<PAGE>
INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
DECEMBER 27, 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 30 different
investment portfolios, 1 of which is described in this prospectus. Miller
Anderson & Sherrerd, LLP (the "Adviser"), a division of Morgan Stanley Dean
Witter Investment Management, is the Fund's investment adviser. This prospectus
offers Institutional Class Shares of the following portfolio (the "Portfolio"):
MID CAP GROWTH II
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
MID CAP GROWTH II PORTFOLIO................................................. 2
FEES AND EXPENSES OF THE PORTFOLIO.......................................... 3
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 4
PURCHASING SHARES........................................................... 6
REDEEMING SHARES............................................................ 7
VALUATION OF SHARES......................................................... 7
GENERAL SHAREHOLDER INFORMATION............................................. 8
FUND MANAGEMENT............................................................. 8
</TABLE>
<PAGE>
INVESTMENT SUMMARY
This section explains the Portfolio's:
[_] Investment Objective
[_] Principal Investment Strategy
[_] Principal Risks
Investor Suitability
[_] The Portfolio may be suitable for long-term investors who can accept the
risks of investing in the stock market.
[_] The Portfolio is designed principally for investment by fiduciary investors
who are entrusted with the responsibility of investing assets held for the
benefit of others.
[_] While the Portfolio considers whether its securities transactions will
generate distributions taxable at capital gain or ordinary income rates,
minimizing such taxes is not a principal investment strategy.
1
<PAGE>
MID CAP GROWTH II PORTFOLIO
Objective
The Mid Cap Growth II Portfolio seeks long-term capital growth.
<TABLE>
<S> <C>
GENERALLY 65% OF TOTAL PORTFOLIO ASSETS
INVESTED IN COMMON STOCKS OF MID CAP COMPANIES
_______________________________________________
EQUITY CAPITALIZATION GENERALLY MATCHING THE
BENCHMARK (CURRENTLY $100 MILLION TO $50
BILLION)
_______________________________________________
FOCUS ON GROWTH SECURITIES
_______________________________________________
BENCHMARK: RUSSELL MID CAP GROWTH INDEX
_______________________________________________
TICKER SYMBOL: NOT AVAILABLE
_______________________________________________
CUSIP NO.: 552-913-170
PORTFOLIO MANAGERS
ARDEN C. ARMSTRONG, DAVID P. CHU AND STEVEN B.
CHULIK
</TABLE>
Approach
The Portfolio invests primarily in common stocks of companies with
capitalizations in the range of companies included in the Russell Mid Cap
Growth 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 earnings estimates fall,
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 common stocks 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. 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. 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.
Performance Information
No performance information is provided because the Mid Cap Growth II Portfolio
has not been in operation for a full calendar year.
2
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIO
The Securities and Exchange Commission (the "Commission") requires all funds to
disclose in the table to the right the fees and expenses that you may pay if
you buy and hold shares of the Portfolio. The Portfolio does not charge any
sales loads or other fees when you purchase or redeem shares.
EXAMPLE
The example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that the Portfolio's operating expenses remain the same. 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.
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>
MID CAP GROWTH II PORTFOLIO .75% NONE .25%* 1.00%**
</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 Portfolio 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>
MID CAP GROWTH
II PORTFOLIO .90%
-----------------------------------------------------------------
</TABLE>
This example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C> <C>
MID CAP GROWTH II PORTFOLIO $102 $318
---------------------------------------------
</TABLE>
3
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS
This section discusses in greater detail the Portfolio's principal investment
strategies and other types of investments that the Portfolio may make. Please
read this section in conjunction with the earlier summary.
EQUITY SECURITIES
Equity securities include preferred stock, convertible securities, ADRs,
rights, warrants and shares of investment companies. The Portfolio 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. The 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.
ADRs are U.S.-dollar denominated securities that represent claims to shares of
foreign stocks. The Portfolio treats 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.
IPOs
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 purchase of shares issued in IPOs
exposes the Portfolio 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. The purchase of
shares issued in IPOs may have a greater impact upon the Portfolio's total
returns during any period that the Portfolio has a small asset base. As the
Portfolio's assets grow, any impact of IPO investments on the Portfolio's total
return may decline.
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 the 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 the
Portfolio must convert the value of foreign securities into dollars, changes in
currency exchange rates can increase or decrease the U.S. dollar value of the
Portfolio's assets. The Portfolio 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 and swaps.
4
<PAGE>
INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
TEMPORARY DEFENSIVE INVESTMENTS
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 Portfolio 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 the 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 the Portfolio "writes" an option, it sells to another
person the right to buy from or sell to the Portfolio a specific amount of a
security or futures contract at an agreed-upon price. The Portfolio may enter
into swap transactions which are contracts in which the Portfolio agrees to
exchange the return or interest rate on one instrument for the return or
interest rate on another instrument. Payments may be based on currencies,
securities indices or commodity indices. Swaps may be used to gain exposure to
a market without directly investing in securities traded in that market.
The Portfolio may enter into public or private over-the-counter derivatives
transactions with counterparties that meet the Fund's requirements for credit
quality and collateral. The Portfolio will not use derivatives to increase its
level of risk above the level that could be achieved using only traditional
investment securities. The Portfolio will not use derivatives as an indirect
way of investing in assets that it cannot, as a matter of policy, invest in
directly.
The 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.
The Portfolio may invest in certain derivatives, such as forwards, futures and
options that require the Portfolio to segregate some or all of its cash or
liquid securities to cover its obligations under those instruments. This can
cause the Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations. If
the Portfolio is in that position, it could be forced to sell other securities
that it wanted to retain or to realize unintended gains or losses.
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.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, the 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 its investment policies, the Portfolio 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 which may affect the Portfolio's performance 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.
5
<PAGE>
PURCHASING SHARES
Institutional Class Shares are available to clients of the Adviser with
combined investments of $5,000,000 and corporations or other institutions such
as trusts and foundations.
Institutional Class Shares of the Portfolio may be purchased directly from MAS
Funds or through a financial intermediary. Investors purchasing shares through
a financial intermediary may be charged a transaction-based or other fee by the
financial intermediary for its services. If you are purchasing Institutional
Class Shares through a financial intermediary, please consult your intermediary
for purchase instructions.
