<PAGE>
MAS FUNDS
SUPPLEMENT DATED SEPTEMBER 21, 2000 TO THE MAS FUNDS' ADVISORY PORTFOLIOS
PROSPECTUS DATED JANUARY 31, 2000
This supplement provides new and additional information beyond that contained in
the Prospectus and should be read in conjunction with the Prospectus.
--------------------------------------------------------------------------------
CREDIT QUALITY LIMITATION CHANGE
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
The dialog box on page 2 of the Prospectus is hereby amended to replace the
credit quality information regarding the securities in which the Advisory
Foreign Fixed Income Portfolio may invest.
The statement is changed to the following:
100% of securities rated B or higher at time of purchase
Page 2 of the Prospectus is hereby amended to delete the first sentence
under the section entitled "Approach" and replace it with the following:
The Portfolio invests in fixed income securities of government and
corporate issuers primarily in countries other than the U.S., including both
investment grade securities and high yield securities rated B or higher
(commonly referred to as "junk bonds"). The Portfolio may invest to a limited
degree in issuers located in emerging markets.
Page 2 of the Prospectus is hereby amended to include the following as the
third paragraph under the section titled "Principal Risks:"
The Portfolio's investments in high yield securities expose it to a
substantial degree of credit risk. Prices of high yield securities will rise and
fall primarily in response to actual or perceived changes in the issuer's
financial health, although changes in market interest rates also will affect
prices. High yield securities may experience reduced liquidity and sudden and
substantial decreases in price.
PLEASE RETAIN FOR FUTURE REFERENCE
<PAGE>
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 31, 2000
(As Revised September 21, 2000)
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-nine
portfolios (each a "Portfolio" and collectively the "Portfolios") offering a
variety of investment alternatives. This Statement of Additional Information
(the "SAI") sets forth information about the Fund applicable to all twenty-nine
Portfolios.
This SAI is not a prospectus but should be read in conjunction with the Fund's
prospectuses dated January 31, 2000, each as revised from time to time. To
obtain any of these prospectuses, please call the Client Services Group.
The Fund's most recent annual report is a separate document supplied with this
SAI and includes the Fund's audited financial statements, which are incorporated
by reference into this SAI.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES 2
INVESTMENT STRATEGIES 7
INVESTMENTS 10
INVESTMENT LIMITATIONS 36
PURCHASE OF SHARES 38
REDEMPTION OF SHARES 38
TRANSACTIONS WITH BROKER/DEALERS 39
SHAREHOLDER SERVICES 39
VALUATION OF SHARES 40
MANAGEMENT OF THE FUND 41
INVESTMENT ADVISER 43
PRINCIPAL UNDERWRITER 47
DISTRIBUTION OF SHARES 47
FUND ADMINISTRATION 47
OTHER SERVICE PROVIDERS 49
LITIGATION 49
BROKERAGE TRANSACTIONS 49
GENERAL INFORMATION 53
TAX CONSIDERATIONS 55
PRINCIPAL HOLDERS OF SECURITIES 58
PERFORMANCE INFORMATION 70
COMPARATIVE INDICES 81
FINANCIAL STATEMENTS 86
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS 87
</TABLE>
<PAGE>
THE PORTFOLIOS' INVESTMENTS AND STRATEGIES'
The prospectus describes the investment objectives, principal investment
strategies and principal risks associated with each Portfolio. The Portfolios
may engage in a variety of investment strategies and invest in a variety of
securities and other instruments. The following tables summarize the permissible
strategies and investments for each Portfolio (abbreviations are explained
following each table). The tables exclude strategies and investments that
Portfolios may make solely for temporary defensive purposes. More details about
each strategy and investment are provided in the discussion following the
tables.
EQUITY AND BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Small Small
Balanced Mid Cap Mid Cap Multi- Cap Cap Value
Balanced Plus Equity Growth Growth Value Asset-Class Growth Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Strategies
-----------------------------------------------------------------------------------------------------------------------------------
Asset Allocation
Management X X X
-----------------------------------------------------------------------------------------------------------------------------------
Core Equity
Investing X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Investing X X
-----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and
Asset Allocation X X X
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Investing X X
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X
-----------------------------------------------------------------------------------------------------------------------------------
Growth Stock
Investing X X
-----------------------------------------------------------------------------------------------------------------------------------
High Yield
Investing X X X
-----------------------------------------------------------------------------------------------------------------------------------
International Equity
Investing X X X
-----------------------------------------------------------------------------------------------------------------------------------
Maturity and
Duration Management X X X
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X
-----------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X
-----------------------------------------------------------------------------------------------------------------------------------
Value Stock
Investing X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Investments
-----------------------------------------------------------------------------------------------------------------------------------
ADRs X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Asset-Backed
Securities X X X
-----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Small Small
Balanced Mid Cap Mid Cap Multi- Cap Cap Value
Balanced Plus Equity Growth Growth Value Asset-Class Growth Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
CMOs X X X
-----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Depositary Receipt X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Securities X X X
-----------------------------------------------------------------------------------------------------------------------------------
Floaters X X X
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed Income
Securities X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
High Yield
Securities X X X
-----------------------------------------------------------------------------------------------------------------------------------
Inverse Floaters X X X
-----------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Investment Funds X X X
-----------------------------------------------------------------------------------------------------------------------------------
Loan Participations
and Assignments X X X
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X
-----------------------------------------------------------------------------------------------------------------------------------
Municipals X X X
-----------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Rights X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
SMBS X X X
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Small Small
Balanced Mid Cap Mid Cap Multi- Cap Cap Value
Balanced Plus Equity Growth Growth Value Asset-Class Growth Value Value II
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Lending X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Structured
Investments X X
-----------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X
-----------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Warrants X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
When-Issued
Securities X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Yankees and
Eurobonds X X X
-----------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global
Cash Fixed Fixed Income Fixed High Intermediate International Limited Multi-Market
Reserves Income Income II Income Yield Duration Fixed Income Duration Fixed Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Strategies
----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Investing X X X X
----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and
Asset Allocation
----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Investing X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Special Advisory Advisory
NY Purpose Targeted Foreign Foreign Advisory
Municipal Municipal Fixed Income Duration Fixed Income Fixed Income Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets
Investing X X
----------------------------------------------------------------------------------------------------------------------------------
Fixed Income and
Asset Allocation X
----------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Investing X X X X
----------------------------------------------------------------------------------------------------------------------------------
Foreign Investing X X X X
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global
Cash Fixed Fixed Income Fixed High Intermediate International Limited Multi-Market
Reserves Income Income II Income Yield Duration Fixed Income Duration Fixed Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Investing X X X
------------------------------------------------------------------------------------------------------------------------------------
Maturity and
Duration Management X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Money Market
Investing X
------------------------------------------------------------------------------------------------------------------------------------
Municipals
Management
------------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investments
------------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Asset-Backed
Securities X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
CMOs X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
Securities X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Floaters X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Foreign Equity X
------------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Securities X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
High Yield
Securities X X X X X
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Special Advisory Advisory
NY Purpose Targeted Foreign Foreign Advisory
Municipal Municipal Fixed Income Duration Fixed Income Fixed Income Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Investing X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Maturity and
Duration Management X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Mortgage Investing X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Money Market
Investing
------------------------------------------------------------------------------------------------------------------------------------
Municipals
Management X X
------------------------------------------------------------------------------------------------------------------------------------
Value Investing X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investments
------------------------------------------------------------------------------------------------------------------------------------
Agencies X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Asset-Backed
Securities X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Cash Equivalents X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
CMOs X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Convertibles X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
Corporates X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets X X X X X
Securities
------------------------------------------------------------------------------------------------------------------------------------
Floaters X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Foreign Currency X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Foreign Equity
------------------------------------------------------------------------------------------------------------------------------------
Foreign Fixed
Income Securities X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Forwards X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Futures X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
High Yield
Securities X X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Global
Cash Fixed Fixed Income Fixed High Intermediate International Limited Multi-Market
Reserves Income Income II Income Yield Duration Fixed Income Duration Fixed Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inverse Floaters X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investment Funds
------------------------------------------------------------------------------------------------------------------------------------
Loan Participations
and Assignments X X X
------------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Municipals X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
NY Municipals
------------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Repurchase
Agreements X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Rights X X
------------------------------------------------------------------------------------------------------------------------------------
SMBS X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Securities Lending X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Structured
Investments X
------------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Warrants X X X
------------------------------------------------------------------------------------------------------------------------------------
When-Issued
Securities X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Yankees and
Eurobonds X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Special Advisory Advisory
NY Purpose Targeted Foreign Foreign Advisory
Municipal Municipal Fixed Income Duration Fixed Income Fixed Income Mortgage
Portfolio Portfolio Portfolio Portfolio Portfolio II Portfolio Portfolio
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inverse Floaters X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investment Companies X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Investment Funds
------------------------------------------------------------------------------------------------------------------------------------
Loan Participations
and Assignments X X
------------------------------------------------------------------------------------------------------------------------------------
Mortgage Securities X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Municipals X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
NY Municipals X
------------------------------------------------------------------------------------------------------------------------------------
Options X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Repurchase X X X X X X X
Agreements
------------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Rights
------------------------------------------------------------------------------------------------------------------------------------
SMBS X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Securities Lending X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Short Sales X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Structured
Investments X
------------------------------------------------------------------------------------------------------------------------------------
Structured Notes X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Swaps X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
U.S. Governments X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Warrants
------------------------------------------------------------------------------------------------------------------------------------
When-Issued
Securities X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Yankees and
Eurobonds X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
Zero Coupons X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
INVESTMENT STRATEGIES
Asset Allocation Management: The Adviser's approach to asset allocation
management is to determine investment strategies for each asset class in a
Portfolio separately, and then determine the mix of those strategies expected to
maximize the return potential within each market. Strategic judgments on the mix
among asset classes are based on valuation disciplines and tools for analysis
which have been developed over the Adviser's twenty-five year history of
managing balanced accounts.
Tactical asset-allocation shifts are based on comparisons of prospective risks,
potential returns, and the likely risk-reducing benefits derived from combining
different asset classes into a single portfolio. Experienced teams of equity,
fixed income, and international investment professionals manage the investments
in each asset class.
Core Equity Investing: The Adviser's "core" or primary equity strategy
emphasizes common stocks of large companies, with targeted investments in small
company stocks that promise special growth opportunities. Depending on the
Adviser's outlook for the economy and different market sectors, the mix between
value stocks and growth stocks will change.
Fixed Income Management and Asset Allocation: In selecting fixed income
securities for certain Portfolios, the Adviser considers the value offered by
various segments of the fixed income securities market relative to cash
equivalents and equity securities. The Adviser may find that certain segments of
the fixed income securities market offer more or less attractive relative value
when compared to equity securities or when compared to other fixed income
securities.
For example, in a given interest rate environment, equity securities may be
judged to be fairly valued when compared to intermediate duration fixed income
securities, but overvalued compared to long duration fixed income securities.
Consequently, while a Portfolio investing only in fixed income securities may
not emphasize long duration assets to the same extent, the fixed-income portion
of a balanced investment may invest a percentage of its assets in long duration
bonds on the basis of their valuation relative to equity securities.
Emerging Market Investing: The Adviser's approach to emerging market investing
is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this SAI, an emerging market describes any country which is generally
considered to be an emerging or developing country by the international
financial community, such as the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation. There are currently over 130 countries which are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. Emerging
markets may include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging markets is either not feasible or very
costly, or may involve unacceptable political risks. Other special risks include
the possible increased likelihood of expropriation or the return to power of a
communist regime which would institute policies to expropriate, nationalize or
otherwise confiscate investments. A Portfolio will focus its investments on
those emerging market countries in which the Adviser believes the potential for
market appreciation outweighs these risks and the cost of investment. Investing
in emerging markets also involves an extra degree of custodial and/or market
risk, especially where the securities purchased are not traded on an official
exchange or where ownership records regarding the securities are maintained by
an unregulated entity (or even the issuer itself).
Foreign Fixed Income Investing: The Adviser invests in foreign bonds and other
fixed income securities denominated in foreign currencies, where, in the opinion
of the Adviser, the combination of current yield and currency value offer
attractive expected returns. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable
7
<PAGE>
currency risk exists, currency futures and options, forwards and swaps may be
used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in foreign bonds
and foreign equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign bonds and foreign
equities may be less liquid and more volatile than securities of comparable U.S.
companies. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the U.S. With respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Because foreign bonds and foreign equities may be denominated in foreign
currencies, and because a Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, a Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Although a Portfolio will endeavor to achieve the most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising the Portfolio's
investments.
Growth Stock Investing: The Adviser focuses on common stocks that generally have
higher growth rates, betas, and price/earnings ratios, and lower yields than the
stock market in general as measured by an appropriate market index.
High Yield Investing: This strategy involves investments in high yield
securities based on the Adviser's analysis of economic and industry trends and
individual security characteristics. The Adviser conducts credit analysis for
each security considered for investment to evaluate its attractiveness relative
to its risk. A high level of diversification is also maintained to limit credit
exposure to individual issuers. See "High Yield Securities" below for further
discussion of these securities, including risks.
