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INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JUNE 14, 2000
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Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
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MAS Funds (the "Fund") is a no-load mutual fund consisting of 29 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"):
STRATEGIC SMALL VALUE
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
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TABLE OF CONTENTS
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INVESTMENT SUMMARY.......................................................... 1
STRATEGIC SMALL VALUE...................................................... 2
FEES AND EXPENSES OF THE PORTFOLIO.......................................... 3
INVESTMENT STRATEGIES AND RELATED RISKS..................................... 4
PURCHASING SHARES........................................................... 5
REDEEMING SHARES............................................................ 6
VALUATION OF SHARES......................................................... 7
GENERAL SHAREHOLDER INFORMATION............................................. 7
FUND MANAGEMENT............................................................. 8
</TABLE>
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INVESTMENT SUMMARY
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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
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OBJECTIVE
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STRATEGIC SMALL VALUE PORTFOLIO
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The Strategic Small Value Portfolio seeks above-average total return over a
market cycle of three to five years.
APPROACH
The Portfolio invests primarily GENERALLY AT LEAST 65% OF TOTAL PORTFOLIO
in common stocks of domestic ASSETS INVESTED IN COMMON STOCKS OF SMALL CAP
companies with equity COMPANIES
capitalizations in the range of ----------------------------------------------
companies included in the EQUITY CAPITALIZATION GENERALLY MATCHING THE
Russell 2000 Value Index. BENCHMARK (CURRENTLY $200 MILLION TO $2
BILLION)
PROCESS
The Adviser analyzes securities ----------------------------------------------
to identify stocks that are FOCUS ON VALUE STOCKS
undervalued, and measures the
relative attractiveness of the ----------------------------------------------
Portfolio's current holdings BENCHMARK: RUSSELL 2000 VALUE INDEX
against potential purchases. ----------------------------------------------
Value stocks are stocks that TICKER SYMBOL: NOT AVAILABLE
are deemed by the Adviser to be ----------------------------------------------
undervalued relative to the CUSIP NO.: 552-913-196
stock market in general. The
Adviser makes value decisions ----------------------------------------------
guided by the appropriate PORTFOLIO MANAGERS
market index, based on value ----------------------------------------------
characteristics such as BRADLEY S. DANIELS, WILLIAM B. GERLACH,
price/earnings and price/book VITALY V. KORCHEVSKY AND GARY G. SCHLARBAUM
ratios. Value stocks generally
are dividend paying common
stocks. However, non-dividend
paying stocks also may be
selected for their value
characteristics. Sector
weightings normally are kept
within 5% of those of the Russell
2000 Value Index. For example, if
the technology sector represents
15% of the Russell 2000 Value Index,
then, as a general matter, the
technology sector would represent
between 10-20% of total Portfolio assets.
There are more than a dozen sectors
represented in the Russell 2000 Value Index
including technology, heavy industry/transportation,
health care, energy and basic resources. In
determining whether securities should be sold,
the Adviser considers factors such as high
valuations relative to other investment opportunities,
and deteriorating short or long-term earnings growth
projections.
PRINCIPAL RISKS
The Portfolio is subject to various risks that could adversely affect its net
asset value, yield and total return. It is possible for an investor to lose
money by investing in the Portfolio.
The prices of common stocks rise and fall in response to events that affect
entire financial markets or industries, and to events that affect a particular
issuer. Investments in smaller companies may involve greater risk than
investments in larger, more established companies, and smaller companies'
securities may be subject to more abrupt or erratic price movements. The
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 value stocks or stocks of small companies, while other
conditions may favor growth stocks or stocks of larger companies. The Adviser's
perception that a stock is under- or over-valued may not be accurate or may not
be realized. At times, the Portfolio's guideline for sector weightings may
result in significant exposure to one or more market sectors.
Please see "Investment Strategies and Related Risks" for information about
other risks of investing in the Portfolio.
PERFORMANCE INFORMATION
No performance information is provided because the Strategic Small Value
Portfolio has not been in operation for a full calendar year.
2
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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.
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FEES AND EXPENSES OF THE PORTFOLIO
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ANNUAL
PORTFOLIO
OPERATING
EXPENSES
(expenses that are
deducted from Portfolio
assets)
<TABLE>
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TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12B-1) FEES EXPENSES EXPENSES
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<S> <C> <C> <C> <C>
STRATEGIC SMALL VALUE PORTFOLIO 1.00% NONE .85%* 1.85%
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</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 rate
shown in the table below. A fee waiver and/or expense reimbursement is
voluntary and the Adviser reserves the right to terminate any waiver and/or
reimbursement at any time and without notice.
