class Portfolio had not commenced
operations.
YIELD OF THE CASH RESERVES PORTFOLIO
The current yield of the Cash Reserves Portfolio is calculated daily on a base
period return of a hypothetical account having a beginning balance of one share
for a particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
the value of the account at the beginning of the period and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualizing of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by dividing the base period return by
7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the results.
Set forth below is an example, for purposes of illustration only, of the current
and effective yield calculations for the Cash Reserves Portfolio for the 7 day
base period ending September 30, 1999.
<TABLE>
<CAPTION>
PERIOD ENDING PERIOD ENDING
9/30/99 9/30/99
-------- --------
<S> <C> <C>
INSTITUTIONAL CLASS INVESTMENT CLASS
VALUE AT BEGINNING OF PERIOD $1.00 $1.00
VALUE AT END OF PERIOD $1.00 $1.00
CURRENT YIELD 5.10% 4.95%
EFFECTIVE YIELD 5.23% 5.07%
</TABLE>
The net asset value per share of the Cash Reserves Portfolio is $1.00 and has
remained at that amount since the initial offering of the Portfolio. The yield
of the Portfolio will fluctuate. The annualizing of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio
invests in, changes in interest rates on instruments, changes in the expenses of
the Fund and other factors. Yields are one basis investors may use to analyze
the Portfolios of the Fund and other investment vehicles; however, yields of
other investment vehicles may not be comparable because of the factors set forth
in the preceding sentence, differences in the time periods compared and
differences in the methods used in valuing Portfolio instruments, computing net
asset value and calculating yield.
OTHER PERFORMANCE INFORMATION
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
79
<PAGE>
From time to time, a Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
the Funds to one another in appropriate categories over specific periods of time
may also be quoted in advertising. The performance of a Portfolio, as well as
the composite performance of all fixed income Portfolios and all equity
Portfolios, may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue
Organization, Inc. or other independent services which monitor the performance
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Fund may use performance
data reported in financial and industry publications, including Barron's,
Business Week, Forbes, Fortune, Investor's Business Daily, IBC/Donoghue's Money
Fund Report, Money Magazine, The Wall Street Journal and USA Today.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types
in any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.
The Portfolios may include in its advertisements, discussions or illustrations
of the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Portfolio (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Portfolio may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers by Morgan Stanley; and the portfolio
manager's goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Portfolios may include
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors;
80
<PAGE>
forecasts of population, gross national product and market performance; and the
underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss
in a declining market, the investor's average cost per share can be lower than
if fixed numbers of shares are purchased at the same intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares during periods of low price levels.
COMPARATIVE INDICES
Each Portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
Consumer Price Index
- --------------------
The Consumer Price Index is published by the US Department of Labor and is a
measure of inflation.
Financial Times Actuaries World Ex US Index
- -------------------------------------------
The FT-A World Ex US Index is a capitalization-weighted price index, expressed
in dollars, after dividend withholding taxes, of foreign stock prices. This
Index is calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
Co., and County NatWest/Wood Mackenzie in conjunction with the Institute of
Actuaries and the Faculty of Actuaries.
CS First Boston High Yield Index
- --------------------------------
The CS First Boston High Yield Index was constructed to mirror the public high
yield debt market. The Index is a market weighted, trader priced index, tracked
by the First Boston Corporation. There are approximately 475 securities in the
index with a total market value of approximately $93 billion.
JP Morgan Traded Government Bond Index
- --------------------------------------
The JP Morgan Traded Government Bond Index is designed to provide a
comprehensive measure of total return performance of the domestic Government
bond market of 13 countries. The Index is maintained by JP Morgan Securities,
Inc. and includes only liquid issues.
81
<PAGE>
J.P. Morgan Emerging Markets Bond Index Global
- ----------------------------------------------
The EMBI Global tracks total returns for U.S. - dollar denominated debt
instruments issued by emerging market sovereign and quasi-sovereign entities:
Brady bonds, loans, Eurobonds, and local market instruments. Countries
covered are Algeria, Argentina, Brazil, Bulgaria, Chile, China, Colombia, Cote
d'Ivoire, Croatia, Ecuador, Greece, Hungary, Lebanon, Malaysia, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Russia, South Africa, South
Korea, Thailand, Turkey, and Venezuela.
Lehman Brothers 5-Year Municipal Bond Index
- -------------------------------------------
Lehman Brothers 5-Year Municipal Bond Index is a total return performance
benchmark for the intermediate investment grade tax exempt bond market. The
Index includes general obligation bonds, revenue bonds, insured bonds and
prefunded bonds with maturities between 4 and 6 years.