International Equity Investing: The Adviser's approach to international equity
investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S. equity
markets and individual securities.
The Adviser considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a Portfolio may also invest in regulated investment companies or
investment funds which invest in such countries to the extent allowed by
applicable law.
Maturity and Duration Management: One of two main components of the Adviser's
fixed income investment strategy is maturity and duration management. The
maturity and duration structure of a
8
<PAGE>
Portfolio investing in fixed income securities is actively managed in
anticipation of cyclical interest rate changes. Adjustments are not made in an
effort to capture short-term, day-to-day movements in the market, but instead
are implemented in anticipation of longer term shifts in the levels of interest
rates. Adjustments made to shorten portfolio maturity and duration are made to
limit capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for maturity and duration strategy lies in analysis of the U.S. and
global economies, focusing on levels of real interest rates, monetary and fiscal
policy actions, and cyclical indicators. See "value investing" for a description
of the second main component of the Adviser's fixed income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations also
have call provisions. Depending on the relative magnitude of these payments and
the nature of the call provisions, the market values of debt obligations may
respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed income securities. Duration is a
measure of the expected life of a fixed income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a fixed
income security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter
the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities generally is thirty years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
Money Market Investing: The Cash Reserves Portfolio invests in securities which
present minimal credit risk and may not yield as high a level of current income
as securities of lower quality or longer maturities which generally have less
liquidity, greater market risk and more price fluctuation. The Cash Reserves
Portfolio is designed to provide maximum stability of principal. However,
because the Cash Reserves Portfolio invests in the money market obligations of
private financial and non-financial corporations in addition to those of the
U.S. Government or its agencies and instrumentalities, it offers higher credit
risk and yield potential relative to money market funds which invest exclusively
in U.S. Government securities. The Cash Reserves Portfolio seeks to maintain,
but does not guarantee, a constant net asset value of $1.00 per share.
A-1 and Prime-1 Commercial Paper Ratings: Commercial paper rated A-1 by Standard
& Poor's Corporation ("Standard & Poor's") has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the
9
<PAGE>
issuer has a strong position within the industry; and (6) the reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is A-1, A-2, or A-
3. The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and the
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships that exist with the issuer; and (8) recognition by
the management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Mortgage Investing: As described in the prospectus, certain Portfolios may
invest greater than 50% of their assets, and other Portfolios also may invest,
in mortgage-related securities. These include mortgage securities representing
interests in pools of mortgage loans made by lenders such as commercial banks,
savings and loan associations, mortgage bankers and others. The pools are
assembled by various organizations, including the Government National Mortgage
Association ("GNMA"), Freddie Mac, Fannie Mae, other government agencies, and
private issuers. It is expected that a Portfolio's primary emphasis will be in
mortgage securities issued by the various government-related organizations.
However, a Portfolio may invest, without limit, in mortgage securities issued by
private issuers when the Adviser deems that the quality of the investment, the
quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or Standard & Poor's or be deemed by the Adviser to be of comparable investment
quality.
Municipals Management: Municipals management emphasizes a diversified portfolio
of high grade municipal debt securities. These securities generally provide
interest income that is exempt from federal regular income tax. However, the
interest on certain types of municipal securities may be subject to the
alternative minimum tax.
The Adviser manages the Fund's municipal Portfolios with the goal of maximizing
their total return. This means that they may invest in taxable investments when
the prospective after-tax total return on such investments is attractive,
regardless of the taxable nature of income on the security. Municipal
Portfolios also may invest in taxable investments such as U.S. Governments,
agencies, corporates, cash equivalents, preferred stocks, mortgage securities,
asset-backed securities, floaters, and inverse floaters.
Value Investing: One of two primary components of the Adviser's fixed income
strategy is value investing. The Adviser seeks to identify undervalued sectors
and securities through analysis of credit quality, option characteristics and
liquidity. Quantitative models are used in conjunction with judgment and
experience to evaluate and select securities with embedded put or call options
which are attractive on a risk- and option-adjusted basis. Successful value
investing will permit a Portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged.
Value Stock Investing: The Adviser emphasizes common stocks that it believes are
undervalued relative to the stock market in general as measured by an
appropriate market index. The Adviser determines value using a variety of
measures, including price/earnings and price/book ratios. Value stocks generally
pay dividends, but the Adviser may select non-dividend paying stocks for their
value characteristics.
INVESTMENTS
ADRs: American Depositary Receipts ("ADRs") are dollar-denominated securities
which are listed and traded in the United States, but which represent claims to
shares of foreign stocks. They are treated as U.S. Equity Securities for
purposes of the Portfolios' investment policies. ADRs may be either sponsored
or unsponsored. Unsponsored ADR facilities typically provide less information to
ADR holders. ADRs also include American Depositary Shares.
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Agencies: Agencies are Fixed Income Securities issued or guaranteed by federal
agencies and U.S. Government sponsored instrumentalities. They may or may not
be backed by the full faith and credit of the U.S. Government. If they are not
backed by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the GNMA, are, in effect, backed by the full faith
and credit of the United States through provisions in their charters that they
may make "indefinite and unlimited" drawings on the Treasury, if needed to
service its debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Fannie Mae, are not guaranteed by the
United States, but those institutions are protected by the discretionary
authority of the U.S. Treasury to purchase certain amounts of their securities
to assist them in meeting their debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and 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.
Asset-Backed Securities: Asset-backed securities are securities secured by non-
mortgage assets such as company receivables, truck and auto loans, leases and
credit card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities also may be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt. Credit support for asset-
backed securities may be based on the underlying assets and/or provided by a
third party through credit enhancements. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees (which are generally
provided by the issuer), senior-subordinated structures and over-
collateralization.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts for a certain period by a letter of credit issued by a financial
institution (such as a bank or insurance company) unaffiliated with the issuers
of such securities. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, there is a risk that another party could acquire an
interest in the obligations superior to that of the holders of the asset-backed
securities. There also is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on those
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with the mortgage-backed securities. In addition, credit card
receivables are unsecured obligations of the card holders.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
Brady Bonds: Brady Bonds are both Emerging Market Securities and Foreign Fixed
Income Securities. They are created by exchanging existing commercial bank
loans to foreign entities for new
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obligations for the purpose of restructuring the issuers' debts under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
Brady Plan). Brady Bonds have been issued fairly recently, and, accordingly, do
not have a long payment history. They may be collateralized or uncollateralized
and issued in various currencies (although most are dollar-denominated). They
are actively traded in the over-the-counter secondary market. Portfolios will
only invest in Brady Bonds consistent with quality specifications.
Dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds or
floating rate discount bonds. These Brady Bonds are generally collateralized in
full as to principal due at maturity by U.S. Treasury Zero Coupon Obligations
having the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury Zero Coupon
Obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments due on the Brady Bonds in the normal course. In light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds generally are viewed
as speculative.
Cash Equivalents: Cash equivalents are short-term Fixed Income Securities
comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank or
savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
Each Portfolio may invest in obligations of U.S. banks, and, except for the
Domestic Fixed Income Portfolio, in foreign branches of U.S. banks (Eurodollars)
and U.S. branches of foreign banks (Yankee dollars). Euro and Yankee dollar
investments will involve some of the same risks of investing in international
securities that are discussed in the foreign investing section of this SAI.
The Portfolios will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
the Adviser to be of an investment quality comparable with other debt securities
which the Portfolio may purchase.
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(2) Each Portfolio (except the Cash Reserves Portfolio) may invest in commercial
paper rated at time of purchase by one or more Nationally Recognized Statistical
Rating Organizations ("NRSRO") in one of their two highest categories, (e.g., A-
l or A-2 by Standard & Poor's or Prime 1 or Prime 2 by Moody's), or, if not
rated, issued by a corporation having an outstanding unsecured debt issue rated
high-grade by a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch
IBCA ("Fitch")). The Cash Reserves Portfolio invests only in commercial paper
rated in the highest category;
(3) Short-term corporate obligations rated high-grade at the time of purchase by
a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) repurchase agreements collateralized by securities listed above; and
(7) The Cash Reserves Portfolio's investments in Cash Equivalents are limited by
the quality, maturity and diversification requirements adopted under Rule 2a-7
of the Investment Company Act of 1940 ("1940 Act").
Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They are primarily issued by corporations needing to
finance large amounts of receivables, but may be issued by banks and other
borrowers. Commercial paper is issued either directly or through broker-dealers,
and may be discounted or interest-bearing. Commercial paper is unsecured, but is
almost always backed by bank lines of credit. Virtually all commercial paper is
rated by Moody's or Standard & Poor's.
CMOs: Collateralized mortgage obligations ("CMOs") are Derivatives structured as
debt obligations or multiclass pass-through certificates. CMOs are issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated for federal income tax purposes as a Real
Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after
1991 must elect to be treated as a REMIC or it will be taxable as a corporation
under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of predictability
than do the underlying Mortgage Assets. As a general matter, the more
predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield on that tranche at the time of issue will be relative to
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prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on other mortgage related securities with
similar average lives. Principal prepayments on the underlying Mortgage Assets
may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Because of the uncertainty of
the cash flows on these tranches, the market prices and yields of these tranches
are more volatile. In addition, some inverse floating rate obligation CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield
to maturity of these CMOs is sensitive not only to changes in interest rates,
but also to changes in prepayment rates on the related underlying Mortgage
Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
The magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risk of prepayment than are other types of
mortgage related securities.
Possible Risks: Due to the possibility that prepayments (on home mortgages and
other collateral) will alter the cash flow on CMOs, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement could
be and to calculate the effect that it will have on the price of the security.
In selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Like bonds in general, mortgage securities will generally decline in price when
interest rates rise. Rising interest rates also tend to discourage refinancings
of home mortgages with the result that the average life of mortgage securities
that a Portfolio holds may be lengthened. This extension of average life causes
the market price of the securities to decrease further than if their average
lives were fixed. In part to compensate for these risks, mortgages will
generally offer higher yields than comparable bonds. However, when interest
rates fall, mortgages may not enjoy as large a gain in market value due to
prepayment risk because additional mortgage prepayments must be reinvested at
lower interest rates.
Common Stock: Common stocks are Equity Securities representing an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
Convertibles: Convertibles may be considered either Equity Securities or Fixed
Income Securities. They are commonly corporates or preferred stocks which may
be exchanged for a fixed number of shares of common stock at the purchaser's
option. Convertibles may be viewed as an investment in the convertible security
or the security into which it may be exchanged. Therefore, the Fund's equity,
fixed income and balanced Portfolios may all purchase convertibles.
Corporates: Corporate bonds ("Corporates") are Fixed Income Securities issued by
private corporations. Bondholders, as creditors, have a prior legal claim over
common and preferred stockholders of the corporation as to both income and
assets for the principal and interest due to the bondholder. A Portfolio will
buy corporates subject to any quality constraints. If a Portfolio holds a
security that is down-graded, the Portfolio may retain the security if the
Adviser deems retention of the security to be in the best interests of the
Portfolio.
Depositary Receipts: Depositary receipts are Foreign Equity Securities,
including Global Depositary Receipts ("GDRs") and European Depositary Receipts
("EDRs"), and other similar types of depositary shares. Depositary receipts are
securities that can be traded in U.S. or foreign securities markets but which
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represent ownership interests in a security or pool of securities by a foreign
or U.S. corporation. Depositary receipts may be sponsored or unsponsored. The
depositary of unsponsored depositary receipts may provide less information to
receipt holders.
Holders of unsponsored GDRs and EDRs generally bear all the costs associated
with establishing the unsponsored GDRs and EDRs. The depositary of unsponsored
GDRs and EDRs is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored GDRs and EDRs voting rights with respect to the deposited securities
or pool of securities. GDRs and EDRs are not necessarily denominated in the
same currency as the underlying securities to which they may be connected.
Generally, GDRs or EDRs in registered form are designed for use in the U.S.
securities market and GDRs or EDRs in bearer form are designed for use in
securities markets outside the United States. Portfolios may invest in
sponsored and unsponsored GDRs and EDRs. For purposes of the Fund's investment
policies, a Portfolio's investments in GDRs or EDRs will be deemed to be
investments in the underlying securities.
Derivatives: Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. Derivatives include the following instruments, each of which is
described in this Statement of Additional Information: CMOs, Forwards, Futures,
Options, SMBS, Structured Investments, Structured Notes, and Swaps.
Each Portfolio (except the Cash Reserves Portfolio) may use derivatives for
various purposes. A Portfolio will use derivatives only in circumstances where
they offer the most economic means of improving its risk/reward profile. A
Portfolio will not use derivatives to increase its risk above the level that it
could achieve using only traditional investment securities. A Portfolio also
will not use derivatives to acquire exposure to changes in the value of assets
or indexes of assets that it could not acquire and hold directly. Any applicable
limitations are described under each investment definition. The Portfolios may
enter into over-the-counter Derivatives transactions with counterparties
approved by the Adviser in accordance with guidelines established by the Board
of Trustees ("Board"). These guidelines provide for a minimum credit rating for
each counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA. Derivatives include, but are not limited
to, CMOs, forwards, futures, options, SMBS, structured investments, structured
notes and swaps.