TOTAL ANNUAL FUND OPERATING EXPENSES
AFTER MAS WAIVER/REIMBURSEMENT & OFFSETS
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STRATEGIC SMALL VALUE PORTFOLIO 1.15%
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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
1 YEAR 3 YEARS
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STRATEGIC SMALL VALUE PORTFOLIO $188 $581
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3
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IPOS
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INVESTMENT STRATEGIES AND RELATED RISKS
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In addition to the principal investment strategies described above, the
Portfolio also may invest in the following as non-principal investment
strategies.
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.
The Portfolio may purchase shares issued as part of, or a short period after,
companies' initial public offerings ("IPOs"), and may at times dispose of those
shares shortly after their acquisition. The Portfolio's purchase of shares
issued in IPOs exposes it to the risks associated with companies that have
little operating history as public companies, as well as to the risks inherent
in those sectors of the market where these new issuers operate. The market for
IPO issuers has been volatile, and share prices of newly-public companies have
fluctuated in significant amounts over short periods of time.
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 for the Portfolio include
futures contracts, options contracts and swaps.
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).
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, interest rates, securities indices or
commodity indices. Swaps may be used to gain exposure to a market without
directly investing in securities traded in that market. Structured investments
are units representing an interest in assets held in a trust that is not an
investment company as defined in the 1940 Act. The trust may pay a return based
on the income it receives from those assets, or it may pay a return based on a
specified index.
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.
4
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RISKS OF DERIVATIVES
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INVESTMENT STRATEGIES AND RELATED RISKS (Continued)
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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,
options and when-issued securities 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.
The primary risks of derivatives are: (i) changes in the market value of
securities held or to be acquired by the Portfolio, and of derivatives relating
to those securities, may not be proportionate, (ii) there may not be a liquid
market for the Portfolio to sell a derivative, which could result in difficulty
closing a position, and (iii) magnification of losses incurred due to changes
in the market value of the securities to which they relate.
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 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.
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PURCHASING SHARES
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Institutional Class Shares of the Portfolio 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.
Institutional Class Shares of the Portfolio may be purchased at the net asset
value per share (NAV) next determined after we receive your purchase order.
INITIAL PURCHASE BY MAIL
You may open an account, subject to acceptance by MAS Funds, by completing and
signing an Account Registration Form provided by MAS Funds' Client Services
Group ("Client Services") and mailing it to MAS Funds c/o Miller Anderson &
Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868 together with
a check payable to MAS Funds.
Please note that payments to investors who redeem shares purchased by check
will not be made until payment of the purchase has been collected, which may
take up to eight business days after purchase. You can avoid this delay by
purchasing shares by wire.
5
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PURCHASING SHARES (Continued)
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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 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.
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REDEEMING SHARES
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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.
6
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REDEEMING SHARES (Continued)
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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.
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VALUATION OF SHARES
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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.
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GENERAL SHAREHOLDER INFORMATION
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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.
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 Portfolio from
U.S. corporations. Capital gain distributions may be taxable at different rates
depending on the length of time the Fund holds its assets.
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.
7
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DIVIDENDS AND DISTRIBUTIONS
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GENERAL SHAREHOLDER INFORMATION (Continued)
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The Portfolio normally distributes substantially all of their 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.
ADVISER
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FUND MANAGEMENT
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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 March 31, 2000, Morgan Stanley Dean Witter Investment
Management had in excess of $177 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 1999 fiscal year.
-------------------------------------------
CONTRACTUAL FY 1999
COMPENSATION ACTUAL
RATE COMPENSATION RATE
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STRATEGIC SMALL VALUE PORTFOLIO 1.00% N/A
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* 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 1.15%.
PORTFOLIO MANAGERS
A description of the business experience during the past five years for each of
the investment professionals who are primarily responsible for the day-to-day
management of the Portfolio is as follows:
BRADLEY S. DANIELS, Principal, MSDW, joined MAS in 1985. He joined the
management team for the Small Cap Value Portfolio in 1986 and the Mid Cap Value
Portfolio in 1994.
WILLIAM B. GERLACH, Principal, MSDW, joined MAS in 1991. He served as a
Research Associate from 1991 to 1996 and has served as an Equity Portfolio
Manager since 1996. He joined the management team for the Small Cap Value and
Mid Cap Value Portfolios in 1996.