Purchases of Institutional Class Shares of the Portfolio are effected 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 Institutional Class Shares of the Portfolio by wiring Federal
Funds to Chase. You should forward a completed Account Registration Form to
Client Services in advance of the wire. 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 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. 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 the Portfolio
or reject any purchase orders when we think it is in the best interest of the
Fund. We may waive the minimum initial and additional investment amounts in
certain cases.
Purchases of the Portfolio's shares will be made in full and fractional shares
of the Portfolio calculated to three decimal places. Certificates for shares
will not be issued unless you request them in writing. Certificates for
fractional shares, however, will not be issued.
6
<PAGE>
REDEEMING SHARES
You may redeem shares of the 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. The Portfolio
will redeem shares at no charge at the NAV next determined after the request is
received in good order. If you redeem shares of the Portfolio through a
financial intermediary, you may be charged a transaction-based or other fee by
the financial intermediary for its services.
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 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. You
may incur brokerage charges when you sell those securities.
VALUATION OF SHARES
We determine the NAV of the Portfolio as of the close of the NYSE (normally
4:00 p.m. Eastern Time) on each day the Portfolio is open for business:
The Portfolio values its securities at market value. When no quotations are
readily available for securities or when the value of securities has been
materially affected by events occurring after the close of the 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. The value
of portfolio securities may change on a day when you cannot purchase or redeem
shares if the Portfolio invests in foreign securities that trade on days when
the Fund is closed.
7
<PAGE>
GENERAL SHAREHOLDER INFORMATION
Exchange Privilege
You may exchange the 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. Certain
portfolios may be closed to new investors from time to time and be unavailable
for exchanges.
Frequent trading by shareholders can disrupt management of the 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 gain distributions may be taxable at different rates
depending on the length of time the Fund holds its assets.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes. The Portfolio may be able to
pass through to you for foreign tax credit purposes the amount of foreign
income taxes that it paid.
Distributions paid in January but declared by the Portfolio in October,
November or December of the previous year are taxable to you in the previous
year.
Exchanges and redemptions of shares in the Portfolio are taxable events.
Dividends and Distributions
The Portfolio normally distributes substantially all of its net investment
income to shareholders annually.
If any net gains are realized from the sale of underlying securities, the
Portfolio normally distributes the gains with the last distributions for the
calendar year. All dividends and distributions are automatically paid in
additional shares of the Portfolio unless you elect otherwise. If you want to
change how your dividends are paid you must notify MAS Funds in writing.
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 September 30, 2000, Morgan Stanley Dean Witter Investment
Management had in excess of $176.8 billion in assets under management.
The Adviser makes investment decisions for the Portfolio and places the
Portfolio's purchase and sales orders. The Portfolio, in turn, pays the Adviser
an annual advisory fee calculated by applying a quarterly rate. The table below
shows the Adviser's annual contractual and actual rates of compensation for the
Fund's 2000 fiscal year.
<TABLE>
<CAPTION>
CONTRACTUAL FY 2000
COMPENSATION ACTUAL
RATE COMPENSATION RATE
--------------------------------------------------------------
<S> <C> <C>
MID CAP GROWTH II PORTFOLIO* .75% N/A
--------------------------------------------------------------
</TABLE>
* The Adviser is voluntarily waiving a portion of its fee and/or reimbursing
certain expenses for the Portfolio to keep Total Operating Expenses from
exceeding .90%.
8
<PAGE>
FUND MANAGEMENT (continued)
Portfolio Managers
The following describes the business experience during the past five years for
each of the investment professionals who are primarily responsible for the day-
to-day management of the Portfolio:
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, the Small Cap Growth Portfolio in 1998 and the Mid Cap Growth II
Portfolio in 2001.
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 and the Mid
Cap Growth II Portfolio in 2001.
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 and the Mid Cap Growth II Portfolio in
2001.
Distributor
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
9
<PAGE>
INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
DECEMBER 27, 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 & Treasurer
John H. Grady, Jr., Assistant Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated December 27, 2000, which contains additional, more
detailed information about the Fund and the Portfolio. The SAI is incorporated
by reference into this prospectus and, therefore, legally forms a part of this
prospectus.
The Fund publishes annual and semi-annual reports ("Shareholder Reports") which
contain additional information about 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 the Fund'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 1-202-942-8090;
(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 906-PROMASINSTMCG2-1200
--------------------------
ONE TOWER BRIDGE . WEST CONSHOHOCKEN, PA 19428
INVESTMENT MANAGEMENT
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MAS FUNDS
MID CAP GROWTH II PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
December 27, 2000
MAS Funds (the "Fund") is a no load mutual fund consisting of thirty portfolios
offering a variety of investment alternatives. This Statement of Additional
Information (the "SAI") sets forth information about the Fund applicable to the
Mid Cap Growth II Portfolio (the "Portfolio").
This SAI is not a prospectus but should be read in conjunction with the
Portfolio's prospectuses dated December 27, 2000 as revised from time to time.
To obtain any of these prospectuses, please call the Client Services Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
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<S> <C>
THE PORTFOLIO'S INVESTMENTS AND STRATEGIES.................................. 2
INVESTMENTS................................................................. 3
INVESTMENT LIMITATIONS...................................................... 16
PURCHASE OF SHARES.......................................................... 18
REDEMPTION OF SHARES........................................................ 19
TRANSACTIONS WITH BROKER/DEALERS............................................ 19
SHAREHOLDER SERVICES........................................................ 20
VALUATION OF SHARES......................................................... 20
MANAGEMENT OF THE FUND...................................................... 22
INVESTMENT ADVISER.......................................................... 24
PRINCIPAL UNDERWRITER....................................................... 26
DISTRIBUTION OF SHARES...................................................... 26
OTHER SERVICE PROVIDERS..................................................... 27
BROKERAGE TRANSACTIONS...................................................... 28
GENERAL INFORMATION......................................................... 29
TAX CONSIDERATIONS.......................................................... 32
PERFORMANCE INFORMATION..................................................... 35
COMPARATIVE INDICES......................................................... 39
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THE PORTFOLIO'S INVESTMENTS AND STRATEGIES
The prospectus describes the investment objective, principal investment
strategies and principal risks associated with the Portfolio, which is
diversified within the meaning of the Investment Company Act of 1940. The
Portfolio may engage in a variety of investment strategies and invest in a
variety of securities and other instruments. Following is a list of the
permissible strategies and investments for the Portfolio. The list excludes
investments that the Portfolio may make solely for temporary defensive purposes.