When a Portfolio engages in certain types of derivatives transactions, including
certain forwards, futures, options and mortgage derivatives, it will have to
segregate cash and/or liquid securities to cover its obligations. At certain
levels, this can cause a Portfolio to lose flexibility in managing its
investments properly, responding to shareholder redemption requests, or meeting
other obligations. A Portfolio in that position could be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
Emerging Market Securities: Emerging market securities are Foreign Equity
Securities or Foreign Fixed Income Securities issued by a company that has one
or more of the following characteristics: (i) its principal securities trading
market is in an emerging market, (ii) alone or on a consolidated basis it
derives 50% or more of its annual revenue from either goods produced, sales made
or services performed in emerging markets, or (iii) it is organized under the
laws of, and has a principal office in, an emerging market country. The Adviser
will base determinations as to eligibility on publicly available information and
inquiries made to the companies.
Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud. With
respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value of
a
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Portfolio's investments in those countries. It may be difficult to obtain and
enforce a judgment in a court outside the United States. Portfolios that invest
in emerging markets may also be exposed to an extra degree of custodial and/or
market risk, especially where the securities purchased are not traded on an
official exchange or where ownership records regarding the securities are
maintained by an unregulated entity (or even the issuer itself).
Equity Securities: Equity securities generally represent an ownership interest
in an issuer, or may be convertible into or represent a right to acquire an
ownership interest in an issuer. While there are many types of equity
securities, prices of all equity securities will fluctuate. Economic, political
and other events may affect the prices of broad equity markets. For example,
changes in inflation or consumer demand may affect the prices of equity
securities generally in the United States. Similar events also may affect the
prices of particular equity securities. For example, news about the success or
failure of a new product may affect the price of a particular issuer's equity
securities. Equity securities include the following types of instruments, each
of which is described in this Statement of Additional Information: ADRs, Common
Stock, Convertibles, Investment Companies, Preferred Stock, Rights and Warrants.
Fixed Income Securities: Fixed income securities generally represent an issuer's
obligation to repay money that it has borrowed together with interest on the
amount borrowed. Fixed income securities come in many varieties and may differ
in the way that interest is calculated, the amount and frequency of payments,
and the type of collateral, if any. Some fixed income securities may have other
novel features such as conversion rights. Fixed income securities include the
following types of instruments, each of which is described in this Statement of
Additional Information: Agencies, Asset-Backed Securities, Cash Equivalents,
Convertibles, Corporates, Floaters, High Yield Securities, Inverse Floaters,
Loan Participations and Assignments, Mortgage Securities, Municipals, NY
Municipals, Preferred Stock, Repurchase Agreements, U.S. Governments, When-
Issued Securities, Yankee and Eurodollar Obligations and Zero Coupons.
Prices of fixed income securities fluctuate and, in particular, are subject to
credit risk and market risk. Credit risk is the possibility that an issuer may
be unable to meet scheduled interest and principal payments. Market risk is the
possibility that a change in interest rates or the market's perception of the
issuer's prospects may adversely affect the value of a fixed income security.
Economic, political and other events also may affect the prices of broad fixed-
income markets. The duration and maturity of a fixed income security also
affect its price volatility. These concepts are described above in Maturity and
Duration Management. Generally, securities with longer maturities or durations
will experience greater price volatility.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. Prepayments and
call provisions also will affect the maturity and value of some fixed income
securities. The occurrence of prepayments and calls generally increases in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, a Portfolio may
be forced to reinvest in lower yielding fixed income securities.
Floaters: Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e., the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
floating or variable rate obligations may carry a demand feature that permits
the holder to tender them back to the issuer of the underlying instrument, or to
a third party, at par value prior to maturity. When the demand feature of
certain floating or variable rate obligations represents an obligation of a
foreign entity, the demand feature will be subject to certain risks discussed
under foreign investing.
Foreign currency: Portfolios investing in Foreign Securities will regularly
transact security purchases and sales in foreign currencies. These Portfolios
may hold foreign currency or purchase or sell currencies on a forward basis.
See Forwards, below.
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Foreign currency warrants. Portfolios may invest in foreign currency warrants,
-------------------------
which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S. dollar-
denominated debt offerings by major corporate issuers in an attempt to reduce
the foreign currency exchange risk which, from the point of view of prospective
purchasers of the securities, is inherent in the international fixed income
marketplace. Foreign currency warrants may attempt to reduce the foreign
exchange risk assumed by purchasers of a security by, for example, providing for
a supplemental payment in the event that the U.S. dollar depreciates against the
value of a major foreign currency such as the Japanese Yen or the Euro. The
formula used to determine the amount payable upon exercise of a foreign currency
warrant may make the warrant worthless unless the applicable foreign currency
exchange rate moves in a particular direction (e.g., unless the U.S. dollar
appreciates or depreciates against the particular foreign currency to which the
warrant is linked or indexed). Foreign currency warrants are severable from the
debt obligations with which they may be offered, and may be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to
purchase additional warrants, thereby incurring additional transaction costs. In
the case of any exercise of warrants, there may be a time delay between the time
a holder of warrants gives instructions to exercise and the time the exchange
rate relating to exercise is determined, during which time the exchange rate
could change significantly, thereby affecting both the market and cash
settlement values of the warrants being exercised. The expiration date of the
warrants may be accelerated if the warrants should be delisted from an exchange
or if their trading should be suspended permanently, which would result in the
loss of any remaining "time value" of the warrants (i.e., the difference between
the current market value and the exercise value of the warrants), and, in the
case where the warrants were "out-of-the-money," in a total loss of the purchase
price of the warrants.
Foreign currency warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate linked
-----------------------------------------
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
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Performance indexed paper. Performance indexed paper is U.S. dollar-denominated
-------------------------
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
Foreign Equity Securities: Foreign equity securities are Equity Securities of
foreign issuers denominated in foreign currency and traded primarily in non-U.S.
markets, including depositary receipts. See also Foreign Securities, below.
Foreign Fixed Income Securities: Foreign fixed income securities are Fixed
Income Securities denominated in foreign currency and issued and traded
primarily outside of the U.S., including: (1) obligations issued or guaranteed
by foreign national governments, their agencies, instrumentalities, or political
subdivisions; (2) debt securities issued, guaranteed or sponsored by
supranational organizations established or supported by several national
governments, including the World Bank, the European Community, the Asian
Development Bank and others; (3) non-government foreign corporate debt
securities; and (4) foreign mortgage securities and various other mortgages and
asset-backed securities. See also Foreign Securities, below.
Foreign Securities: Foreign Securities include Brady Bonds, Depositary Receipts,
Emerging Market Securities, Foreign Currency, Foreign Equity Securities, Foreign
Fixed Income Securities, and Investment Funds. Investing in foreign securities
involves certain special risks not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios will
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies. Certain Portfolios may enter into forward foreign
currency exchange contracts to hedge their respective holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to domestic issuers, there may be less publicly available information about
certain foreign securities than about domestic securities. Securities of some
foreign issuers are generally less liquid and more volatile than securities of
comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers and listed issuers than in the United
States. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries.
Although the Portfolios will endeavor to achieve most favorable execution costs
in their Portfolio transactions, fixed commissions on many foreign exchanges are
generally higher than negotiated commissions on U.S. exchanges. In addition, it
is expected that the expenses for custodian arrangements of the Portfolio's
foreign securities will be somewhat greater than the expenses for the custodian
arrangements for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and interest
income. Although in some countries a portion of these taxes is recoverable, the
non-recovered portion of foreign withholding taxes will reduce the income
received from investments in such countries. However, these foreign withholding
taxes are not expected to have a significant impact on those Portfolios for
which the investment objective is to seek long-term capital appreciation and any
income should be considered incidental.
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European Currency Transition. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan means that financial
transactions and market information, including share quotations and company
accounts, in participating countries are now denominated in Euros. Monetary
policy for participating countries is uniformly managed by a new central bank,
the European Central Bank.
The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets worldwide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the Euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets worldwide.
Forwards: Forward Foreign Currency Exchange Contracts ("Forwards") are
Derivatives which are used to protect against uncertainty in the level of future
foreign exchange rates. A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Such contracts do not
eliminate fluctuations caused by changes in the local currency prices of the
securities, but rather, they establish an exchange rate at a future date. Also,
although such contracts can minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they limit any potential gain
that might be realized.
A Portfolio may use currency exchange contracts in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies (transaction hedge) or to lock in the U.S.
dollar value of portfolio positions (position hedge). In addition, the
Portfolios may cross hedge currencies by entering into a transaction to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which a Portfolio has or expects to have portfolio exposure.
Portfolios may also engage in proxy hedging which is defined as entering into
positions in one currency to hedge investments denominated in another currency,
where the two currencies are economically linked. A Portfolio's entry into
forward contracts, as well as any use of cross or proxy hedging techniques will
generally require the Portfolio to hold liquid securities or cash equal to the
Portfolio's obligations in a segregated account throughout the duration of the
contract.
A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the foreign currency value of the security and adopt a synthetic
investment position reflecting the credit quality of the U.S. dollar-denominated
security.
Risks. Forward contracts are not traded on contract markets regulated by the
Securities and Exchange Commission ("SEC") or the Commodity Futures Trading
Commission ("CFTC"). They are traded through financial institutions acting as
market-makers. Portfolios that trade forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with them.
Forward contracts may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio's ability to act upon economic
events occurring in foreign markets during non business hours in
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the United States, (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (v)
lesser trading volume.
Currency hedging strategies involve certain other risks as well. There is a
risk in adopting a transaction hedge or position hedge to the extent that the
value of a security denominated in foreign currency is not exactly matched with
a Portfolio's obligation under the forward contract. On the date of maturity, a
Portfolio may be exposed to some risk of loss from fluctuations in that
currency. Although the Adviser will attempt to hold such mismatching to a
minimum, there can be no assurance that the Adviser will be able to do so. For
proxy hedges, cross hedges or a synthetic position, there is an additional risk
in that these transactions create residual foreign currency exposure. When a
Portfolio enters into a forward contract for purposes of creating a position
hedge, transaction hedge, cross hedge or a synthetic security, it will generally
be required to hold liquid securities or cash in a segregated account with a
daily value at least equal to its obligation under the forward contract.
Futures: Futures contracts and options on futures contracts ("Futures") are
Derivatives. Each Portfolio, except the Cash Reserves Portfolio, may invest in
Futures. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the CFTC.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. A Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's custodian or with a futures
commission merchant as approved by the Board.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
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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, a Portfolio would continue to
be required to make daily cash payments to maintain its required margin. In such
situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Portfolio may be required to make
delivery of the instruments underlying interest rate futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to effectively hedge. A Portfolio will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. A Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
A Portfolio's use of futures involves the risk of imperfect or no correlation
where the securities underlying futures contracts have different maturities than
the Portfolio securities being hedged. It is also possible that a Portfolio
could both lose money on futures contracts and also experience a decline in
value of its portfolio securities. There is also the risk that a Portfolio could
lose margin deposits in the event of bankruptcy of a broker with whom the
Portfolio has an open position in a futures contract or related option. Most
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
High Yield Securities: High yield securities are Fixed Income Securities,
generally corporates, preferred stocks, and convertibles, rated Ba through C by
Moody's or BB through D by Standard & Poor's, and unrated fixed income
securities considered to be of equivalent quality. Securities rated less than
Baa by Moody's or BBB by Standard & Poor's are classified as non-investment
grade securities and are commonly referred to as junk bonds or high yield, high
risk securities. Such securities carry a high degree of risk and are considered
speculative by the major credit rating agencies. See the Appendix for more
information about fixed income security ratings. Investment grade securities
that Portfolios hold may be downgraded to below investment grade by the rating
agencies. If a Portfolio holds a security that is downgraded, the Portfolio may
choose to retain the security.
While fixed income securities rated below investment grade offer high yields,
they also normally carry with them a greater degree of risk than securities with
higher ratings. Lower-rated bonds are considered speculative by traditional
investment standards. High yield securities may be issued as a consequence of
corporate restructuring or similar events. Also, high yield securities are often
issued by smaller, less credit worthy companies, or by highly leveraged
(indebted) firms, which are generally less able than more established or less
leveraged firms to make scheduled payments of interest and principal. High
yield securities issued under these circumstances pose substantial risks. The
price movement of high yield
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securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
investment grade bonds. Compared with investment grade securities, the values of
high yield securities tend to be more volatile and may react with greater
sensitivity to changes in interest rates.
The High Yield market is subject to credit risk. Default rates and recoveries
fluctuate, driven by numerous factors including the general economy. From 1970-
1999, Moody's estimates an average annual default rate for speculative-grade
issuers of 3.45%. In addition, the secondary market for high yield securities
is generally less liquid than that for investment grade corporate securities. In
periods of reduced market liquidity, high yield bond prices may become more
volatile, and both the high yield market and a Portfolio may experience sudden
and substantial price declines.
A lower level of liquidity might have an effect on a Portfolio's ability to
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for high yield securities by various dealers. Under such
conditions, a Portfolio may find it difficult to value its securities
accurately. A Portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in high yield securities.
High yield bonds may also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors.