VITALY V. KORCHEVSKY, Vice President, MSDW, joined MAS as a Portfolio Manager
in 1999. He served as an Analyst/Portfolio Manager for Gardner Lewis Asset
Management from 1998-1999, and as a Portfolio Manager for Crestar Asset
Management Co. from 1995-1998. He joined the management team for the Mid Cap
Value and Small Cap Value Portfolios in 2000.
GARY G. SCHLARBAUM, Managing Director, MSDW; Director, MAS Fund Distribution,
Inc., joined MAS in 1987. He joined the management team for the Equity and
Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992 and the
Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through MAS Fund Distribution,
Inc., a wholly-owned subsidiary of the Adviser.
8
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INSTITUTIONAL CLASS PROSPECTUS
[LOGO OF MAS FUNDS]
JUNE 14, 2000
TRUSTEES OF THE FUND
--------------------
Thomas L. Bennett, Chairman Thomas L. Gerrity
Joseph P. Healey Joseph J. Kearns
Vincent R. McLean C. Oscar Morong, Jr.
James H. Scott
OFFICERS OF THE FUND
--------------------
Lorraine Truten, President Richard J. Shoch, Secretary
James A. Gallo, Vice President & John H. Grady, Jr., Assistant
Treasurer Secretary
In addition to this prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated June 14, 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
INVESTMENT MANAGEMENT ONE TOWER BRIDGE . WEST
CONSHOHOCKEN, PA 19428
<PAGE>
MAS FUNDS
STRATEGIC SMALL VALUE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
JUNE 14, 2000
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-nine
portfolios offering a variety of investment alternatives. This Statement of
Additional Information (the "SAI") sets forth information about the Fund
applicable to the Strategic Small Value Portfolio (the "Portfolio").
This SAI is not a prospectus but should be read in conjunction with the
Portfolio's prospectus dated June 14, 2000, as revised from time to time. To
obtain this prospectus, please call the Client Services Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
<TABLE>
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TABLE OF CONTENTS
<S> <C>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES.. 2
INVESTMENTS................................. 2
INVESTMENT LIMITATIONS...................... 17
PURCHASE OF SHARES.......................... 20
REDEMPTION OF SHARES........................ 20
SHAREHOLDER SERVICES........................ 21
VALUATION OF SHARES......................... 22
MANAGEMENT OF THE FUND...................... 23
INVESTMENT ADVISER.......................... 26
PRINCIPAL UNDERWRITER....................... 27
OTHER SERVICE PROVIDERS..................... 27
BROKERAGE TRANSACTIONS...................... 28
GENERAL INFORMATION......................... 29
TAX CONSIDERATIONS.......................... 32
PERFORMANCE INFORMATION..................... 35
COMPARATIVE INDICES......................... 39
</TABLE>
<PAGE>
THE PORTFOLIO'S INVESTMENTS AND STRATEGY
The prospectus describes the investment objective, principal investment
strategy 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: Value Stock Investing
INVESTMENTS: ADRs, Agencies, Cash Equivalents, Commercial Paper, Common Stock,
Convertibles, Corporates, Depositary Receipts, Futures, Investment Companies,
Options, Preferred Stock, Repurchase Agreements, Reverse Repurchase Agreements,
Rights, Securities Lending, Short Sales, Swaps, U.S. Governments, Warrants,
When-Issued Securities, and Zero Coupons.
INVESTMENT STRATEGY
VALUE STOCK INVESTING: The Adviser invests primarily in common stocks that it
believes are undervalued relative to the stock market in general as measured by
an appropriate market index. The Adviser determines value using a variety of
measures, including price/earnings and price/book ratios. Value stocks generally
pay dividends, but the Adviser may select non-dividend paying stocks for their
value characteristics.
INVESTMENTS
ADRS: American Depositary Receipts ("ADRs") are dollar-denominated securities
which are listed and traded in the United States, but which represent claims to
shares of foreign stocks. They are treated as U.S. EQUITY SECURITIES for
purposes of the 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.