More details about each strategy and investment are provided in the discussion
following the list.
Strategy: Foreign Investing and International Equity Investing
Investments: ADRs, Cash Equivalents, Commercial Paper, Common Stock,
Convertibles, Depositary Receipts, Equity Securities, Foreign Currency, Foreign
Equity Securities, Futures, Investment Companies, Options, Preferred Stock,
Repurchase Agreements, Reverse Repurchase Agreements, Rights, Securities
Lending, Short Sales, Warrants, and When-Issued Securities.
INVESTMENT STRATEGY
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 the 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 the Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Portfolio's foreign securities will be greater
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than the expenses for the custodial arrangements for handling U.S. securities of
equal value. Certain foreign governments levy withholding taxes against dividend
and interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Portfolio receives from the companies comprising the Portfolio's
investments.
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. The Portfolio seeks to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, the Portfolio may also invest in regulated investment companies or
investment funds which invest in such countries to the extent allowed by
applicable law.
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 Portfolio's 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.
Cash Equivalents: Cash equivalents are short-term fixed income securities
comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank or
savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Portfolio 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.
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banks, the security is deemed by the Adviser to be of an investment quality
comparable with other debt securities which the Portfolio may purchase.
(2) The Portfolio may invest in commercial paper rated at time of purchase by
one or more Nationally Recognized Statistical Rating Organizations ("NRSRO") in
one of their two highest categories, (e.g., A-1 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"));
(3) Short-term corporate obligations rated high-grade at the time of purchase by
a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others; and
(6) repurchase agreements collateralized by securities listed above.
Commercial Paper: 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.
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 Portfolio may
purchase convertibles.
Depositary Receipts: Depositary receipts are Foreign Equity Securities,
including Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs"), and other similar types of depositary shares. Depositary receipts are
securities that can be traded in U.S. or foreign securities markets but which
represent ownership interests in a security or pool of securities by a
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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. The Portfolio may invest in
sponsored and unsponsored GDRs and EDRs. For purposes of the Fund's investment
policies, the Portfolio's investments in GDRs or EDRs will be deemed to be
investments in the underlying securities.
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.
Foreign currency: When the Portfolio invests in Foreign Securities, it will
transact security purchases and sales in foreign currencies. The Portfolio may
hold foreign currency or purchase or sell currencies on a forward basis.
Foreign currency warrants. The Portfolio may invest in foreign currency
-------------------------
warrants, which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
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
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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.
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Performance indexed paper. Performance indexed paper is U.S. dollar-denominated
-------------------------
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
Foreign Equity Securities: Foreign equity securities are Equity Securities of
foreign issuers denominated in foreign currency and traded primarily in non-U.S.
markets, including depositary receipts.
Futures: Futures contracts and options on futures contracts ("Futures") are
derivatives. The Portfolio may invest in Futures. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC").
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. The Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's custodian or with a futures
commission merchant as approved by the Board.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as
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long as the contract remains open. The Fund expects to earn interest income on
its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of the
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Risks. Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Portfolio would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Portfolio may be required to make
delivery of the instruments underlying interest rate futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Portfolio's ability to effectively hedge. The Portfolio will
minimize the risk that it will be unable to close out a futures contract by only
entering into futures which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. The Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
The Portfolio's use of futures involves the risk of imperfect or no correlation
where the securities underlying futures contracts have different maturities than
the Portfolio securities being hedged.
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It is also possible that the Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk that the Portfolio could lose margin deposits in the
event of bankruptcy of a broker with whom the Portfolio has an open position in
a futures contract or related option. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of contract, no trades may be made on that day at a price beyond
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Investment Companies: Investment companies are Equity Securities and include
open-end or closed-end investment companies. The 1940 Act generally prohibits
the Portfolio from acquiring more than 3% of the outstanding voting shares of an
investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any one investment company and no more than 10% in
any combination of investment companies. The 1940 Act also prohibits the
Portfolio from acquiring in the aggregate more than 10% of the outstanding
voting shares of any registered closed-end investment company.
To the extent the Portfolio invests a portion of its assets in investment
companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the Portfolio itself. The Portfolio may
not purchase shares of any affiliated investment company except as permitted by
Securities and Exchange Commission ("SEC") rule or order.
Options: Options are derivatives. An option is a legal contract that gives the
holder the right to buy or sell a specified amount of the underlying security or
futures contract at a fixed or determinable price upon the exercise of the
option. A call option conveys the right to buy and a put option conveys the
right to sell a specified quantity of the underlying security.
The Portfolio may purchase over-the-counter options ("OTC Options") from, or
sell them to, securities dealers, financial institutions or other parties
("Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC Option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Portfolio expects generally to enter
into OTC Options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any
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guarantor of credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC Option will be satisfied. The staff of the
SEC currently takes the position that OTC Options purchased by the Portfolio or
sold by it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Portfolio's limitation on investing in illiquid
securities.
The Portfolio may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-
hedging purposes if it is designed to protect against a decline in the U.S.
dollar value of a currency due to the changes of exchange rates vis a vis the
U.S. dollar and the option is written for a currency other than the currency in
which the security is denominated. In such circumstances, the Portfolio will
follow the coverage requirements as described in the preceding paragraph.
Risks of Options. Investments in options involve some of the same risks that
are involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased. Those
price changes also can result in the Portfolio holding an option that will
expire worthless. For example, if the Portfolio purchases a call option and the
price of the underlying security fails to rise above the option's strike price,
the Portfolio would not exercise the option. As a result, the option will
expire worthless and the Portfolio will lose the price it paid for the option.