Certain types of high yield bonds are non-income paying securities. For example,
zero coupons pay interest only at maturity and payment-in-kind bonds pay
interest in the form of additional securities. Payment in the form of additional
securities, or interest income recognized through discount accretion, will,
however, be treated as ordinary income which will be distributed to shareholders
even though the Portfolio does not receive periodic cash flow from these
investments.
Inverse Floaters: Inverse floating rate obligations ("inverse floaters") are
Fixed Income Securities which have coupon rates that vary inversely to another
specified floating rate, such as LIBOR (London Inter-Bank Offered Rate). If the
specified reference rate rises, the coupon rate of the inverse floater falls,
while a decrease in the reference rate causes an increase in the inverse
floater's coupon rate. Inverse floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality, redemption
provisions and maturity. Inverse floater CMOs exhibit greater price volatility
than the majority of mortgage pass-through securities or CMOs. Some inverse
floater CMOs are extremely sensitive to changes in prepayments. As a result, the
yield to maturity of an inverse floater CMO is sensitive not only to changes in
interest rates but also to changes in prepayment rates on the related underlying
mortgage assets.
Investment Companies: Investment companies are Equity Securities and include
open-end or closed-end investment companies. The 1940 Act generally prohibits
the Portfolios from acquiring more than 3% of the outstanding voting shares of
an investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any one investment company and no more than 10% in
any combination of investment companies. The 1940 Act also prohibits the
Portfolios from acquiring in the aggregate more than 10% of the outstanding
voting shares of any registered closed-end investment company.
To the extent a Portfolio invests a portion of its assets in investment
companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the Portfolio itself. The Portfolios may
not purchase shares of any affiliated investment company except as permitted by
SEC rule or order.
Investment Funds: Investment funds are Emerging Market Securities. Some
emerging market countries have laws and regulations that currently preclude or
limit direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging market
countries through investment funds. Portfolios that may invest in these
Investment Funds are subject to applicable law as discussed under
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Investment Restrictions and will invest in such Investment Funds only where
appropriate given that the Portfolio's shareholders will bear indirectly the
layer of expenses of the underlying investment funds in addition to their
proportionate share of the expenses of the Portfolio. Under certain
circumstances, an investment in an investment fund will be subject to the
additional limitations that apply to investments in investment companies.
Investment Grade Securities: Investment grade securities are Fixed Income
Securities that are (a) rated by one or more NRSROs in one of the four highest
rating categories at the time of purchase (e.g., AAA, AA, A or BBB by Standard &
Poor's or Fitch or Aaa, Aa, A or Baa by Moody's); (b) guaranteed by the U.S.
Government or a private organization; or (c) considered by the Adviser to be
investment grade quality. Securities rated BBB or Baa represent the lowest of
four levels of Investment Grade Securities and are regarded as borderline
between definitely sound obligations and those in which the speculative element
begins to predominate. Securities rated A or higher are considered to be "high
grade." Any Portfolio is permitted to hold Investment Grade Securities or "high
grade" securities, and may hold unrated securities if the Adviser considers the
risks involved in owning that security to be equivalent to the risks involved in
holding an Investment Grade Security or "high grade" security, respectively.
The Adviser may retain securities if their ratings fall below investment grade
if it deems retention of the security to be in the best interests of the
Portfolio.
Mortgage securities, including mortgage pass-throughs and CMOs, deemed
investment grade by the Adviser, will either carry a guarantee from an agency of
the U.S. Government or a private issuer of the timely payment of principal and
interest (such guarantees do not extend to the market value of such securities
or the net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned that they are considered by the Adviser to
be investment grade quality.
Loan Participations and Assignments: Loan participations and assignments are
Fixed Income Securities. A Portfolio may invest in fixed rate and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders"). A
Portfolio's investments in Loans are expected in most instances to be in the
form of participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In the case of a
Participation, a Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. If a Lender selling a Participation becomes insolvent, a Portfolio may
be treated as a general creditor of the Lender and may not benefit from any set-
off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation. Even
under such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. A Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. The
lack of a liquid secondary market for Assignments and Participations also may
make it more difficult for the Portfolio to assign a value to those securities
for purposes of valuing the Portfolio's holdings and calculating its net asset
value.
Participations and Assignments involve a risk of loss in case of default or
insolvency of the borrower. In addition, they may offer less legal protection to
a Portfolio in the event of fraud or misrepresentation and may involve a risk of
insolvency of the Lender. Certain Participations and Assignments may also
include
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standby financing commitments that obligate the investing Portfolio to supply
additional cash to the borrower on demand. Participations involving emerging
market country issuers may relate to Loans as to which there has been or
currently exists an event of default or other failure to make payment when due,
and may represent amounts owed to Lenders that are themselves subject to
political and economic risks, including the risk of currency devaluation,
expropriation, or failure. Those Participations and Assignments present
additional risk of default or loss.
Mortgage Securities: Mortgage-backed securities ("Mortgage Securities") are
Fixed Income Securities representing an ownership interest in a pool of
residential and commercial mortgage loans. Generally, these securities are
designed to provide monthly payments of interest and principal to the investor.
The mortgagee's monthly payments to his/her lending institution are passed
through to investors such as the Portfolio. Most issuers or poolers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
Portfolios may invest in securities issued or guaranteed by GNMA, FHLMC, Fannie
Mae, private issuers and other government agencies. There can be no assurance
that the private insurers can meet their obligations under the policies.
Mortgage securities issued by non-agency issuers, whether or not such securities
are subject to guarantees, may entail greater risk. If a Portfolio purchases a
mortgage security that does not have an issuer-provided guarantee, the security
will be rated investment grade at the time of purchase by one or more NRSROs,
or, if unrated, deemed by the Adviser to be of equivalent quality.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. The bondholder has a first priority perfected security
interest in collateral, usually consisting of agency mortgage pass-through
securities, although other assets, including U.S. Treasuries (including zero
coupon U.S. Treasuries), agencies, cash equivalent securities, whole loans and
corporate bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type.
Average Life. The average life of pass-through pools varies with the
maturities, coupon rates, and type of the underlying mortgage instruments. In
addition, a pool's term may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions.
Returns of Mortgage Securities. Yields on mortgage pass-through securities are
typically quoted based on a prepayment assumption derived from the coupon and
maturity of the underlying instruments. Actual prepayment experience may cause
the realized return to differ from the assumed yield. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, thus affecting the realized returns of the Portfolios. The
compounding effect from reinvestment of monthly payments received by each
Portfolio will increase its return to shareholders, compared to bonds that pay
interest semi-annually.
About Mortgage Securities. Interests in pools of mortgage securities differ
from other forms of debt securities, which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the borrowers on their mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments resulting from the sale of the underlying
property, refinancing or foreclosure net of fees or costs which may be incurred.
Some mortgage securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make payment.
Residential Mortgage-Backed Securities. Pools consist of whole mortgage loans
or participation in loans. The majority of these loans are made to purchasers of
1-4 family homes. The terms and characteristics of
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the mortgage instruments are generally uniform within a pool but may vary among
pools. For example, in addition to fixed-rate fixed-term mortgages, the
Portfolios may purchase pools of adjustable rate mortgages ("ARM"), growing
equity mortgages ("GEM"), graduated payment mortgages ("GPM") and other types
where the principal and interest payment procedures vary. ARM's are mortgages
which reset the mortgage's interest rate with changes in open market interest
rates. The Portfolios' interest income will vary with changes in the applicable
interest rate on pools of ARM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Portfolios' net asset values since the prices at which these securities are
valued each day will reflect the payment procedures.
All poolers apply standards for qualifications to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
Residential mortgage loans are pooled by FHLMC. FHLMC is a corporate
instrumentality of the U.S. Government and was created by Congress in 1970 for
the purpose of increasing the availability of mortgage credit for residential
housing. FHLMC issues Participation Certificates ("PC's") which represent
interests in mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal.
Fannie Mae is a Government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae purchases residential mortgages from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, banks, commercial banks, credit unions, mortgage bankers,
state and local housing finance agencies and other financial institutions. Pass-
through securities issued by Fannie Mae are guaranteed as to timely payment of
principal and interest by Fannie Mae.
The principal Government guarantor of mortgage-backed securities is GNMA. GNMA
is a wholly-owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by approved institutions and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
Government and Government-related pools because there are no direct or indirect
Government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance purchased by the issuer. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can be
no assurance that the private insurers can meet their obligations under the
policies. The Portfolios will purchase mortgage securities that are rated
investment grade quality by Moody's and/or Standard & Poor's or, if unrated,
deemed by the Adviser to be of investment grade quality.
It is expected that Governmental or private entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payment
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Portfolios will, consistent with their investment objective and policies,
consider making investments in such new types of securities.
There are two methods of trading mortgage securities. A specified pool
transaction is a trade in which the pool number of the security to be delivered
on the settlement date is known at the time the trade is made. This is in
contrast with the typical mortgage security transaction, called a TBA (to be
announced)
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transaction, in which the type of mortgage securities to be delivered is
specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. The pool numbers
of the pools to be delivered at settlement will be announced shortly before
settlement takes place. The terms of the TBA trade may be made more specific if
desired. Generally, agency pass-through mortgage securities are traded on a TBA
basis.
Possible Risks: Due to the possibility that prepayments on home mortgages will
alter cash flow on Mortgage Securities, it is not possible to determine in
advance the actual final maturity date or average life. Like bonds in general,
mortgage-backed securities will generally decline in price when interest rates
rise. Rising interest rates also tend to discourage refinancings of home
mortgages, with the result that the average life of mortgage securities held by
a Portfolio may be lengthened. This extension of average life causes the market
price of the securities to decrease further than if their average lives were
fixed. However, when interest rates fall, mortgages may not enjoy as large a
gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to calculate
the effect that it will have on the price of the security. Prepayments at a time
when interest rates are falling generally means that a Portfolio may have to
invest the principal payments it receives at lower interest rates. In selecting
mortgage securities, the Adviser will look for those securities that offer a
higher yield to compensate for any variation in average maturity.
Commercial Mortgage-Backed Securities ("CMBS"): CMBS are generally multi-class
or pass-through securities backed by a mortgage loan or a pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments. The commercial mortgage loans that underlie CMBS have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. That is, at their maturity date, repayment
of the remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or sale of the property. Unlike most single
family residential mortgages, commercial real estate property loans often
contain provisions which substantially reduce the likelihood that such
securities will be prepaid. The provisions generally impose significant
prepayment penalties on loans, and, in come cases there may be prohibitions on
principal prepayments for several years following origination.
Municipals: Municipal securities are Fixed Income Securities issued by local,
state and regional governments that provide interest income which is exempt from
federal income taxes. Municipals include both municipal bonds (those securities
with maturities of five years or more) and municipal notes (those with
maturities of less than five years). Municipal bonds are issued for a wide
variety of reasons: to construct public facilities, such as airports, highways,
bridges, schools, hospitals, mass transportation, streets, water and sewer
works; to obtain funds for operating expenses; to refund outstanding municipal
obligations; and to loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered municipal bonds if
their interest is exempt from federal income tax. Industrial development bonds
are issued by, or on behalf of, public authorities to obtain funds for various
privately-operated manufacturing facilities, housing, sports arenas, convention
centers, airports, mass transportation systems and water, gas or sewage works.
Industrial development bonds are ordinarily dependent on the credit quality of a
private user, not the public issuer.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues.
Industrial revenue bonds in most cases are revenue bonds and generally do not
have the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include tax anticipation
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notes, revenue anticipation notes, bond anticipation notes, construction loan
notes and short-term discount notes. Project notes are instruments issued by the
Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, they are also secured by the full faith and credit of the United
States.
Municipal notes are issued to meet the short-term funding requirements of local,
regional and state governments. Municipal notes include bond anticipation notes,
revenue anticipation notes and tax and revenue anticipation notes. These are
short-term debt obligations issued by state and local governments to aid cash
flows while waiting for taxes or revenue to be collected, at which time the debt
is retired. Other types of municipal notes in which the Portfolio may invest are
construction loan notes, short-term discount notes, tax-exempt commercial paper,
demand notes, and similar instruments.
Municipal bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
Note obligations with demand or put options may have a stated maturity in excess
of one year, but permit any holder to demand payment of principal plus accrued
interest upon a specified number of days' notice. Frequently, such obligations
are secured by letters of credit or other credit support arrangements provided
by banks. The issuer of such notes normally has a corresponding right, after a
given period, to repay at its discretion the outstanding principal of the note
plus accrued interest upon a specific number of days' notice to the bondholders.
The interest rate on a demand note may be based upon a known lending rate, such
as the prime lending rate, and be adjusted when such rate changes, or the
interest rate on a demand note may be a market rate that is adjusted at
specified intervals. Each note purchased by the Portfolios will meet the quality
criteria set out in the prospectus for the Portfolios.
The yields of municipal bonds depend on, among other things, general money
market conditions, conditions in the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and Standard & Poor's represent their opinions of
the quality of the municipal bonds rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields, while municipal bonds of the same maturity and coupon, but
with different ratings may have the same yield. It will be the responsibility of
the investment management staff to appraise independently the fundamental
quality of the bonds held by the Portfolios.