AGENCIES: Agencies are FIXED INCOME SECURITIES issued or guaranteed by federal
agencies and U.S. Government sponsored instrumentalities. They may or may not
be backed by the full faith and credit of the U.S. Government. If they are not
backed by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero
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coupon issues, while the U.S. Treasury is explicitly required to advance funds
sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association
("GNMA"), are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and Fannie Mae, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority of the U.S. Treasury
to purchase certain amounts of their securities to assist them in meeting their
debt obligations. Finally, other agencies and instrumentalities, such as the
Farm Credit System and the Freddie Mac, are federally chartered institutions
under Government supervision, but their debt securities are backed only by the
credit worthiness of those institutions, not the U.S. Government. Some of the
U.S. Government agencies that issue or guarantee securities include the Export-
Import Bank of the United States, Farmers Home Administration, Federal Housing
Administration, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized under
federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and Fannie Mae.
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. banks, the security is deemed by the
Adviser to be of an investment quality comparable with other debt securities
which the Portfolio may purchase.
(2) The Portfolio may invest in commercial paper rated at time of purchase by
one or more Nationally Recognized Statistical Rating Organizations ("NRSRO") in
one of their two highest categories, (e.g., A-l or A-2 by Standard & Poor's or
Prime 1 or Prime 2 by Moody's), or, if not
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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.
CORPORATES: Corporate bonds ("Corporates") are FIXED INCOME SECURITIES issued by
private corporations. Bondholders, as creditors, have a prior legal claim over
common and preferred stockholders of the corporation as to both income and
assets for the principal and interest due to the bondholder. The Portfolio may
buy corporates subject to any quality constraints. If the Portfolio holds a
security that is down-graded, the Portfolio may retain the security if the
Adviser deems retention of the security to be in the best interests of the
Portfolio.
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.
DERIVATIVES: Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives in which the Portfolio will invest include the following
instruments, each of which is described in this Statement of Additional
Information: FUTURES, OPTIONS and SWAPS.
The Portfolio may use derivatives for various purposes. The Portfolio will use
derivatives only in circumstances where they offer the most economic means of
improving its risk/reward profile. The Portfolio will not use derivatives to
increase its risk above the level that it could achieve using only traditional
investment securities. The Portfolio also will not use derivatives to acquire
exposure to changes in the value of assets or indexes of assets that it could
not acquire and hold directly. Any applicable limitations are described under
each investment definition. The Portfolio may enter into over-the-counter
Derivatives transactions with counterparties approved by the Adviser in
accordance with guidelines established by the Board of Trustees ("Board"). These
guidelines provide for a minimum credit rating for each counterparty and various
credit enhancement techniques (for example, collateralization of amounts due
from counterparties) to limit exposure to counterparties with ratings below AA.
When the Portfolio engages in certain types of derivatives transactions,
including certain forwards, futures, options and mortgage derivatives, it will
have to segregate cash and/or liquid securities to cover its obligations. At
certain levels, this can cause the Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. If the Portfolio is in that position, it could be forced to
sell other securities that it wanted to retain or to realize unintended gains or
losses.
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
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equity securities. Equity securities include the following types of instruments,
each of which is described in this Statement of Additional Information: ADRS,
COMMON STOCK, CONVERTIBLES, INVESTMENT COMPANIES, PREFERRED STOCK, RIGHTS and
WARRANTS.
FIXED INCOME SECURITIES: Fixed income securities generally represent an issuer's
obligation to repay money that it has borrowed together with interest on the
amount borrowed. Fixed income securities come in many varieties and may differ
in the way that interest is calculated, the amount and frequency of payments,
and the type of collateral, if any. Some fixed income securities may have other
novel features such as conversion rights. Fixed income securities include the
following types of instruments, each of which is described in this Statement of
Additional Information: AGENCIES, CASH EQUIVALENTS, CONVERTIBLES, CORPORATES,
PREFERRED STOCK, REPURCHASE AGREEMENTS, U.S. GOVERNMENTS, WHEN-ISSUED SECURITIES
and ZERO COUPONS.
Prices of fixed income securities fluctuate and, in particular, are subject to
credit risk and market risk. Credit risk is the possibility that an issuer may
be unable to meet scheduled interest and principal payments. Market risk is the
possibility that a change in interest rates or the market's perception of the
issuer's prospects may adversely affect the value of a fixed income security.
Economic, political and other events also may affect the prices of broad fixed-
income markets. The duration and maturity of a fixed income security also
affect its price volatility. Generally, securities with longer maturities or
durations will experience greater price volatility.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. Prepayments and
call provisions also will affect the maturity and value of some fixed income
securities. The occurrence of prepayments and calls generally increases in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, the Portfolio
may be forced to reinvest in lower yielding fixed income securities.