By contrast, if the Portfolio writes a call option on a security and the price
of the underlying security rises above the strike price, the purchaser of the
option may exercise the option, so that the Portfolio will not benefit from the
increase in value of the underlying security.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. The market prices of options generally
can be more volatile than the market prices on the underlying futures contract
or securities. Another risk is that the Counterparty to an over-the-counter
option will be unable to fulfill its obligation to the Portfolio due to
bankruptcy or other circumstances.
Options on Currencies. The Portfolio may purchase and write options on foreign
currencies in a manner similar to that in which it would use futures contracts
on foreign currencies, or forward contracts. For example, a decline in the
dollar value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in the
foreign currency remains constant. To protect against such diminution in the
value of portfolio securities, the Portfolio may purchase put options on the
foreign currency. If the value of the currency falls, the Portfolio will have
the right to sell the currency for a fixed amount in dollars and thereby offset,
in whole or in part, the adverse effect that the foreign currency's fall would
have had on the Portfolio's holdings.
Conversely, the Portfolio may buy call options on a foreign currency when the
Adviser wants to purchase securities denominated in that currency and believes
that the dollar value of that foreign currency will increase, thereby increasing
the cost of acquiring those securities. Purchasing such options may offset, at
least partially, the effects of the adverse movements in exchange rates. As
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in the case of other types of options, however, the benefit to the Portfolio
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Portfolio loses money on transactions in foreign currency options, which could
reduce the gain the Portfolio might have achieved from advantageous changes in
the exchange rates.
The Portfolio may write options on foreign currencies for the same purposes. For
example, where the Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, the Portfolio also may be required to forego
all or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolio may only write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
by the Portfolio. A written call option is also covered if the Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or liquid securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars, marked-to-market
daily.
The Portfolio may also write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the Portfolio owns or has the right to acquire
due to an adverse change in the exchange rate and which is denominated in the
currency underlying the option. In such circumstances, the Portfolio will either
"cover" the transaction as described above or collateralize the option by
maintaining in a segregated account
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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 Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and foreign currency
transactions, instead of a single transaction, as part of a single hedging
strategy when, in the opinion of the Adviser, it is in the best interest of the
Portfolio to do so. A combined transaction, while part of a single strategy, may
contain elements of risk that are present in each of its component transactions
and will be structured in accordance with applicable SEC regulations and SEC
staff guidelines.
Risks of options on futures contracts and on foreign currencies. Options on
foreign currencies are traded over-the-counter through financial institutions
acting as market-makers, although they are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, if the Portfolio writes options, it could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Furthermore, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the Portfolio to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the
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mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
Preferred Stock: Preferred stocks are non-voting ownership shares in a
corporation which pay a fixed or variable stream of dividends. Preferred stocks
have a preference over common stocks in the event of the liquidation of an
issuer. Preferred stocks have many of the characteristics of both Equity
Securities and fixed income securities.
Repurchase Agreements: Repurchase agreements are Fixed Income Securities in the
form of an agreement backed by collateral. The Portfolio may invest in
repurchase agreements collateralized by U.S. Government securities, certificates
of deposit and certain bankers' acceptances. Repurchase agreements are
transactions by which the Portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. In these transactions, the securities
purchased by the Portfolio have a total value in excess of the value of the
repurchase agreement and are held by the Portfolio's custodian bank until
repurchased. Such agreements permit the Portfolio to keep all its assets at work
while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. The Adviser and the Fund's Administrator will continually
monitor the value of the underlying securities to ensure that their value always
equals or exceeds the repurchase price.
Pursuant to an SEC order, the Portfolio may pool its daily uninvested cash
balances with those of the Fund's other portfolios in order to invest in
repurchase agreements on a joint basis. By entering into repurchase agreements
on a joint basis, it is expected that the Portfolio will incur lower transaction
costs and potentially obtain higher rates of interest on such repurchase
agreements. The Portfolio's participation in the income from jointly purchased
repurchase agreements will be based on the 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, the
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its
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interest in the underlying securities. While the Fund's management acknowledges
these risks, it is expected that they can be controlled through stringent
security and counterparty selection criteria and careful monitoring procedures.
Reverse Repurchase Agreements: Under a Reverse Repurchase Agreement, the
Portfolio sells a security and promises to repurchase that security at an agreed
upon future date and price. The price paid to repurchase the security reflects
interest accrued during the term of the agreement. The Portfolio will establish
a separate custodial account holding cash and other liquid assets in an amount
not less than the purchase obligations of the agreement. Reverse Repurchase
Agreements may be viewed as a speculative form of borrowing called leveraging.
The Portfolio may invest in reverse repurchase agreements if (i) interest earned
from leveraging exceeds the interest expense of the original reverse repurchase
transaction and (ii) proceeds from the transaction are not invested for longer
than the term of the Reverse Repurchase Agreement.
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. If the Portfolio purchases a
right, it 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: The Portfolio may lend its investment securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, the Portfolio attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Portfolio. The Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the 1940 Act or the rules and regulations
or interpretations of the SEC thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of cash,
an irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Portfolio at any time, and (d) the Portfolio receives
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the 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
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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 Sales: A short sale is a transaction in which the Portfolio sells
securities that it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. To deliver the securities to the buyer,
the Portfolio arranges through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement. When selling short, the Portfolio
intends to replace the securities at a lower price and therefore, profit from
the difference between the cost to replace the securities and the proceeds
received from the sale of the securities. When the Portfolio makes a short sale,
the proceeds it receives from the sale will be held on behalf of a broker until
the Portfolio replaces the borrowed securities. The Portfolio may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Portfolio secures its obligation to replace the borrowed securities by
depositing collateral with the broker, consisting of cash or other liquid
securities. The Portfolio also must place in a segregated account with its
custodian cash or other liquid securities equal in value to the difference, if
any, between (i) the current market value of the securities sold short, and (ii)
any cash or other liquid securities deposited as collateral with the broker in
connection with the short sale. This amount will be adjusted daily to reflect
changes in the value of the securities sold short. The Portfolio also can cover
its obligations by owning another security (such as a call option) giving it the
right to obtain the same kind and amount of the security it sold short.