Municipal bonds are sometimes purchased on a "when-issued" basis, meaning the
Portfolio has committed to purchase certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the federal income tax exemption for interest on municipal bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Portfolios to achieve
their investment objectives. In that event, the Fund's Trustees and officers
would reevaluate investment objectives and policies and consider recommending to
shareholders changes in such objectives and policies.
Similarly, from time to time proposals have been introduced before state and
local legislatures to restrict or eliminate the state and local income tax
exemption for interest on municipal bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of a Portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate investment objectives and
policies and consider recommending to shareholders changes in such objectives
and policies.
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The Portfolios eligible to purchase municipal bonds may also purchase bonds the
income on which is subject to the alternative minimum tax ("AMT bonds"). AMT
bonds are tax-exempt private activity bonds issued after August 7, 1986, the
proceeds of which are directed, at least in part, to private, for-profit
organizations. While the income from AMT bonds is exempt from regular federal
income tax, it is a tax preference item in the calculation of the alternative
minimum tax. The alternative minimum tax is a special separate tax that applies
to some taxpayers who have certain adjustments to income or tax preference
items.
NY Municipals: NY Municipals are Fixed Income Securities issued by the New York
State government, state agencies and various local governments, including
counties, cities, municipalities, townships, special districts and authorities.
In general, the credit quality and credit risk of any issuer's debt is
contingent upon the state and local economy, the health of the issuer's
finances, the amount of the issuer's debt, the quality of management and the
strength of legal provisions in the debt document that protects debt holders.
Credit risk is usually lower wherever the economy is strong, growing and
diversified, where financial operations are sound and the debt burden is
reasonable.
Concentration of investment in the securities of one state exposes the NY
Municipal Portfolio to greater credit risks than would be present in a
nationally diversified portfolio of municipal securities. The risks associated
with investment in the securities of a single state include possible tax changes
or a deterioration in economic conditions and differing levels of supply and
demand for the municipal securities of that state.
Certain state-created agencies have statutory authority to incur debt for which
legislation providing for state appropriations to pay debt service thereon is
not required. The debt of these agencies is supported by assets of, or revenues
derived from, the various projects financed; it is not an obligation of the
State. Some of these agencies, however, are indirectly dependent on State funds
through various state-assisted programs.
The NY Municipal Portfolio will make significant investments in NY Municipal
Bonds. The Portfolio's performance will depend in part upon the ability of the
issuers of these Bonds to meet their obligations for the payment of principal
and interest. The Portfolio may acquire Bonds whose issuers are affected by the
financial circumstances facing New York generally. While the overall wealth of
New York, as reflected by its per capita income, is among the highest in the
nation, New York has a large accumulated deficit and the per capita debt is
among the highest in the country. Additionally, New York City, which represents
a significant part of the state's economy, has struggled at times to maintain
fiscal stability. Financial difficulties affecting New York's economy generally
may also affect municipal securities issuers, by jeopardizing their credit
standing, impairing their borrowing abilities, and affording fewer markets for
their outstanding debt obligations. In recent years, Standard & Poor's and
Moody's have downgraded several different issues of municipal securities of New
York City and New York State and their agencies and instrumentalities.
Historically, there has been a strong demand for New York Municipal Bonds, and
as a consequence, New York Municipal Bonds are often issued with relatively
lower yields, and traded in the marketplace at relatively higher prices than
comparably rated municipal bonds issued in other jurisdictions.
Options: Options are Derivatives. An option is a legal contract that gives the
holder the right to buy or sell a specified amount of the underlying security or
futures contract at a fixed or determinable price upon the exercise of the
option. A call option conveys the right to buy and a put option conveys the
right to sell a specified quantity of the underlying security.
Portfolios may purchase over-the-counter options ("OTC Options") from, or sell
them to, securities dealers, financial institutions or other parties
("Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC Option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Portfolios expect generally to enter
into OTC Options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument
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underlying an OTC Option it has entered into with a Portfolio or fails to make a
cash settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor of credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC Option will be satisfied. The staff of the SEC currently takes
the position that OTC Options purchased by the Portfolios or sold by them (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to each Portfolio's limitation on investing in illiquid securities.
The Portfolios may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-
hedging purposes if it is designed to protect against a decline in the U.S.
dollar value of a currency due to the changes of exchange rates vis a vis the
U.S. dollar and the option is written for a currency other than the currency in
which the security is denominated. In such circumstances, the Portfolios will
follow the coverage requirements as described in the preceding paragraph.
Risks of Options. Investments in options involve some of the same risks that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased. Those
price changes also can result in a Portfolio holding an option that will expire
worthless. For example, if a Portfolio purchases a call option and the price of
the underlying security falls to rise above the option's strike price, the
Portfolio would not exercise the option. As a result, the option will expire
worthless and the Portfolio will lose the price it paid for the option. By
contrast, if a Portfolio writes a call option on a security and the price of the
underlying security rises above the strike price, the purchaser of the option
may exercise the option, so that the Portfolio will not benefit from the
increase in value of the underlying security.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. The market prices of options generally
can be more volatile than the market prices on the underlying futures contract
or securities. Another risk is that the Counterparty to an over-the-counter
option will be unable to fulfill its obligation to the Portfolio due to
bankruptcy or other circumstances.
Options on Currencies. All Portfolios, except the Cash Reserves, Domestic Fixed
Income, Limited Duration and Advisory Mortgage Portfolios, may purchase and
write options on foreign currencies in a manner similar to that in which they
would use futures contracts on foreign currencies, or forward contracts. For
example, a decline in the dollar value of a foreign currency in which Portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. To protect against such
diminution in the value of portfolio securities, a Portfolio may purchase put
options on the foreign currency. If the value of the currency falls, a Portfolio
will have the right to sell the currency for a fixed amount in dollars and
thereby offset, in whole or in part, the adverse effect that the foreign
currency's fall would have had on the Portfolio's holdings.
Conversely, a Portfolio may buy call options on a foreign currency when the
Adviser wants to purchase securities denominated in that currency and believes
that the dollar value of that foreign currency will increase, thereby increasing
the cost of acquiring those securities. Purchasing such options may offset, at
least partially, the effects of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to a Portfolio derived
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Portfolios
lose money on transactions in foreign currency options, which could reduce the
gain the Portfolio might have achieved from advantageous changes in the exchange
rates.
The Portfolios may write options on foreign currencies for the same purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
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relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolios may only write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or liquid securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars, marked-to-market
daily.
The Portfolios may also write call options on foreign currencies for cross-
hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which a Portfolio owns or has the right to acquire
due to an adverse change in the exchange rate and which is denominated in the
currency underlying the option. In such circumstances, the Portfolio will either
"cover" the transaction as described above or collateralize the option by
maintaining in a segregated account with the Custodian, cash or liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
Combined Transactions. The Portfolios may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and foreign currency
transactions, instead of a single transaction, as part of a single hedging
strategy when, in the opinion of the Adviser, it is in the best interest of the
Portfolio to do so. A combined transaction, while part of a single strategy, may
contain elements of risk that are present in each of its component transactions
and will be structured in accordance with applicable SEC regulations and SEC
staff guidelines.
Risks of options on futures contracts and on foreign currencies. Options on
foreign currencies are traded over-the-counter through financial institutions
acting as market-makers, although they are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, a Portfolio that writes options could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will 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
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OCC, thereby reducing the risk of counterparty default. Furthermore, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in a Portfolio's
ability to act upon economic events occurring in foreign markets during non
business hours in the United States, (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
Preferred Stock: Preferred stocks are non-voting ownership shares in a
corporation which pay a fixed or variable stream of dividends. Preferred stocks
have a preference over common stocks in the event of the liquidation of an
issuer. Preferred stocks have many of the characteristics of both Equity
Securities and Fixed Income Securities. Therefore, the Fund's equity, fixed
income and balanced Portfolios may all purchase preferred stocks.
Repurchase Agreements: Repurchase agreements are Fixed Income Securities in the
form of an agreement backed by collateral. Each of the Fund's Portfolios may
invest in repurchase agreements collateralized by U.S. Government securities,
certificates of deposit and certain bankers' acceptances. Repurchase agreements
are transactions by which a Portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. In these transactions, the securities
purchased by a Portfolio have a total value in excess of the value of the
repurchase agreement and are held by the Portfolio's custodian bank until
repurchased. Such agreements permit a Portfolio to keep all its assets at work
while retaining "overnight" flexibility in pursuit of investments of a longer-
term nature. The Adviser and the Fund's Administrator will continually monitor
the value of the underlying securities to ensure that their value always equals
or exceeds the repurchase price.
Pursuant to an SEC order, the Fund's Portfolios may pool their daily uninvested
cash balances in order to invest in repurchase agreements on a joint basis. By
entering into repurchase agreements on a joint basis, it is expected that the
Portfolios will incur lower transaction costs and potentially obtain higher
rates of interest on such repurchase agreements. Each Portfolio's participation
in the income from jointly purchased repurchase agreements will be based on that
Portfolio's percentage share in the total repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, a
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a
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bankruptcy court may determine that the underlying securities are collateral not
within the control of a Portfolio and therefore subject to sale by the trustee
in bankruptcy. Finally, it is possible that a Portfolio may not be able to
substantiate its interest in the underlying securities. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through stringent security and counterparty selection criteria and careful
monitoring procedures.
Reverse Repurchase Agreements: Under a Reverse Repurchase Agreement, a Portfolio
sells a security and promises to repurchase that security at an agreed upon
future date and price. The price paid to repurchase the security reflects
interest accrued during the term of the agreement. The Portfolio will establish
a separate custodial account holding cash and other liquid assets in an amount
not less than the purchase obligations of the agreement. Reverse Repurchase
Agreements may be viewed as a speculative form of borrowing called leveraging.
A Portfolio may invest in reverse repurchase agreements if (i) interest earned
from leveraging exceeds the interest expense of the original reverse repurchase
transaction and (ii) proceeds from the transaction are not invested for longer
than the term of the Reverse Repurchase Agreement.
Rights: Rights are Equity Securities representing a preemptive right of
stockholders to purchase additional shares of a stock at the time of a new
issuance, before the stock is offered to the general public. A stockholder who
purchases rights may be able to retain the same ownership percentage after the
new stock offering. A right usually enables the stockholder to purchase common
stock at a price below the initial offering price. A Portfolio that purchases a
right takes the risk that the right might expire worthless because the market
value of the common stock falls below the price fixed by the right.
Securities Lending: Each Portfolio may lend its investment securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, a Portfolio attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Portfolio. Each Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the 1940 Act or the rules and regulations
or interpretations of the SEC thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of cash,
an irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Portfolio at any time, and (d) the Portfolio receives
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Trustees.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Trustees. In addition, voting rights may pass with the
loaned securities, but if a material event were to occur affecting an investment
on loan, the loan must be called and the securities voted.
Short Selling: A short sale is a transaction in which a Portfolio sells
securities that it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. To deliver the securities to the buyer,
the Portfolio arranges through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement. When selling short, the
Portfolio intends to replace the securities at a lower price and therefore,
profit from the difference between the cost to replace the securities and the
proceeds received from the sale of the securities. When the Portfolio makes a
short sale, the proceeds it receives from the sale will be held on behalf of a
broker until the Portfolio replaces the borrowed securities. The Portfolio may
have to pay a
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premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Portfolio secures its obligation to replace the borrowed securities by
depositing collateral with the broker, consisting of cash or other liquid
securities. The Portfolio also must place in a segregated account with its
custodian cash or other liquid securities equal in value to the difference, if
any, between (i) the current market value of the securities sold short, and (ii)
any cash or other liquid securities deposited as collateral with the broker in
connection with the short sale. This amount will be adjusted daily to reflect
changes in the value of the securities sold short. A Portfolio also can cover
its obligations by owning another security (such as a call option) giving it the
right to obtain the same kind and amount of the security it sold short.
Risks: Short sales by a Portfolio involve certain risks and special
considerations. If the Adviser incorrectly predicts that the price of a
borrowed security will decline, the Portfolio will have to replace the
securities by purchasing them at a higher price than it received from the sale.
Therefore, losses from short sales may be unlimited. By contrast, when a
Portfolio purchases a security and holds it, the Portfolio cannot lose more than
the amount it paid for the security.
SMBS: Stripped mortgage-backed securities ("SMBS") are Derivatives in the form
of multiclass mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal payments may have a
material adverse effect on a Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
SMBS are generally purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers. Certain of these
securities may be deemed "illiquid" and subject to each Portfolio's limitation
on investing in illiquid securities.
Structured Investments: Structured investments are Derivatives in the form of a
unit or units representing an undivided interest(s) in assets held in a trust
that is not an investment company as defined in the 1940 Act. A trust unit pays
a return based on the total return of securities and other investments held by
the trust and the trust may enter into one or more swaps to achieve its
objective. For example, a trust may purchase a basket of securities and agree to
exchange the return generated by those securities for the return generated by
another basket or index of securities. A Portfolio will purchase Structured
Investments in trusts that engage in such swaps only where the counterparties
are approved by the Adviser in accordance with credit-risk guidelines
established by the Board.