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
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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 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.
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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. 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
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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 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
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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 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
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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 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
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purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, if the
Portfolio writes options, it could lose amounts substantially in excess of its
initial investment, due to the margin and collateral requirements.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Furthermore, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the Portfolio to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
PREFERRED STOCK: Preferred stocks are non-voting ownership shares in a
corporation which pay a fixed or variable stream of dividends. Preferred stocks
have a preference over common stocks in the event of the liquidation of an
issuer. Preferred stocks have many of the characteristics of both EQUITY
SECURITIES and FIXED INCOME SECURITIES.
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'
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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 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
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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 rights may pass with the
loaned securities, but if a material event were to occur affecting an investment
on loan, the loan must be called and the securities voted.
SHORT SELLING: A short sale is a transaction in which the Portfolio sells
securities that it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. To deliver the securities to the buyer,
the Portfolio arranges through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement. When selling short, the
Portfolio intends to replace the securities at a lower price and therefore,
profit from the difference between the cost to replace the securities and the
proceeds received from the sale of the securities. When the Portfolio makes a
short sale, the proceeds it receives from the sale will be held on behalf of a
broker until the Portfolio replaces the borrowed securities. The Portfolio may
have to pay a premium to borrow the securities and must pay any dividends or
interest payable on the securities until they are replaced.
The Portfolio secures its obligation to replace the borrowed securities by
depositing collateral with the broker, consisting of cash or other liquid
securities. The Portfolio also must place in a segregated account with its
custodian cash or other liquid securities equal in value to the difference, if
any, between (i) the current market value of the securities sold short, and (ii)
any
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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 be devoted to short selling at any
given time.
SWAPS: The Portfolio may enter into swap contracts ("Swaps"). A swap is a
DERIVATIVE in the form of an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed-income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, the Portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the Portfolio may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon national amount.
The swaps in which the Portfolio may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Portfolio is
contractually obligated to make. If the other party to a swap defaults, the
Portfolio's risk of loss consists of the net amount of payments that the
Portfolio is contractually entitled to receive. Currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. If there is a default by
the Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors, and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts
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owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap
Counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities to avoid any potential leveraging of the
Portfolio. To the extent that these swaps, caps, floors, and collars are entered
into for hedging purposes, the Adviser believes such obligations do not
constitute "senior securities" under the 1940 Act and, accordingly, will not
treat them as being subject to the Portfolio's borrowing restrictions. The
Portfolio may enter into OTC Derivatives transactions (swaps, caps, floors,
puts, etc., but excluding foreign exchange contracts) with Counterparties that
are approved by the Adviser in accordance with guidelines established by the
Board. These guidelines provide for a minimum credit rating for each
Counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from Counterparties) to limit exposure to
Counterparties with ratings below AA.
RISKS: Interest rate and total rate of return Swaps do not involve the delivery
of securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps may involve the delivery of the entire principal value
of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap may be subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
U.S. GOVERNMENTS: The term "U.S. Government securities" ("U.S. Governments")
refers to a variety of FIXED INCOME SECURITIES issued or guaranteed by the U.S.
Government and various instrumentalities which have been established or
sponsored by the U.S. Government, on which the payment of principal and interest
is backed by the full faith and credit of the U.S. Government. For example,
U.S. Treasury securities are backed by the "full faith and credit" of the U.S.
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.
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WHEN-ISSUED SECURITIES: Certain FIXED INCOME SECURITIES are purchased on a
"when-issued" basis. This means that the securities are purchased at a certain
price, but may not be delivered for up to 90 days. No payment or delivery is
made until the Portfolio receives payment or delivery from the other party to
the transaction. Although the Portfolio receives no income from the above
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market price
of the securities at the time of delivery may be higher or lower than the
purchase price. The Portfolio will maintain with the custodian a segregated
account consisting of cash or liquid securities in an amount at least equal to
these commitments.
ZERO COUPONS: Zero coupon bonds are FIXED INCOME SECURITIES that do not make
regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by zero coupon bondholders each year. The Fund, which expects to
qualify as a regulated investment company, intends to pass along such interest
as a component of the Portfolio's distributions of net investment income.