Risks: Short sales by the Portfolio involve certain risks and special
considerations. If the Adviser incorrectly predicts that the price of a borrowed
security will decline, the Portfolio will have to replace the securities by
purchasing them at a higher price than it received from the sale. Therefore,
losses from short sales may be significant. By contrast, when the Portfolio
purchases a security and holds it, the Portfolio cannot lose more than the
amount it paid for the security. The Adviser does not anticipate that more than
1% of the Portfolio's total assets will de devoted to short selling at any given
time.
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 the Portfolio receives no income from the above
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market price
of the securities at the time of delivery may be higher or lower than the
purchase price. The Portfolio will maintain with the
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custodian a segregated account consisting of cash or liquid securities in an
amount at least equal to these commitments.
INVESTMENT LIMITATIONS
Fundamental Limitations. The Portfolio is subject to the following restrictions
which are fundamental policies and may not be changed without the approval of
the lesser of: (1) at least 67% of the voting securities of the Portfolio
present at a meeting if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the Portfolio.
As a matter of fundamental policy, the Portfolio will not change its objective
and 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;
(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;
(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
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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) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iv) asset-backed
securities will be classified according to the underlying assets securing such
securities.
Non-Fundamental Limitations. The Portfolio is also subject to the following
restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, the Portfolio will not:
(1) (a) enter into futures contracts to the extent that the 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 the 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) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, provided that the
Portfolio may make margin deposits in connection with transactions in options,
futures, and options on futures;
(3) sell short unless the Portfolio (i) by virtue of its ownership of other
securities, has the right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, or (ii) maintains in a segregated account on the books of the
Fund's custodian an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short or such other amount as the SEC or its
staff may permit by rule, regulation, order or interpretation (transactions in
futures contracts and options, however, are not deemed to constitute selling
securities short);
(4) borrow money other than from banks or other portfolios of MAS Funds,
provided that the Portfolio may borrow from banks or other portfolios of MAS
Funds so long as such borrowing is not inconsistent with the 1940 Act or the
rules, regulations, interpretations or orders of the SEC and its staff
thereunder; or purchase additional securities when borrowings exceed 5% of total
(gross) assets;
(5) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that the Portfolio may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
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(6) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board;
(7) invest for the purpose of exercising control over management of any company;
(8) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder; or
(9) issue senior securities, as defined in the Investment Company Act of 1940,
except as permitted by rule, regulation or order of the SEC.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the value or
total cost of the Portfolio's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
Pursuant to an order from the SEC the Portfolio may enter into interfund lending
arrangements. Interfund loans and borrowings permit the 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. The 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, the 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 Portfolio should be designated on the Account Registration Form. The
Portfolio reserves the right in its sole discretion (i) to suspend the offering
of its shares, (ii) to reject purchase orders, and (iii) to reduce or waive the
minimum for initial and subsequent investments. The officers of the Fund may
from time to time waive the minimum initial and subsequent investment
requirements in connection with investments in the Fund by employees of the
Adviser and its affiliates.
Investors purchasing and redeeming shares of the Portfolio through a financial
intermediary may be charged a transaction-based fee or other fee for the
financial intermediary's services. Each financial intermediary is responsible
for sending you a schedule of fees and information regarding any additional or
different conditions regarding purchases and redemptions. Customers of financial
intermediaries should read this SAI in light of the terms governing
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accounts. The Fund does not pay compensation to or receive compensation from
financial intermediaries for the sale of Institutional Class Shares.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order to
confirm that telephone instructions in connection with redemptions are genuine,
the Fund and Distributor will provide written confirmation of transactions
initiated by telephone.
REDEMPTION OF SHARES
The Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for the Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit. The Fund has made an
election with the SEC pursuant to Rule 18f-1 under the 1940 Act to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Portfolio at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above limits
may be paid in whole or in part in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Fund. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Fund's prospectuses under "Valuation of Shares" and a redeeming
shareholder would normally incur brokerage expenses in converting these
securities to cash.
No charge is made by the Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, accepts the order. In
other words, orders will be priced at the net asset value next computed after
such orders are accepted by an authorized broker or the broker's authorized
designee.
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 the
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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 Portfolio to another person by written
request to the Client Services Group at the address noted above. If shares are
being transferred to a new account, requests for transfer must be accompanied by
a completed Account Registration Form for the receiving party. If shares are
being transferred to an existing account, the request should clearly identify
the account and number of shares to be transferred and include the signature of
all registered owners and all share certificates, if any, which are subject to
the transfer. The signature on the letter of request, the share certificate or
any stock power must be guaranteed in the same manner as described under
"Redemption of Shares." As in the case of redemptions, the written request must
be received in good order before any transfer can be made.
VALUATION OF SHARES
Net asset value per share ("NAV") is determined by dividing the total market
value of the Portfolio's investments and other assets, less any liabilities, by
the total outstanding shares of the 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.
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Bonds and other fixed income securities listed on a foreign exchange are valued
at the latest quoted sales price available before the time when assets are
valued. NAV includes interest on bonds and other fixed income securities which
are accrued daily. Bonds and other fixed income securities which are traded over
the counter and on an exchange will be valued according to the broadest and most
representative market, and it is expected that for bonds and other fixed income
securities this ordinarily will be the over-the-counter market.
However, bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service are determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities and any
developments related to specific securities. Bonds and other fixed income
securities not priced in this manner are valued at the most recent quoted bid
price, or when stock exchange valuations are used, at the latest quoted sale
price on the day of valuation. If there is no such reported sale, the latest
quoted bid price will be used. Securities purchased with remaining maturities of
60 days or less are valued at amortized cost when the Board determines that
amortized cost reflects fair value. In the event that amortized cost does not
approximate market, market prices as determined above will be used.
MANAGEMENT OF THE FUND
Trustees' Responsibilities
The Trustees supervise the Trust's affairs under the laws governing business
trusts in the Commonwealth of Pennsylvania. The Trustees have approved contracts
under which certain companies provide essential management, administrative and
shareholder services to the Trust.