Lehman Brothers 10-Year Municipal Bond Index
- --------------------------------------------
Lehman Brothers 10-Year Municipal Bond Index is a total return performance
benchmark for the long term, investment grade tax exempt bond market. The Index
includes general obligation bonds, revenue bonds, insured bonds and prefunded
bonds with maturities between 8 and 12 years.
Lehman Brothers Aggregate Index
- -------------------------------
The Lehman Brothers Aggregate Index is a fixed-income market value-weighted
Index that combines the Lehman Brothers Government/Corporate Index and the
Lehman Brothers Mortgage-Backed Securities Index. It includes fixed rate issues
of investment grade (BBB) or higher, with maturities of at least one year and
outstanding par values of at least $100 million for U. S. Government issues and
$25 million for others.
Lehman Brothers Government/Corporate Index
- ------------------------------------------
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U. S. Treasury, issues of Government agencies, and corporate
debt backed by the U. S. Government. The Corporate Bond Index includes fixed-
rate nonconvertible corporate debt. Also included are Yankee Bonds and
nonconvertible debt issued by or guaranteed by foreign or international
governments and agencies. All issues are investment grade (BBB) or higher, with
maturities of at least one year and an outstanding par value of at least $100
million for U. S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and then
removed. All returns are market value weighted inclusive of accrued income.
Lehman Brothers Intermediate Government/Corporate Index
- -------------------------------------------------------
The Lehman Brothers Intermediate Government/Corporate Index is a combination of
the Government and Corporate Bond Indices. All issues are investment grade (BBB)
or higher, with maturities of one to ten years and an outstanding par value of
at least $100 million for U. S. Government issues and $25 million for others.
The Government Index includes public obligations of the U. S. Treasury, issues
of Government agencies, and corporate debt backed by the U. S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued by or guaranteed by
foreign or international governments and agencies. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
Lehman Brothers Long Municipal Bond Index
- -----------------------------------------
The Lehman Brothers Long Municipal Bond Index is a total return for the long-
term, investment-grade tax-exempt bond market for bonds. The Index includes
municipal bonds with maturities of 22 years or more.
82
<PAGE>
Lehman Brothers Mortgage-Backed Securities Index
- ------------------------------------------------
The Lehman Brothers Mortgage-Backed Securities Index includes fixed rate
mortgage securities backed by GNMA, FHLMC, and FNMA. Graduated Payment Mortgages
(GPM's) are included. All issues are AAA, with maturities of at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
Lipper Growth & Income Fund Index
- ---------------------------------
The Lipper Growth & Income Fund Index is a net asset value weighted Index of the
30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
Lipper High Current Yield Fund Average
- --------------------------------------
The Lipper High Current Yield Fund Average reports the average return of all the
Funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of Funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
Salomon World Government Bond Index ex US
- -----------------------------------------
The Salomon World Government Bond Index ex US is designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the U.S. The index has been constructed
with the aim of choosing "an inclusive" universe of institutionally traded fixed
rate bonds. The selection of security types to be included in the index is made
with the aim of being as comprehensive as possible, while satisfying the
criterion of reasonable availability to domestic and international institutions
and the existence of complete pricing and market profile data.
International Finance Corporation Emerging Markets Index
- --------------------------------------------------------
The International Finance Corporation Emerging Markets Index is an Index
designed to measure the total return in either US or local currency terms of
developing markets as defined by the World Bank. The selection of stocks is made
based on size, liquidity and industry. The weight given to any stock is
determined by its market capitalization.
Lipper Money Market Average
- ---------------------------
The Lipper Money Market Average reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market funds
for any given period. The number of funds tracked varies. As a result, reported
returns for longer time periods do not always match the linked product of
shorter period returns.
Merrill Lynch Corporate & Government Bond Index
- -----------------------------------------------
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
Morgan Stanley Capital International World ex USA Index
- -------------------------------------------------------
The Morgan Stanley Capital International World ex USA Index is a capitalization-
weighted price index expressed in dollars. The Index reflects the performance of
over 1,100 companies in 19 foreign equity markets. The Index includes dividends,
net of foreign withholding taxes.