Structured Notes: Structured notes are Derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows a Portfolio to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.
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Swaps: All Portfolios, except the Cash Reserves and Mid Cap Growth Portfolios,
may enter into swap contracts ("Swaps"). A swap is a Derivative in the form of
an agreement to exchange the return generated by one instrument for the return
generated by another instrument. The payment streams are calculated by reference
to a specified index and agreed upon notional amount. The term "specified index"
includes currencies, fixed interest rates, prices, total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed-income index for the
return generated by a second fixed-income index. The currency swaps in which the
Portfolios may enter will generally involve an agreement to pay interest streams
in one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon national amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to a swap defaults, a Portfolio's risk of
loss consists of the net amount of payments that a Portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the Counterparty, the Portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap Counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities to avoid any potential leveraging of the Portfolio. To the
extent that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to a Portfolio's borrowing restrictions. All of the Portfolios, except
the Cash Reserves Portfolio, may enter into OTC Derivatives transactions (swaps,
caps, floors, puts, etc., but excluding foreign exchange contracts) with
Counterparties that are approved by the Adviser in accordance with guidelines
established by the Board. These guidelines provide for a minimum credit rating
for each Counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from Counterparties) to limit exposure to
Counterparties with ratings below AA.
Risks: Interest rate and total rate of return Swaps do not involve the delivery
of securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency swaps may involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap may be subject to the risk that
the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
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The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
U.S. Governments: The term "U.S. Government securities" ("U.S. Governments")
refers to a variety of Fixed Income Securities issued or guaranteed by the U.S.
Government and various instrumentalities which have been established or
sponsored by the U.S. Government, on which the payment of principal and interest
is backed by the full faith and credit of the U.S. Government. For example,
U.S. Treasury securities are backed by the "full faith and credit" of the U.S.
Warrants: Warrants are Equity Securities in the form of options issued by a
corporation which give the holder the right to purchase stock, usually at a
price that is higher than the market price at the time the warrant is issued. A
purchaser takes the risk that the warrant may expire worthless because the
market price of the common stock fails to rise above the price set by the
warrant.
When-Issued Securities: Certain Fixed Income Securities are purchased on a
"when-issued" basis. This means that the securities are purchased at a certain
price, but may not be delivered for up to 90 days. No payment or delivery is
made until the Portfolio receives payment or delivery from the other party to
the transaction. Although a Portfolio receives no income from the above
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market price
of the securities at the time of delivery may be higher or lower than the
purchase price. A Portfolio will maintain with the custodian a segregated
account consisting of cash or liquid securities in an amount at least equal to
these commitments.
Yankee and Eurobond Obligations: Each Portfolio, except the Domestic Fixed
Income Portfolio, may invest in Eurobond and Yankee obligations, which are Fixed
Income Securities. The Eurobonds that the Portfolios will purchase may include
bonds issued and denominated in euros (the new currency unit implemented on
January 1, 1999 by the countries participating in the European Monetary Union).
Eurobonds may be issued by government and corporate issuers in Europe. Yankee
bank obligations are U.S. dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurobond and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk and liquidity risk. However,
Eurobond (and to a limited extent, Yankee) obligations also are subject to
certain sovereign risks. One such risk is the possibility that a sovereign
country might prevent capital from flowing across its borders. Other risks
include: adverse political and economic developments; the extent and quality of
government regulation of financial markets and institutions; the imposition of
foreign withholding taxes, and the expropriation or nationalization of foreign
issuers. The Cash Reserves Portfolio will perform the same credit analysis on
Eurobond and Yankee obligations that it purchases as it does on domestic issues,
and will seek to invest in obligations of issuers that have at least the same
financial strength as the domestic issuers whose securities it purchases.
Zero Coupons: Zero coupon bonds are Fixed Income Securities that do not make
regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by zero coupon bondholders each year. The Fund, which expects to
qualify as a regulated investment company, intends to pass along such interest
as a component of the Portfolio's distributions of net investment income.
Zero Coupons may offer investors the opportunity to earn higher yields than
those available on ordinary interest-paying obligations of similar credit
quality and maturity. However, zero coupon obligation prices may also exhibit
greater price volatility than ordinary fixed income securities because of the
manner in which their principal and interest are returned to the investor. Zero
Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities ("CATS"), Treasury
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Receipts ("TRS"), Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
INVESTMENT LIMITATIONS
Fundamental Limitations. Each Portfolio of the Fund is subject to the following
restrictions which are fundamental policies and may not be changed without the
approval of the lesser of: (1) at least 67% of the voting securities of the
Portfolio present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the
Portfolio.
As a matter of fundamental policy, each Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subject to the limitations described in non-fundamental limitation (7), below,
(ii) by lending its portfolio securities, and (iii) by lending Portfolio assets
to other Portfolios of the Fund, so long as such loans are not inconsistent with
the 1940 Act, or the rules and regulations, or interpretations or orders of the
SEC thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a result, it
would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer (this restriction is not applicable
to the Global Fixed Income, International Fixed Income, Advisory Foreign Fixed
Income or the Advisory Foreign Fixed Income II Portfolios);
(5) with respect to 75% of its assets, purchase securities of any issuer if, as
a result, more than 5% of the Portfolio's total assets, taken at market value at
the time of such investment, would be invested in the securities of such issuer
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (this restriction
does not apply to the Global Fixed Income, International Fixed Income, Advisory
Foreign Fixed Income or Advisory Foreign Fixed Income II Portfolios);
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes, and (ii) in connection with reverse repurchase agreements,
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 ("1933 Act") in connection with the disposition of restricted
securities); and
(8) acquire any securities of companies within one industry, if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
however that (i) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(ii) the Cash Reserves Portfolio may invest without limitation in certificates
of deposit or bankers' acceptances of domestic banks; (iii) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iv)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; (v) asset-backed securities
will be classified according
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to the underlying assets securing such securities; and (vi) the Advisory
Mortgage Portfolio will concentrate in mortgage-backed securities.
Non-Fundamental Limitations. Each Portfolio is also subject to the following
restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, no Portfolio will:
(1) in the case of any equity or balanced Portfolio
(a) enter into futures contracts to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of each Portfolio's total assets, and will
maintain assets sufficient to meet its obligations under such contracts in a
segregated account with the custodian bank or will otherwise comply with the
SEC's position on asset coverage; or
(b) write put or call options except to the extent described above in (a);
(2) in the case of any fixed income Portfolio, enter into futures contracts or
options on futures contracts for purposes other than bona fide hedging if more
than 5% of the Portfolio's total assets at the time of the transaction would be
required as margin and option premiums to secure the Portfolio's obligations
under such contracts;
(3) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, provided that each
Portfolio may make margin deposits in connection with transactions in options,
futures, and options on futures;
(4) sell short unless the Portfolio (i) by virtue of its ownership of other
securities, has the right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, or (ii) maintains in a segregated account on the books of the
Fund's custodian an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short or such other amount as the SEC or its
staff may permit by rule, regulation, order or interpretation (transactions in
futures contracts and options, however, are not deemed to constitute selling
securities short);
(5) borrow money other than from banks or other Portfolios of MAS Funds,
provided that a Portfolio may borrow from banks or other Portfolios of MAS Funds
so long as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or
purchase additional securities when borrowings exceed 5% of total (gross)
assets;
(6) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that each Portfolio may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(7) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board;
(8) invest for the purpose of exercising control over management of any company;
and
(9) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes
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in the value or total cost of the Portfolio's assets will not be considered a
violation of the restriction, and the sale of securities will not be required.
Pursuant to an order from the SEC, the Portfolios may enter into interfund
lending arrangements. Interfund loans and borrowings permit each Portfolio to
lend money directly to and borrow from other Portfolios of the Fund for
temporary purposes. Such loans and borrowings normally extend overnight but may
have a maximum duration of seven days. A Portfolio will borrow through the
interfund lending facility only when the costs are lower than the costs of bank
loans, and will lend through the facility only when the returns are higher than
those available from an investment in repurchase agreements. In addition, a
Portfolio will borrow and lend money through interfund lending arrangements only
if, and to the extent that, such practice is consistent with the Portfolio's
investment objective and other investments. Any delay in repayment to a lending
Portfolio could result in a lost investment opportunity or additional borrowing
costs.
PURCHASE OF SHARES
The Portfolios requested should be designated on the Account Registration Form.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders, and (iii) to reduce or
waive the minimum for initial and subsequent investments. The officers of the
Fund may from time to time waive the minimum initial and subsequent investment
requirements in connection with investments in the Fund by employees of the
Adviser and its affiliates.
The Cash Reserves Portfolio declares dividends daily and, therefore, at the time
of a purchase must have funds immediately available for investment. As a
result, you must pay for shares of the Cash Reserves Portfolio with Federal
Funds (monies credited to the Portfolio's Custodian by a Federal Reserve Bank).
Payment for shares of the other Portfolios need not be converted into Federal
Funds before acceptance by the Fund.
Investors purchasing and redeeming shares of the Portfolios through a
Shareholder Organization may be charged a transaction-based fee or other fee for
the Shareholder Organization's services. Each Shareholder Organization is
responsible for sending you a schedule of fees and information regarding any
additional or different conditions regarding purchases and redemptions.
Customers of Shareholder Organizations should read this SAI in light of the
terms governing accounts with their organization. The Fund does not pay
compensation to or receive compensation from Shareholder Organizations for the
sale of Institutional Class Shares.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order to
confirm that telephone instructions in connection with redemptions are genuine,
the Fund and Distributor will provide written confirmation of transactions
initiated by telephone.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit. The Fund has made an
election with the SEC pursuant to Rule 18f-1 under the 1940 Act to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Portfolio at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above limits
may be paid in whole or in part in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist
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which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Fund's prospectuses under "Valuation of Shares" and a
redeeming shareholder would normally incur brokerage expenses in converting
these securities to cash.
No charge is made by a Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, accepts the order. In
other words, orders will be priced at the net asset value next computed after
such orders are accepted by an authorized broker or the broker's authorized
designee.
SHAREHOLDER SERVICES
Exchange Privilege
The exchange privilege is only available with respect to the Fund's Portfolios
that are qualified for sale in a shareholder's state. Exchange requests should
be sent to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge,
West Conshohocken, PA 19428-0868. Any such exchange will be based on the
respective net asset values of the shares involved. Before making an exchange, a
shareholder should consider the investment objectives of the Portfolio to be
purchased. Exchange requests may be made either by mail or telephone. Telephone
exchanges (referred to as "expedited exchanges") will be accepted only if the
certificates for the shares to be exchanged are held by the Fund for the account
of the shareholder and the registration of the two accounts are identical.
Requests for expedited exchanges received prior to the time at which each
Portfolio determines its net asset value, as described in the prospectus will be
processed as of the close of business on the same day. Requests received after
these times will be processed on the next business day. Expedited exchanges may
also be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board to assure that such exchanges do not
disadvantage the Fund and its shareholders. The officers of the Fund reserve the
right not to accept any request for an exchange when, in their opinion, the
exchange privilege is being used as a tool for market timing.
Because an exchange of shares amounts to a redemption from one Portfolio and
purchase of shares of another Portfolio, the information regarding purchase and
redemption of shares applies to exchanges. For federal income tax purposes, an
exchange between Portfolios of the Fund is a taxable event, and, accordingly, a
capital gain or loss may be realized. It is likely, therefore, that a capital
gain or loss would be realized on an exchange between Portfolios; you may want
to consult your tax adviser for further information in this regard. The exchange
privilege may be modified or terminated at any time.
Transfer of Shares
Shareholders may transfer shares of the Fund's Portfolios to another person by
written request to the Client Services Group at the address noted above. If
shares are being transferred to a new account, requests for transfer must be
accompanied by a completed Account Registration Form for the receiving party.
If shares are being transferred to an existing account, the request should
clearly identify the account and number of shares to be transferred and include
the signature of all registered owners and all share certificates, if any, which
are subject to the transfer. The signature on the letter of request, the share
certificate or any stock power must be guaranteed in the same manner as
described under "Redemption of Shares." As in the case of redemptions, the
written request must be received in good order before any transfer can be made.
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VALUATION OF SHARES
Net asset value per share ("NAV") is determined by dividing the total market
value of each Portfolio's investments and other assets, less any liabilities, by
the total outstanding shares of that Portfolio. NAV for Investment Class
Shares, Institutional Class Shares and Adviser Class Shares may differ due to
class-specific expenses paid by each class, and the shareholder servicing fees
charged to Investment Class Shares and distribution fees charged to Adviser
Class Shares.
Equity securities listed on a U.S. securities exchange or Nasdaq for which
market quotations are available are valued at the last quoted sale price on the
day of valuation. Price information on listed equity securities is taken from
the exchange where the security is primarily traded. Equity securities listed
on a foreign exchange are valued at the latest quoted sales price available
before the time when assets are valued. For purposes of NAV, all assets and
liabilities initially expressed in foreign currencies are converted into U.S.
dollars at the bid price of the foreign currencies against U.S. dollars.
Unlisted equity securities and listed U.S. equity securities not traded on the
valuation date for which market quotations are readily available are valued at
the mean of the most recent quoted bid and asked price.