Trustees and Officers
The Fund's officers, under the supervision of the Board of Trustees, manage the
day-to-day operations of the Fund. The Trustees set broad policies for the Fund
and choose its officers. The following is a list of the Trustees and officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years:
Thomas L. Bennett, * 10/4/47, Chairman of the Board of Trustees; Managing
Director, Morgan Stanley Dean Witter Investment Management Inc.; 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, ICG Commerce, Inc.; Sunoco; Fannie Mae;
Reliance Group Holdings; CVS Corporation; Knight-Ridder, Inc.; Internet Capital
Group; Investor Force Holdings, Inc.; formerly Director, IKON Office Solutions,
Inc., Fiserv, Digital Equipment Corporation and Union Carbide Corporation.
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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).
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 Inc., 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 Inc.; 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; Principal,
Morgan Stanley Dean Witter Investment Management Inc.; 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 Inc.; 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.
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<PAGE>
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 Chase Global Fund Services Company, the
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, 1999.
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 Fund Total Compensation
Name of Trustee the 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
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Aggregate Pension or Benefits
Compensation from Accrued as Part of Fund Total Compensation
Name of Trustee the Fund# Expenses from the Fund
--------------- ----------------- -------- -------------
<S> <C> <C> <C>
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 September 30, 2000, Morgan
Stanley Dean Witter Investment Management had in excess of $ billion in assets
under management.
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board and in conformance
with the stated investment objectives and policies of the Portfolio manages the
investment and reinvestment of the assets of the Portfolio. In this regard, it
is the responsibility of the Adviser to make investment decisions for the
Portfolio and to place the Portfolio's purchase and sales orders for investment
securities.
As compensation for the services rendered by the Adviser under the Agreement and
the assumption by the Adviser of the expenses related thereto (other than the
cost of securities purchased for the Portfolio and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of such
securities), the Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on an annual percentage rate of % of the
Portfolio's average daily net assets for the quarter.
In cases where a shareholder of the Portfolio 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
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<PAGE>
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 from exceeding % of its average daily net assets.
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 Portfolio; in such event, continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Portfolio. If the holders of the Portfolio fail to approve the
Agreement, the Adviser may continue to serve as investment adviser to the
Portfolio until new arrangements have been made. The Agreement is automatically
terminated if assigned, and may be terminated by the Portfolio without penalty,
at any time, (1) by vote of the Board or by vote of the outstanding voting
securities of the Portfolio or (2) on sixty (60) days' written notice to the
Adviser, or (3) by the Adviser upon ninety (90) days' written notice to the
Fund.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated to
each portfolio of the Fund, based on their relative net assets. The Portfolio
bears its own advisory fees and brokerage commissions and transfer taxes in
connection with the acquisition and disposition of its investment securities.
The Fund, the Advisor, and the Distributor have adopted a Code of Ethics
("Code") which governs the personal trading activities of all "Access Persons"
of the Fund, the Advisor and the Distributor. Access Persons include the Fund's
trustees, the Adviser's officers and employees who make, participate in, or
obtain information regarding the Fund's securities transactions as part of their
regular duties ("Advisory Persons"), and the Distributor's directors and
officers. The Code is based upon the principle that such Access Persons have a
fiduciary duty to place the interest of the Fund and the Advisor's and
Distributor's other clients ahead of their own.
The Code requires all employees of the Adviser to, among other things, preclear
their securities transactions (with limited exceptions, such as transactions in
shares of mutual funds, direct obligations of the U.S. government and certain
money market instruments) and to maintain their personal brokerage accounts
(with certain limited exceptions) at a broker-dealer that is affiliated with
MSDW. The Code bans Access Persons (other than the Fund's independent trustees)
and all other employees of the Adviser from acquiring any securities in an
initial public offering, and prohibits all employees of the Adviser from
profiting on short-term trading in securities. In addition, no employee of the
Adviser may purchase or sell any security while there is a pending buy or sell
order in the same or related security for the Fund or other clients of the
Adviser, and no Access Person or other employee of the Adviser may purchase or
sell a security which to his or her knowledge at the time is being considered
for purchase or sale by the Advisor on behalf of the Fund or any other client.
Finally, the Code provides for trading "black out" periods of seven calendar
days during which time Advisory Persons may not trade in securities that the
Adviser has purchased or sold for its clients.
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.
DISTRIBUTION OF SHARES
The Fund's Distribution Plan provides that the Adviser Class will pay the
Distributor an annualized fee of .25% of the average daily net assets of the
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 ar not "interested persons" 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
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<PAGE>
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.
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. , located at 200 Berkeley Street, Boston, MA
02116-5022, serves as independent accountants for the Fund and audits the annual
financial statements of the Portfolio.
Fund Counsel. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
LITIGATION
The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
Portfolio Transactions
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolio and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolio. In so doing,
the Adviser will consider all matters it deems relevant, including the
following: the Adviser's knowledge of negotiated commission rates and spreads
currently available; the nature of the security or instrument being traded; the
size and type of the transaction; the nature and character of the markets for
the security or instrument to be purchased or sold; the desired timing of the
transaction; the activity existing and expected in the market for the particular
security or instrument; confidentiality; the execution, clearance, and
settlement capabilities of the broker or dealer selected and other brokers or
dealers considered; the reputation and perceived soundness of the broker or
dealer selected and other brokers or dealers considered; the Adviser's knowledge
of any actual or apparent operational problems of a broker or dealer; and the
reasonableness of the commission or its equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, the Portfolio will not necessarily pay the lowest available commission
on brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be
26
<PAGE>
the case with other transactions requiring more routine services. In addition,
the Portfolio may pay higher commission rates or markups than the lowest
available when the Adviser believes it is reasonable to do so in light of the
value of the research, statistical, pricing, and execution services provided by
the broker or dealer effecting the transaction. The Adviser does not attempt to
put a specific dollar value on the research services rendered or to allocate the
relative costs or benefits of those services among its clients, believing that
the research it receives will help the Adviser to fulfill its overall duty to
its clients. The Adviser uses research services obtained in this manner for the
benefit of all of its clients, though each particular research service may not
be used to service each client. As a result, the Fund may pay brokerage
commissions or markups that are used, in part, to purchase research services
that are not used to benefit the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place Portfolio orders with qualified
broker-dealers who recommend the Portfolio or who act as agents in the purchase
of shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients serviced by the Adviser. The Adviser may place a
combined order for two or more accounts or portfolios of the fund 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
the Portfolio and one or more of these other clients serviced by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and reasonable
by the Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees.