Zero Coupons may offer investors the opportunity to earn higher yields than
those available on ordinary interest-paying obligations of similar credit
quality and maturity. However, zero coupon obligation prices may also exhibit
greater price volatility than ordinary fixed income securities because of the
manner in which their principal and interest are returned to the investor. Zero
Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities ("CATS"), Treasury Receipts
("TRS"), Separate Trading of Registered Interest and Principal of Securities
("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The Portfolio is subject to the following restrictions
which are fundamental policies and may not be changed without the approval of
the lesser of: (1) at least 67% of the voting securities of the Portfolio
present at a meeting if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the Portfolio.
As a matter of fundamental policy, the Portfolio will not 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;
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(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 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
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(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;
(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
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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 accounts
with their organization. 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
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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.
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
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
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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.
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
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<PAGE>
in this manner are valued at the most recent quoted bid price, or when stock
exchange valuations are used, at the latest quoted sale price on the day of
valuation. If there is no such reported sale, the latest quoted bid price will
be used. Securities purchased with remaining maturities of 60 days or less are
valued at amortized cost when the Board determines that amortized cost reflects
fair value. In the event that amortized cost does not approximate market, market
prices as determined above will be used.
MANAGEMENT OF THE FUND
TRUSTEES' RESPONSIBILITIES
The Trustees supervise the Trust's affairs under the laws governing business
trusts in the Commonwealth of Pennsylvania. The Trustees have approved
contracts under which certain companies provide essential management,
administrative and shareholder services to the Trust.
TRUSTEES AND OFFICERS
The Fund's officers, under the supervision of the Board of Trustees, manage the
day-to-day operations of the Fund. The Trustees set broad policies for the Fund
and choose its officers. The following is a list of the Trustees and officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years:
THOMAS L. BENNETT, * 10/4/47, Chairman of the Board of Trustees; Managing
Director, Morgan Stanley Dean Witter & Co.; Member of the Morgan Stanley Dean
Witter Investment 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; formerly Director, IKON Office Solutions, Inc., Fiserv, Digital Equipment
Corporation and Union Carbide Corporation.
JOSEPH P. HEALEY, 2/20/43, Trustee; Headmaster, Ethical Culture Fieldston
School; Trustee, Springside School; formerly Headmaster, Haverford School; Dean,
Hobart College; Associate Dean, William & Mary College.
JOSEPH J. KEARNS, 8/2/42, Trustee; investment consultant; Director, Electro Rent
Corporation; Trustee, Southern California Edison Nuclear Decommissioning Trust;
Director, The Ford Family Foundation; formerly CFO of The J. Paul Getty Trust.
VINCENT R. MCLEAN, 6/1/31, Trustee; Director, Legal and General America, Inc.;
Director, Banner Life Insurance Co.; Director, William Penn Life Insurance
Company of New York; formerly Executive Vice President, Chief Financial
Officer, Director and Member of the Executive Committee of Sperry Corporation
(now part of Unisys Corporation).
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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 & Co.;
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 & Co.; Head of Mutual Fund Services, Miller Anderson & Sherrerd,
LLP; President, MAS Fund Distribution, Inc.
JAMES A. GALLO, 6/18/64, Vice President and Treasurer, MAS Funds; Vice
President, Morgan Stanley Dean Witter & Co.; 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 & Co.; Fund Compliance Officer, Miller Anderson & Sherrerd, LLP;
formerly Fund Legal Administrator and then Counsel, Vice President and Assistant
Secretary, SEI Corporation.
JOHN H. GRADY, JR., 6/1/60, Assistant Secretary, MAS Funds; Partner, Morgan,
Lewis & Bockius LLP.
COMPENSATION OF TRUSTEES AND OFFICERS
The Fund pays each Trustee, who is not also an officer or interested person, a
fee for each Board Meeting attended plus travel and other expenses incurred in
attending such meetings. Trustees who are also officers or interested persons
receive no remuneration for their service as Trustees. The Fund's officers and
employees are paid by the Adviser or 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
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received from the Fund for the year. The Plan also permits the Eligible Trustee
to defer all, or a portion, of the fees received for attending meetings of the
Board throughout the year. Amounts deferred by each Eligible Trustee are
credited with a return equal to what those amounts would have received if they
had been invested in portfolios of the Fund selected by that Trustee. Any
deferred amounts will not be available to Eligible Trustees for a period of
three (3) or more years and distributions may not be deferred beyond the
Eligible Trustee's membership on the Board. Distributions to an Eligible Trustee
are either in the form of a lump sum or equal annual installments over a period
of five (5) years and commence within ninety (90) days after the last date
during the deferral period on which the Fund makes a valuation of the Eligible
Trustee's deferred compensation. The Fund intends that the Plan shall be
maintained at all times on an unfunded basis for federal income tax purposes
under the Internal Revenue Code of 1986. The rights of an Eligible Trustee and
the beneficiaries to the amounts held under the Plan are unsecured and such
amounts are subject to the claims of the creditors of the Fund. The Plan became
effective May 23, 1996. THERE WERE NO PAYMENTS UNDER THE PLAN DURING THE FISCAL
YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999.