Bonds and other fixed income securities listed on a foreign exchange are valued
at the latest quoted sales price available before the time when assets are
valued. NAV includes interest on bonds and other fixed income securities which
are accrued daily. Bonds and other fixed income securities which are traded
over the counter and on an exchange will be valued according to the broadest and
most representative market, and it is expected that for bonds and other fixed
income securities this ordinarily will be the over-the-counter market.
However, bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service are determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities and any
developments related to specific securities. Bonds and other fixed income
securities not priced in this manner are valued at the most recent quoted bid
price, or when stock exchange valuations are used, at the latest quoted sale
price on the day of valuation. If there is no such reported sale, the latest
quoted bid price will be used. Securities purchased with remaining maturities
of 60 days or less are valued at amortized cost when the Board determines that
amortized cost reflects fair value. In the event that amortized cost does not
approximate market, market prices as determined above will be used.
Cash Reserves Portfolio: For the purpose of calculating the Cash Reserves
Portfolio's NAV, securities are valued by the amortized cost method of
valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value based on amortized cost is higher or lower than the price the Portfolio
would receive if it sold the instrument.
The use of amortized cost and the maintenance of the Portfolio's per share NAV
at $1.00 is based on its election to operate under the provisions of Rule 2a-7
under the 1940 Act. As conditions of operating under Rule 2a-7, the Portfolio
must maintain a dollar-weighted average Portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of thirteen months or less
and invest only in U.S. dollar-denominated securities which are determined by
the Trustees to present minimal credit risks and which are of eligible quality
as determined under the rule.
The Board has established procedures reasonably designed, taking into account
current market conditions and the Portfolio's investment objective, to stabilize
the net asset value per share as computed for the purposes of sales and
redemptions at $1.00. These procedures include periodic review, as the Trustees
deem appropriate and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized cost value per
share and a net asset value per share based upon available indications of market
value. In such a review, investments for which market quotations are
40
<PAGE>
readily available are valued at the most recent bid price or quoted yield
equivalent for such securities or for securities of comparable maturity, quality
and type as obtained from one or more of the major market makers for the
securities to be valued. Other investments and assets are valued at fair value,
as determined in good faith by the Board.
In the event of a deviation of over 1/2 of 1% between a Portfolio's NAV based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost, the Trustees will promptly consider what action, if any,
should be taken. The Board will also take any action they deem appropriate to
eliminate or to reduce to the extent reasonably practicable any material
dilution or other unfair results which might arise from differences between the
two. This action may include redeeming shares in kind, selling instruments
prior to maturity to realize capital gains or losses or to shorten average
maturity, withholding dividends, paying distributions from capital gains or
losses, or utilizing a NAV not equal to $1.00 based upon available market
quotations.
MANAGEMENT OF THE FUND
Trustees' Responsibilities
The Trustees supervise the Trust's affairs under the laws governing business
trusts in the Commonwealth of Pennsylvania. The Trustees have approved
contracts under which certain companies provide essential management,
administrative and shareholder services to the Trust.
Trustees and Officers
The Fund's officers, under the supervision of the Board of Trustees, manage the
day-to-day operations of the Fund. The Trustees set broad policies for the Fund
and choose its officers. The following is a list of the Trustees and officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years:
Thomas L. Bennett, * 10/4/47, Chairman of the Board of Trustees; Managing
Director, Morgan Stanley Dean Witter & 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; Investor Force Holdings, Inc.; 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).
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
41
<PAGE>
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 Sub-Administrator.
The Fund maintains an unfunded Deferred Compensation Plan ("Plan") which allows
each independent Trustee to defer payment of his or her retainer and fees to a
later date. The Fund's policy is for each Trustee to defer at least twenty-five
percent (25%) of his or her retainer and fees received annually from the Fund.
To that end, the Plan requires that each Eligible Trustee (defined by the Plan
as a member of the Board who is not an "interested person" of the Fund, as such
term is defined under Section 2(a)(19) of the 1940 Act) defer his or her entire
retainer, which is deemed a deferral of twenty-five percent (25%) of the
Trustee's retainer and fees received from the Fund for the year. The Plan also
permits the Eligible Trustee to defer all, or a portion, of the fees received
for attending meetings of the Board throughout the year. Amounts deferred by
each Eligible Trustee are credited with a return equal to what those amounts
would have received if they had been invested in Portfolios of the Fund selected
by that Trustee. Any deferred amounts will not be available to Eligible Trustees
for a period of three (3) or more years and distributions may not be deferred
beyond the Eligible Trustee's membership on the Board. Distributions to an
Eligible Trustee are either in the form of a lump sum or equal annual
installments over a period of five (5) years and commence within ninety (90)
days after the last date during the deferral period on which the Fund makes a
valuation of the Eligible Trustee's deferred compensation. The Fund intends that
the Plan shall be maintained at all times on an unfunded basis for federal
income tax purposes under the Internal Revenue Code of 1986. The rights of an
Eligible Trustee and the beneficiaries to the amounts held under the Plan are
unsecured and such amounts are subject to the claims of the creditors of the
Fund. The Plan became effective May 23, 1996. THERE WERE NO PAYMENTS UNDER THE
PLAN DURING THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999.
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.
42
<PAGE>
<TABLE>
<CAPTION>
Aggregate Pension or Benefits
Compensation from Accrued as Part of Total Compensation
Name of Trustee the Fund# Fund Expenses from the Fund
--------------- --------- ------------- -------------
<S> <C> <C> <C>
Thomas L. Bennett* -0- -0- -0-
Thomas P. Gerrity 70,000 -0- 70,000
Joseph P. Healey 70,000 -0- 70,000
Joseph J. Kearns 70,000 -0- 70,000
C. Oscar Morong, Jr. 70,000 -0- 70,000
Vincent R. McLean 70,000 -0- 70,000
James H. Scott* -0- -0- -0-
</TABLE>
* Trustees Bennett and Scott are deemed to be "interested persons" of the Fund
as that term is defined in the 1940 Act.
# Includes amounts deferred from quarterly meeting fees at the election of
Trustees under the Deferred Compensation Plan. In addition, each Trustee has
deferred his retainer of $18,000 under the Deferred Compensation Plan.
INVESTMENT ADVISER
The Investment Adviser to the Fund, Miller Anderson & Sherrerd, LLP, is wholly
owned by indirect subsidiaries of Morgan Stanley Dean Witter & Co. (MSDW), and
is a division of Morgan Stanley Dean Witter Investment Management. The Adviser
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors. As of November 30, 1999, Morgan
Stanley Dean Witter Investment Management had in excess of $177 billion in
assets under management.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors") serves as Sub-Adviser
to the Cash Reserves Portfolio. MSDW Advisors, located at Two World Trade
Center, New York, New York 10048, is a wholly-owned subsidiary of MSDW. Under
an Investment Sub-Advisory Agreement with the Adviser, MSDW Advisors, subject to
the control and supervision of the Fund, its officers and Trustees and the
Adviser, and in accordance with the investment objectives, policies and
restrictions of the Cash Reserves Portfolio, makes day-to-day investment
decisions for the Cash Reserves Portfolio and places the Portfolio's purchase
and sales orders. The Adviser pays MSDW Advisors 40% of the fee the Adviser
receives from the Cash Reserves Portfolio as compensation for sub-advisory
services. The Investment Sub-Advisory Agreement will continue in effect for an
initial term of two years, and thereafter for successive annual periods as long
as such continuance is approved in accordance with the 1940 Act. MSDW ADVISORS
RECEIVED $85,750 AS COMPENSATION FOR ITS SUB-ADVISORY SERVICES FOR THE CASH
RESERVES PORTFOLIO.
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board and in conformance
with the stated investment objectives and policies of each Portfolio of the
Fund, manages the investment and reinvestment of the assets of each Portfolio of
the Fund. In this regard, it is the responsibility of the Adviser to make
investment decisions for the Fund's Portfolios and to place each Portfolio's
purchase and sales orders for investment securities.
As compensation for the services rendered by the Adviser under the Agreement and
the assumption by the Adviser of the expenses related thereto (other than the
cost of securities purchased for the Portfolios
43
<PAGE>
and the taxes and brokerage commissions, if any, payable in connection with the
purchase and/or sale of such securities), each Portfolio pays the Adviser an
advisory fee calculated by applying a quarterly rate, based on the following
annual percentage rates, to the Portfolio's average daily net assets for the
quarter:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Portfolio Rate (%)
--------- --------
--------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 0.500
--------------------------------------------------------------------------------
Growth Portfolio 0.500
--------------------------------------------------------------------------------
Mid Cap Growth Portfolio 0.500
--------------------------------------------------------------------------------
Mid Cap Value Portfolio 0.750
--------------------------------------------------------------------------------
Small Cap Growth Portfolio 1.000
--------------------------------------------------------------------------------
Small Cap Value Portfolio 0.750
--------------------------------------------------------------------------------
Value Portfolio 0.500
--------------------------------------------------------------------------------
Value II Portfolio 0.500
--------------------------------------------------------------------------------
Cash Reserves Portfolio 0.250
--------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Fixed Income II Portfolio 0.375
--------------------------------------------------------------------------------
Global Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 0.450
--------------------------------------------------------------------------------
High Yield Portfolio 0.450
--------------------------------------------------------------------------------
Intermediate Duration Portfolio 0.375
--------------------------------------------------------------------------------
International Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Limited Duration Portfolio 0.300
--------------------------------------------------------------------------------
Municipal Portfolio 0.375
--------------------------------------------------------------------------------
NY Municipal Portfolio 0.375
--------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Targeted Duration Portfolio 0.375
--------------------------------------------------------------------------------
Balanced Portfolio 0.450
--------------------------------------------------------------------------------
Balanced Plus Portfolio 0.550
--------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 0.650
--------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 0.375
--------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio 0.375
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Portfolio Rate (%)
--------- --------
--------------------------------------------------------------------------------
<S> <C>
Advisory Mortgage Portfolio 0.375
--------------------------------------------------------------------------------
</TABLE>
In cases where a shareholder of any of the Portfolios has an investment
counseling relationship with the Adviser, the Adviser may, at its discretion,
reduce the shareholder's investment counseling fees by an amount equal to the
pro-rata advisory fees paid by the Fund. This procedure will be utilized with
clients having contractual relationships based on total assets managed by Miller
Anderson & Sherrerd, LLP to avoid situations where excess advisory fees might be
paid to the Adviser. In no event will a client pay higher total advisory fees as
a result of the client's investment in the Fund. In addition, the Adviser has
voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to the extent necessary, if any, to keep total annual operating expenses
actually deducted from Portfolio assets for the Institutional Class of the Cash
Reserves, Domestic Fixed Income, Multi-Market Fixed Income, Municipal, Multi-
Asset-Class, Small Cap Growth, Advisory Foreign Fixed Income, Advisory Foreign
Fixed Income II and Advisory Mortgage Portfolios from exceeding .320%, .500%,
.580%, .500%, .780%, 1.150%, .150%, .150% and .080% of their average daily net
assets, respectively. The Adviser also has voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary, if any,
to keep total annual operating expenses actually deducted from Portfolio assets
for the Investment Class of the Cash Reserves and Multi-Asset-Class Portfolios
from exceeding .470% and .930% of their average daily net assets, respectively,
and for the Adviser Class of the Domestic Fixed Income and Multi-Asset-Class
Portfolios from exceeding .750% and 1.030% of their average daily net assets,
respectively.
For the fiscal years ended September 30, 1997, 1998 and 1999 the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Advisory Fees Paid Advisory Fees Waived
--------------------------------------------------------------------------------------------------------------------
Portfolio 1997 1998 1999 1997 1998 1999
(000) (000) (000) (000) (000) (000)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Portfolio 6,928 5,809 4,147 0 0 0
--------------------------------------------------------------------------------------------------------------------
Growth Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 1,961 2,551 3,801 0 0 0
--------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 896 2,700 4,636 28 0 0
--------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio * 0 260 * 8 47
--------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 5,161 6,499 6,359 0 0 0
--------------------------------------------------------------------------------------------------------------------
Value Portfolio 14,010 18,304 10,356 0 0 0
--------------------------------------------------------------------------------------------------------------------
Value II Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 166 252 368 65 68 66
--------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 372 300 570 11 7 0
--------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 9,431 15,592 17,842 0 0 0
--------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 776 1,213 1,502 0 0 0
--------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 289 264 251 0 0 0
--------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio * 255 441 * 28 0
--------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Advisory Fees Paid Advisory Fees Waived
--------------------------------------------------------------------------------------------------------------------
Portfolio 1997 1998 1999 1997 1998 1999
(000) (000) (000) (000) (000) (000)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Portfolio 1,558 2,363 3,425 0 0 0
--------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 144 405 350 23 0 0
--------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 549 551 488 0 0 0
--------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 404 647 632 4 0 0
--------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 211 282 318 30 34 96
--------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 1,816 2,045 1,870 0 0 0
--------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1,527 1,781 1,971 0 0 0
--------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 797 1,125 1,108 126 78 40
--------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 0 0 0 713 699 56
--------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * * * * * *
--------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 0 0 0 9,155 16,638 26,671
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
The Agreement continues for successive one year periods, only if each renewal is
specifically approved by an in-person vote of the Fund's Board, including the
affirmative votes of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as defined in the 1940 Act) of any such party
at a meeting called for the purpose of considering such approval. In addition,
the question of continuance of the Agreement may be presented to the
shareholders of the Fund; in such event, continuance shall be effected only if
approved by the affirmative vote of a majority of the outstanding voting
securities of each Portfolio of the Fund. If the holders of any Portfolio fail
to approve the Agreement, the Adviser may continue to serve as investment
adviser to each Portfolio which approved the Agreement, and to any Portfolio
which did not approve the Agreement until new arrangements have been made. The
Agreement is automatically terminated if assigned, and may be terminated by any
Portfolio without penalty, at any time, (1) by vote of the Board or by vote of
the outstanding voting securities of the Portfolio or (2) on sixty (60) days'
written notice to the Adviser, or (3) by the Adviser upon ninety (90) days'
written notice to the Fund.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated to
each Portfolio, based on their relative net assets. Each Portfolio bears its own
advisory fees and brokerage commissions and transfer taxes in connection with
the acquisition and disposition of its investment securities.