As an indirect subsidiary of Morgan Stanley Dean Witter & Co., the Adviser is
affiliated with certain U.S.-registered broker-dealers and foreign
broker-dealers (collectively, the "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.
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
27
<PAGE>
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 thirty
portfolios.
The shares of each portfolio of the Fund are fully paid and non-assessable,
except as set forth below, and have no preference as to conversion, exchange,
dividends, retirement or other features. The shares of each portfolio of the
Fund have no preemptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder of a class is entitled to one vote for each full
class share held (and a fractional vote for each fractional class share held) in
the shareholder's name on the books of the Fund. Shareholders of a class have
exclusive voting rights regarding any matter submitted to shareholders that
relates solely to that class of shares (such as a distribution plan or service
agreement relating to that class), and separate voting rights on any other
matter submitted to shareholders in which the interests of the shareholders of
that class differ from the interests of holders of any other class.
Meetings of shareholders will not be held except as required by the 1940 Act and
other applicable law. A meeting will be held to vote on the removal of a Trustee
or Trustees of the Fund if requested in writing by the holders of not less than
10% of the outstanding shares of the Fund. The Fund will assist in shareholder
communication in such matters to the extent required by law.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such portfolio;
2) Subject to the majority vote of shares of any portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
portfolio and distribute such assets ratably among the shareholders of such
portfolio; and
3) Without the approval of the shareholders of any portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
portfolios into a single portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any portfolio as provided in paragraphs 1), 2), and 3) above, that
portfolio shall terminate and the
28
<PAGE>
Trustees shall be discharged of any and all further liabilities and duties
hereunder and the right, title and interest of all parties shall be canceled and
discharged with regard to that portfolio.
Dividends and Distributions
The Fund's policy is to distribute substantially all of the Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed income
and capital gains. The amounts of any income dividends or capital gains
distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of the
Portfolio by an investor may have the effect of reducing the per share net asset
value of the Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes.
Unless the shareholder elects otherwise in writing, all dividends and
distributions are automatically received in additional shares of the Portfolio
at net asset value (as of the business day following the record date). This will
remain in effect until the Fund is notified by the shareholder in writing at
least three days prior to the record date that either the Income Option (income
dividends in cash and capital gains distributions in additional shares at net
asset value) or the Cash Option (both income dividends and capital gain
distributions in cash) has been elected. An account statement is sent to
shareholders whenever a dividend or distribution is paid.
The Portfolio is treated as a separate entity (and hence, as a separate
"regulated investment company") for federal tax purposes. Any net capital gains
recognized by the Portfolio are distributed to its investors without need to
offset (for federal income tax purposes) such gains against any net capital
losses of another portfolio.
Undistributed net investment income is included in the Portfolio's net assets
for the purpose of calculating NAV. Therefore, on the ex-dividend date, the NAV
excludes the dividend (i.e., is reduced by the per share amount of the
dividend). Dividends paid shortly after the purchase of shares by an investor,
although in effect a return of capital, are taxable as ordinary income.
Certain mortgage securities may provide for periodic or unscheduled payments of
principal and interest as the mortgages underlying the securities are paid or
prepaid. However, such principal payments (not otherwise characterized as
ordinary discount income or bond premium expense) will not normally be
considered as income to the Portfolio and therefore will not be distributed as
dividends. Rather, these payments on mortgage-backed securities will be
reinvested on your behalf by the Portfolio.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations
29
<PAGE>
of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Fund or the
Trustees, but this disclaimer may not be effective in some jurisdictions or as
to certain types of claims. The Declaration of Trust further provides for
indemnification out of the Fund's property of any shareholder held personally
liable for the obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only to
the rights of creditors of the Fund) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act shareholders of any additional series
or class of shares would normally have to approve the adoption of any advisory
contract relating to such series or class and of any changes in the investment
policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
TAX CONSIDERATIONS
The Portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the federal excise tax. To do so, the
Portfolio expects to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year.
In order for the Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such securities or currencies. It is anticipated that
any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In addition, (i) the Portfolio must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income and 90% of its investment company
taxable income; (ii) at the close of each quarter of the Portfolio's taxable
year, at least 50% of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other regulated
30
<PAGE>
investment companies and such other securities with limitations; and (iii) at
the close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its assets may be invested in securities of any one issuer, or of
two or more issuers engaged in same or similar businesses if the Portfolio owns
at least 20% of the voting power of such issuers.
The Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes including unrealized
gains at the end of the Portfolio's fiscal year on certain futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the Portfolio's other investments and shareholders will be advised of the
nature of the payments.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolio may be "Section 1256 contracts." Section 1256
contracts held by the Portfolio at the end of its taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
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
("60/40") although all foreign currency gains and losses from such contracts may
be treated as ordinary in character absent a special election.
Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap contracts undertaken by the Portfolio, may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by the Portfolio. In addition,
losses realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to the Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
the Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
The Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If the Portfolio makes any of the elections,
the amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the 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.
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The Code provides constructive sales treatment for appreciated financial
positions such as stock which has increased in value in the hands of the
Portfolio. Under this constructive sales treatment, the Portfolio may be treated
as having sold such stock and be required to recognize gain if it enters into a
short sale, an offsetting notional principal contract, a futures or forward
contract, or a similar transaction with respect to such stock or substantially
identical property.
The Portfolio is treated as a separate entity for federal income tax purposes
and intends to qualify for the special tax treatment afforded regulated
investment companies. As such, the Portfolio will not be subject to federal
income tax to the extent it distributes net investment company taxable income
and net capital gains to shareholders. The Fund will notify you annually as to
the tax classification of all distributions.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, you must certify
on your Account Registration Form that your Social Security Number or Taxpayer
Identification Number is correct, and that you are not subject to backup
withholding.
Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. The Portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the Portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of the Portfolio
by a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than twelve
months and short-term if for twelve months or less. Generally, long-term capital
gains are currently taxed at a maximum rate of 20% and short-term gains are
currently taxed at ordinary income tax rates. If shares on which a net capital
gain distribution has been received are subsequently sold or redeemed, and such
shares have been held for six months or less, any loss recognized will be
treated as long-term capital loss to the extent of the long-term capital gain
distributions.
Foreign Income Taxes: Investment income received by the Portfolio from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Portfolio to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolio's assets to be
invested within various countries is not known. The Portfolio intends to operate
so as to qualify for treaty-reduced rates of tax where applicable.
If at the end of the Portfolio's year, more than 50% of the Portfolio's assets
are represented by foreign securities, then the Portfolio may file an election
with the Internal Revenue Service to pass through to shareholders the amount of
foreign income taxes paid by the Portfolio. The
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Portfolio will make such an election only if it is deemed to be in the best
interests of its shareholders.
If the Portfolio makes the above-described election, the Portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the Portfolio. The Portfolio's
shareholders will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
Portfolio; (ii) treat their pro rata share of foreign taxes as paid by them;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the Portfolio
which represents income from sources within foreign countries; and (iv) either
deduct their pro rata share of foreign taxes in computing their taxable income
or use it within the limitations set forth in the Code as a foreign tax credit
against U.S. income taxes (but not both). In no event shall a shareholder be
allowed a foreign tax credit if the shareholder holds shares in the Portfolio
for 15 days or less during the 30-day period beginning on the date which is 15
days before the date on which such shares become ex-dividend with respect to
such dividends.
Each shareholder of the Portfolio will be notified within 60 days after the
close of each taxable (fiscal) year of the Fund if the foreign taxes paid by the
Portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the Portfolio's gross income from foreign sources. The notice from the
Portfolio to shareholders will also include the amount of foreign taxes paid by
the Portfolio which are not allowable as a foreign tax credit because the
Portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because, and to the extent that, the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
State and Local Income Taxes: The Fund is not liable for any corporate income or
franchise tax in the Commonwealth of Pennsylvania. Shareholders should consult
their tax advisors for the state and local income tax consequences of
distributions from the Portfolio.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of the Portfolio. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods for computing performance follows.
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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 the Portfolio's annual total return for any one
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
P (1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the stated period
The Portfolio may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
Aggregate total returns may be shown by means of schedules, charts or graphs and
may include subtotals of the various components of total return (e.g., income
dividends or returns for specific types of securities such as industry or
country types). The formula for calculating aggregate total return can be
expressed as follows:
Aggregate Total Return = [ ( ERV ) - P ]
-------------------------
P
The Portfolio may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
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Yield
In addition to total return, the Portfolio may quote performance in terms of a
30-day yield. The yield formula provides for semiannual compounding, which
assumes that net investment income is earned and reinvested at a constant rate
and annualized at the end of a six-month period. Methods used to calculate
advertised yields are standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by the Portfolio to
maintain its books and records, therefore the advertised 30-day yield may not
reflect the income paid to your own account or the yield reported in the
Portfolio's reports to shareholders. The Portfolio may also advertise or quote a
yield which is gross of expenses.
The yield figures provided will be calculated according to a formula prescribed
by the SEC and can be expressed as follows:
Yield = 2 [ ( (a-b/cd) + 1)/6/ - 1 ]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
Other Performance Information
The Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze the Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, the Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, the Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Portfolio to other funds in an appropriate category over specific periods of
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time may also be quoted in advertising. The performance of the Portfolio, as
well as the composite performance of 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 its rankings in an applicable universe. In
addition, the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Business Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall
Street Journal and USA Today.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, Treasury bills, the U.S. rate of inflation (based on the
Consumer Price Index), and combinations of various capital markets. The
performance of these capital markets is based on the returns of different
indices. The Portfolio may use the performance of these capital markets in order
to demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Portfolio. The
Portfolio may also compare its performance to that of other compilations or
indices that may be developed and made available in the future.
The Portfolio may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investments in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of the Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in the Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolio may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
Portfolio dividends or other distributions are reinvested by being paid in
additional Portfolio shares, any future income or capital appreciation of the
Portfolio would increase the value, not only of the original investment in the
Portfolio, but also of the additional Portfolio shares received through
reinvestment.
The Portfolio may include in its advertisements, discussions or illustrations of
the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of the Portfolio (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to the Portfolio may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio
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managers by Morgan Stanley; and the portfolio manager's goals, strategies and
investment techniques.
The Portfolio's advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
United States, a foreign, or the global economy and the U.S., a foreign, or the
global economy as a whole and the effects of inflation. The Portfolio may
include discussions and illustrations of the growth potential of various global
markets including, but not limited to, Africa, Asia, Europe, Latin America,
North America, South America, emerging markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the
Portfolio's shareholder reports (including the investment composition of the
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Portfolio.
The Portfolio may quote various measures of volatility and benchmark correlation
in advertising. The Portfolio may compare these measures to those of other
funds. Measures of volatility seek to compare the historical share price
fluctuations or total returns to those of a benchmark. Measures of benchmark
correlation indicate how valid a comparative benchmark may be. Measures of
volatility and correlation may be calculated using averages of historical data.
The Portfolio may also advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in the Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
COMPARATIVE INDICES
The Portfolio 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.
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Russell Mid Cap Growth Index
----------------------------
The Russell Mid Cap Index consists of the 800 smallest companies in the Russell
1000 Index, which represent approximately 24% of the total market capitalization
of the Russell 1000 Index. As of the latest reconstitution, the average market
capitalization was approximately $4.2 billion; the median market capitalization
was approximately $3.2 billion. The largest company in the index had an
approximate market capitalization of $13 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 800 stocks in the Russell
Mid Cap Index. The Index is an equity market capitalization weighted Index
available from Frank Russell & Co. on a monthly basis.
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