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>
PENSION OR
AGGREGATE BENEFITS ACCRUED TOTAL
COMPENSATION AS PART OF FUND COMPENSATION
NAME OF TRUSTEE FROM THE FUND# EXPENSES FROM THE FUND
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
THOMAS L. -0- -0- -0-
BENNETT*
THOMAS P. GERRITY 70,000 -0- 70,000
JOSEPH P. HEALEY 70,000 -0- 70,000
JOSEPH J. KEARNS 70,000 -0- 70,000
C. OSCAR MORONG, 70,000 -0- 70,000
JR.
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.
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<PAGE>
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 March 31, 2000, Morgan
Stanley Dean Witter Investment Management had in excess of $177 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 1.00% 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 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 1.15% 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.
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<PAGE>
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.
PRINCIPAL UNDERWRITER
MAS Fund Distribution, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Adviser, with its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428, distributes the shares of the Fund. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. The Distribution Agreement continues
in effect so long as such continuance is approved at least annually by the
Fund's Board, including a majority of those Trustees who are not parties to such
Distribution Agreement nor interested persons of any such party. The
Distribution Agreement provides that the Fund will bear the costs of the
registration of its shares with the SEC and various states and the printing of
its prospectuses, statements of additional information and reports to
shareholders.
FUND ADMINISTRATION
MAS also serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Under its Administration Agreement
with the Fund, MAS receives an annual fee, accrued daily and payable monthly, of
0.08% of the Fund's average daily net assets, and is responsible for all fees
payable under any sub-administration agreements. Chase Global Funds Services
Company, 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. PricewaterhouseCoopers LLP, located at 160 Federal
Street, Boston, MA 02110, serves as independent accountants for the Fund and
audits the annual financial statements of the Portfolio.
FUND COUNSEL. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
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<PAGE>
LITIGATION
The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolio and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolio. In so doing,
the Adviser will consider all matters it deems relevant, including the
following: the Adviser's knowledge of negotiated commission rates and spreads
currently available; the nature of the security or instrument being traded; the
size and type of the transaction; the nature and character of the markets for
the security or instrument to be purchased or sold; the desired timing of the
transaction; the activity existing and expected in the market for the particular
security or instrument; confidentiality; the execution, clearance, and
settlement capabilities of the broker or dealer selected and other brokers or
dealers considered; the reputation and perceived soundness of the broker or
dealer selected and other brokers or dealers considered; the Adviser's knowledge
of any actual or apparent operational problems of a broker or dealer; and the
reasonableness of the commission or its equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, the Portfolio will not necessarily pay the lowest available commission
on brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be the case with other
transactions requiring more routine services. In addition, the Portfolio may pay
higher commission rates or markups than the lowest available when the Adviser
believes it is reasonable to do so in light of the value of the research,
statistical, pricing, and execution services provided by the broker or dealer
effecting the transaction. The Adviser does not attempt to put a specific dollar
value on the research services rendered or to allocate the relative costs or
benefits of those services among its clients, believing that the research it
receives will help the Adviser to fulfill its overall duty to its clients. The
Adviser uses research services obtained in this manner for the benefit of all of
its clients, though each particular research service may not be used to service
each client. As a result, the Fund may pay brokerage commissions or markups that
are used, in part, to purchase research services that are not used to benefit
the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place Portfolio orders with qualified broker-
dealers who recommend the Portfolio or who act as agents in the purchase of
shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients serviced by the Adviser. The Adviser may place a
combined order for two or more accounts or portfolios of the fund for the
purchase or sale of the same security if, in its judgment,
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<PAGE>
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 Fund was originally established as The MAS Pooled Trust Fund, a
Pennsylvania business trust, in February, 1984.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value, from an unlimited number of
series ("portfolios") of shares. Currently the Fund consists of twenty-nine
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
29
<PAGE>
shareholders in which the interests of the shareholders of that class differ
from the interests of holders of any other class.