83
<PAGE>
Morgan Stanley Capital International EAFE Index
- -----------------------------------------------
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morgan Stanley Capital International EAFE-GDP Weighted Index
- ------------------------------------------------------------
The Morgan Stanley Capital International EAFE-GDP index is an arithmetic average
of the performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East. The Index is weighted by the
Gross Domestic Product of the various countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
- ----------------------------------------------------------------
The Morgan Stanley Capital International Emerging Markets Free Index is a
capitalization weighted Index of over 800 stocks from 17 different emerging
market countries.
Nasdaq Industrials Index
- ------------------------
The Nasdaq Industrials Index is a measure of all Nasdaq National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The Index is exclusive of
warrants, and all domestic common stocks traded in the regular Nasdaq market
which are not part of the Nasdaq National Market System. The Nasdaq Industrials
Index is market value weighted.
Russell 1000
- ------------
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
Russell 2000
- ------------
The Russell 2000 Index consists of the 2,000 smallest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,000 stocks in the Russell 2000 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
Russell 2500
- ------------
The Russell 2500 Index consists of the 2,500 smallest of the 3,000 largest
stocks. Market capitalization is typically between $1.7 billion and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,500 stocks in the Russell 2500 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
Russell 3000
- ------------
The Russell 3000 Index is a combination of the Russell 1000 Index and the
Russell 2000 Index.
84
<PAGE>
Salomon 1-3 Year Treasury/Government Sponsored Index
- ----------------------------------------------------
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the Index.
Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index
- --------------------------------------------------------------
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the Index.
Salomon Broad Index
- -------------------
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed-income market capitalization-weighted index, including U. S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government Index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U. S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the Index is published monthly.
Salomon High-Yield Market Index
- -------------------------------
The Salomon High-Yield Market Index includes public, non-convertible corporate
bond issues with at least one year remaining to maturity and $50 million in par
amount outstanding which carry a below investment-grade quality rating from
either Standard & Poor's or Moody's rating services.
Salomon Mortgage Index
- ----------------------
The Salomon Mortgage Index includes agency pass-throughs (GNMA, FHLMC, FNMA) and
FHA and GNMA project loans. Pools with remaining terms shorter than 25 years are
seasoned; pools with longer terms are classified as new. The Index is published
monthly.
Salomon One To Three Year Treasury Index
- ----------------------------------------
The Salomon One To Three Year Treasury Index includes only U.S. Treasury Notes
and Bonds with maturities one year or greater and less than three years.
Salomon World Government Bond Index
- -----------------------------------
The Salomon World Government Bond Index is designed to provide a comprehensive
measure of total return performance of the domestic Government bond market of
thirteen countries. The Index has been constructed with the aim of choosing an
"all inclusive" universe of institutionally traded fixed-rate bonds. The
selection of security types to be included in the Index is made with the aim of
being as comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
S&P 500
- -------
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the Index. The
list is maintained by Standard & Poor's Corporation. It is market capitalization
weighted. Unlike the Russell indices, there are always 500 names in the S&P 500.
Changes are made by Standard & Poor's as needed.
85
<PAGE>
S&P Mid Cap 400 Index
- ---------------------
The S&P Mid Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is also a market-value
weighted Index and was the first benchmark of mid cap stock price movement.
S&P/BARRA Mid Cap 400 Growth Index
- ----------------------------------
The S&P/BARRA Mid Cap 400 Growth Index is constructed by dividing the stocks in
the S&P MidCap 400 Index according to a single attribute: price-to-book ratios.
The MidCap 400 Growth Index is composed of firms with higher price-to-book
ratios. Like the MidCap 400, the MidCap 400 Growth Index is capitalization-
weighted, meaning that each stock is weighted in the appropriate index in
proportion to its market value.
S&P 500 Ex South Africa Index
- -----------------------------
The S&P 500 Ex South Africa Index is the same as the S&P 500 Index excluding
companies that are on the Investor Responsibility Research Center ("IRRC") list
of companies doing business in South Africa. This Index is maintained by
Wilshire Associates.
Wilshire 5000 Equity Index
- --------------------------
The Wilshire 5000 Equity Index measures performance of all US headquartered
equity securities with readily available price data. Approximately 6,000
capitalization weighted security returns are used to calculate the Index.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1999,
including notes thereto and the report of PricewaterhouseCoopers LLP thereon are
incorporated herein by reference. A copy of the 1999 Annual Report will
accompany the delivery of this Statement of Additional Information.
86
<PAGE>
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 IBCA Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
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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.
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.
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B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as 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
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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 IBCA Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
D: Issuer is in default on its debt obligations and has filed for reorganization
or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
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