Meetings of shareholders will not be held except as required by the 1940 Act and
other applicable law. A meeting will be held to vote on the removal of a Trustee
or Trustees of the Fund if requested in writing by the holders of not less than
10% of the outstanding shares of the Fund. The Fund will assist in shareholder
communication in such matters to the extent required by law.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such portfolio;
2) Subject to the majority vote of shares of any portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
portfolio and distribute such assets ratably among the shareholders of such
portfolio; and
3) Without the approval of the shareholders of any portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
portfolios into a single portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any portfolio as provided in paragraphs 1), 2), and 3) above, that
portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that portfolio.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all of 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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.
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Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. The Portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the Portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of the Portfolio
by a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than twelve
months and short-term if for twelve months or less. Generally, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term gains
are currently taxed at ordinary income tax rates. If shares on which a net
capital gain distribution has been received are subsequently sold or redeemed,
and such shares have been held for six months or less, any loss recognized will
be treated as long-term capital loss to the extent of the long-term capital gain
distributions.
FOREIGN INCOME TAXES: Investment income received by the Portfolio from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Portfolio to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolio's assets to be
invested within various countries is not known. The Portfolio intends to
operate so as to qualify for treaty-reduced rates of tax where applicable.
If at the end of the Portfolio's year, more than 50% of the Portfolio's assets
are represented by foreign securities, then the Portfolio may file an election
with the Internal Revenue Service to pass through to shareholders the amount of
foreign income taxes paid by the Portfolio. The Portfolio will make such an
election only if it is deemed to be in the best interests of its shareholders.
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,
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and, if so, the amount of each shareholder's pro rata share (by country) of (i)
the foreign taxes paid, and (ii) the Portfolio's gross income from foreign
sources. The notice from the Portfolio to shareholders will also include the
amount of foreign taxes paid by the Portfolio which are not allowable as a
foreign tax credit because the Portfolio did not hold the foreign securities for
more than 15 days during the 30-day period beginning on the date which is 15
days before the date on which the security becomes ex-dividend with respect to
the foreign source dividend or because, and to the extent that, the recipient of
the dividend is under an obligation to make related payments with respect to
positions in substantially similar or related property. Shareholders who are not
liable for federal income taxes, such as retirement plans qualified under
Section 401 of the Code, will not be affected by any such "pass-through" of
foreign tax credits.
STATE AND LOCAL INCOME TAXES: The Fund is not liable for any corporate income
or franchise tax in the Commonwealth of Pennsylvania. Shareholders should
consult their tax advisors for the state and local income tax consequences of
distributions from the Portfolio.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of the Portfolio. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods for computing performance follows.
TOTAL RETURN
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
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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.
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.
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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
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
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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 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.
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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.
RUSSELL 2000
------------
The Russell 2000 Index is a market capitalization weighted index of the 2,000
smallest of the 3,000 largest U.S. stocks, maintained by the Frank Russell
Company, rebalanced each year on June 30th. As of June 30, 1999, the market
capitalization range was $178 million to $1.35 billion. If a company in the
index is merged into another company, taken private, or goes bankrupt, that
company's stock is not replaced in the index until the next rebalancing.
Therefore, there can be fewer than 2000 stocks in the Russell 2000 Index. If a
stock's market capitalization increases above the high end or falls below the
low end of the market capitalization range, it remains in the Russell 2000 until
the next rebalancing. Thus, there can be "large" and "micro-cap" stocks in the
Russell 2000, especially in the months leading up to the next rebalancing.
RUSSELL 2000 VALUE
------------------
The Russell 2000 Value Index is a market capitalization weighted index of value
stocks within the 2,000 smallest of the 3,000 largest U.S. stocks, maintained by
the Frank Russell Company, rebalanced each year on June 30th. As of June 30,
1999, the market capitalization range was $178 million to $1.35 billion. Frank
Russell Company uses a proprietary methodology using price to book ratios and
long term growth estimates to determine which stocks should be classified as
"value" or "growth". If a company in the index is merged into another company,
taken private, or goes bankrupt, that company's stock is not replaced in the
index until the next rebalancing. If a stock's market capitalization increases
above the high end or falls below the low end of the market capitalization
range, it remains in the Russell 2000 Value until the next rebalancing. Thus,
there can be "large" and "micro-cap" stocks in the Russell 2000 Value,
especially in the months leading up to the next rebalancing.
39