46
<PAGE>
PRINCIPAL UNDERWRITER
MAS Fund Distribution, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Adviser, with its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428, distributes the shares of the Fund. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. The Distribution Agreement continues
in effect so long as such continuance is approved at least annually by the
Fund's Board, including a majority of those Trustees who are not parties to such
Distribution Agreement nor interested persons of any such party. The
Distribution Agreement provides that the Fund will bear the costs of the
registration of its shares with the SEC and various states and the printing of
its prospectuses, statements of additional information and reports to
shareholders.
Shareholder Service Agreement. The Fund has entered into a Shareholder Service
Agreement with the Distributor whereby the Distributor will compensate service
providers who provide certain services to clients who beneficially own
Investment Class shares of the Portfolios described in the Investment Class
prospectus. Each Portfolio will pay to the Distributor a fee at the annual rate
of .15% of the average daily net assets of such Portfolio attributable to the
shares serviced by the service provider, which fee will be computed daily and
paid monthly. During the fiscal year ended September 30, 1999, the Fund paid
$149,058 to compensate the Distributor under this Shareholder Service Agreement.
DISTRIBUTION OF SHARES
The Fund's Distribution Plan provides that the Adviser Class Shares will pay the
Distributor an annualized fee of .25% of the average daily net assets of each
Portfolio attributable to Adviser Class Shares, which the Distributor can use to
compensate broker/dealers and service providers which provide distribution
services to Adviser Class Shareholders or their customers who beneficially own
Adviser Class Shares.
The Fund has adopted the Distribution Plan in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of the Plan must be approved annually by
a majority of the Trustees of the Fund and the Trustees who are not "interested
persons" of the Fund within the meaning of the 1940 Act. The Plan requires that
quarterly written reports of amounts spent under the Plan and the purposes of
such expenditures be furnished to and reviewed by the Trustees. The Plan may not
be amended to increase materially the amount which may be spent thereunder
without approval by a majority of the outstanding Adviser Class Shares of the
Fund. All material amendments of the Plan will require approval by a majority of
the Trustees of the Fund and of the Trustees who are not "interested persons" of
the Fund. For the fiscal year ended September 30, 1999, the Equity, Mid Cap
Growth, Mid Cap Value, Small Cap Value, Value, Domestic Fixed Income, Fixed
Income, High Yield, and Balanced Portfolios paid $2,924, $398,723, $53,032,
$8,052, $773,781, $1,222, $340,526, $34,776, and $70,808, respectively, in
distribution fees pursuant to the Distribution Plan. Other than $194,993 of
fees retained by the Distributor, fees paid to the Distributor during the fiscal
year were used to reimburse third-parties for distribution-related services
performed on behalf of the Fund.
FUND ADMINISTRATION
MAS also serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Under its Administration Agreement
with the Fund, MAS receives an annual fee, accrued daily and payable monthly, of
0.08% of the Fund's average daily net assets, and is responsible for all fees
payable under any sub-administration agreements. Chase Global Funds Services
Company, an affiliate of The Chase Manhattan Bank, serves as transfer agent and
provides fund accounting and other services pursuant to a sub-administration
agreement.
For the fiscal years ended September 30, 1997, 1998 and 1999, the Fund paid the
following administrative fees (no administrative fees were waived):
47
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Administrative Fees Paid
------------------------
----------------------------------------------------------------------------------------------------------------
Portfolio 1997 1998 1999
(000) (000) (000)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio 1,136 931 664
----------------------------------------------------------------------------------------------------------------
Growth Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 314 408 608
----------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 123 288 494
----------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio * 1 24
----------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 550 694 678
----------------------------------------------------------------------------------------------------------------
Value Portfolio 2,285 2,930 1,655
----------------------------------------------------------------------------------------------------------------
Value II Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 74 102 139
----------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 82 66 122
----------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 2,030 3,327 3,805
----------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 165 259 320
----------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 62 57 56
----------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio * 50 79
----------------------------------------------------------------------------------------------------------------
High Yield Portfolio 356 504 731
----------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 36 86 75
----------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 117 118 108
----------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 109 173 169
----------------------------------------------------------------------------------------------------------------
Municipal Portfolio 51 67 88
----------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 414 436 399
----------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Balanced Portfolio 280 317 350
----------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 143 148 141
----------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 152 149 6
----------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * * *
----------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 1,954 3,549 5,688
----------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
48
<PAGE>
OTHER SERVICE PROVIDERS
Custodian. The Chase Manhattan Bank, New York, NY serves as Custodian for the
Fund. The Custodian holds cash, securities, and other assets of the Fund as
required by the 1940 Act.
Transfer and Dividend Disbursing Agent. Chase Global Funds Services Company, a
subsidiary of The Chase Manhattan Bank, 73 Tremont Street, Boston, MA 02108-
3913, serves as the Funds' Transfer Agent and Dividend Disbursing Agent.
Independent Accountants. PricewaterhouseCoopers LLP, located at 160 Federal
Street, Boston, MA 02110, serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
Fund Counsel. Morgan, Lewis & Bockius LLP, located at 1701 Market Street,
Philadelphia, PA 19103, acts as the Fund's legal counsel.
LITIGATION
The Fund is not involved in any litigation.
BROKERAGE TRANSACTIONS
Portfolio Transactions
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs the Adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
Portfolios. In so doing, the Adviser will consider all matters it deems
relevant, including the following: the Adviser's knowledge of negotiated
commission rates and spreads currently available; the nature of the security or
instrument being traded; the size and type of the transaction; the nature and
character of the markets for the security or instrument to be purchased or sold;
the desired timing of the transaction; the activity existing and expected in the
market for the particular security or instrument; confidentiality; the
execution, clearance, and settlement capabilities of the broker or dealer
selected and other brokers or dealers considered; the reputation and perceived
soundness of the broker or dealer selected and other brokers or dealers
considered; the Adviser's knowledge of any actual or apparent operational
problems of a broker or dealer; and the reasonableness of the commission or its
equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, a Portfolio will not necessarily pay the lowest available commission on
brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be the case with other
transactions requiring more routine services. In addition, a Portfolio may pay
higher commission rates or markups than the lowest available when the Adviser
believes it is reasonable to do so in light of the value of the research,
statistical, pricing, and execution services provided by the broker or dealer
effecting the transaction. The Adviser does not attempt to put a specific dollar
value on the research services rendered or to allocate the relative costs or
benefits of those services among its clients, believing that the research it
receives will help the Adviser to fulfill its overall duty to its clients. The
Adviser uses research services obtained in this manner for the benefit of all of
its clients, though each particular research service may not be used to service
each client. As a result, the Fund may pay brokerage commissions or markups that
are used, in part, to purchase research services that are not used to benefit
the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place Portfolio orders
49
<PAGE>
with qualified broker-dealers who recommend the Fund's Portfolios or who act as
agents in the purchase of shares of the Portfolios for their clients.
Some securities considered for investment by each of the Fund's Portfolios may
also be appropriate for other clients serviced by the Adviser. The Adviser may
place a combined order for two or more accounts or Portfolios for the purchase
or sale of the same security if, in its judgment, joint execution is in the best
interest of each participant and will result in best price execution.
Transactions involving commingled orders are allocated in a manner deemed to be
equitable to each account or Portfolio. Although it is recognized that, in some
cases, joint execution of orders could adversely affect the price or volume of
the security that a particular account or fund may obtain, it is the opinion of
the Adviser and the Fund's Board that combining such orders generally will be
more advantageous to the Fund than effecting such transactions separately.
If purchases or sales of securities consistent with the investment policies of a
Portfolio and one or more of these other clients serviced by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and reasonable
by the Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees.
As an indirect subsidiary of Morgan Stanley Dean Witter & Co., the Adviser is
affiliated with certain U.S.-registered broker-dealers and foreign broker-
dealers (collectively, the "Affiliated Brokers"). The Adviser may, in the
exercise of its discretion under its investment management agreement, effect
transactions in securities or other instruments for the Fund through the
Affiliated Brokers. THE FUND DID NOT PAY ANY BROKERAGE COMMISSIONS TO ANY
AFFILIATES FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999.
Annual Turnover
The annual turnover rate for each Portfolio for the past two fiscal years ended
September 30 was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Portfolio 1998 1999
--------- ---- ----
--------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Portfolio 77% 103%
--------------------------------------------------------------------------------------------
Growth Portfolio N/A N/A
--------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 172 208
--------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 213 244
--------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 67 300
--------------------------------------------------------------------------------------------
Small Cap Value Portfolio 163 251
--------------------------------------------------------------------------------------------
Value Portfolio 56 53
--------------------------------------------------------------------------------------------
Value II Portfolio N/A N/A
--------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 145 115
--------------------------------------------------------------------------------------------
Fixed Income Portfolio 121 103
--------------------------------------------------------------------------------------------
Fixed Income II Portfolio 92 106
--------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 88 56
--------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Portfolio 1998 1999
--------- ---- ----
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
High Yield Portfolio 75 45
--------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 131 97
--------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 75 64
--------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 107 102
--------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 163 86
--------------------------------------------------------------------------------------------------------
Municipal Portfolio 140 88
--------------------------------------------------------------------------------------------------------
NY Municipal Portfolio N/A N/A
--------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 105 124
--------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio N/A N/A
--------------------------------------------------------------------------------------------------------
Balanced Portfolio 100 111
--------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio N/A N/A
--------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 107 101
--------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 318 0
--------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio N/A N/A
--------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 126 94
--------------------------------------------------------------------------------------------------------
</TABLE>
N/A -- Portfolio had not commenced operations as of September 30 of the
applicable year.
Commissions Paid
For the fiscal years ended September 30, 1997, 1998, and 1999, the Fund paid
brokerage commissions of approximately $19,134,219, $26,885,547, and
$34,111,732, respectively. For the fiscal years ended September 30, 1997, 1998
and 1999, the Fund paid in the aggregate $3,693, $0, and $0, respectively, as
brokerage commissions to Morgan Stanley & Co. Incorporated ("Morgan Stanley"),
an affiliated broker-dealer, which represented .02%, 0%, and 0% of the total
amount of brokerage commissions paid in each respective period. For the fiscal
years ended September 30, 1997, 1998 and 1999, the Fund paid in the aggregate
$118,000, $0, and $0, respectively, as brokerage commissions to Dean Witter
Reynolds, Inc., an affiliated broker-dealer, which represented .67%, 0%, and 0%
of the total amount of brokerage commissions paid in each respective period.
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999, THE FUND
DID NOT PAY ANY BORKERAGE COMMISSIONS TO ANY AFFILIATED BROKER-DEALER.
For the fiscal year ended September 30, 1999, the Fund paid brokerage
commissions of $2,895,719, $5,508,686, $6,176,281, $181,492, $12,117,949,
$5,869,544, $897,000, and $465,060 for the Equity, Mid Cap Growth, Mid Cap
Value, Small Cap Growth, Small Cap Value, Value, Balanced and Multi-Asset-Class
Portfolios, respectively.
51
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1997
--------------------------------------------------------------------------------------------------
Total Percent of Total Percent of Total
Portfolio ($) Commissions to Morgan Commissions to DWR
Stanley
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity 3,869,410 .17 N/A
--------------------------------------------------------------------------------------------------
Growth N/A N/A N/A
--------------------------------------------------------------------------------------------------
Mid Cap Growth 3,051,138 .11 N/A
--------------------------------------------------------------------------------------------------
Mid Cap Value 1,249,687 N/A 2.9
--------------------------------------------------------------------------------------------------
Small Cap Growth N/A N/A N/A
--------------------------------------------------------------------------------------------------
Small Cap Value 3,954,424 N/A 1.94
--------------------------------------------------------------------------------------------------
Value 3,391,575 N/A .24
--------------------------------------------------------------------------------------------------
Value II N/A N/A N/A
--------------------------------------------------------------------------------------------------
Cash Reserves N/A N/A N/A
--------------------------------------------------------------------------------------------------
Domestic Fixed Income N/A N/A N/A
--------------------------------------------------------------------------------------------------
Fixed Income N/A N/A N/A
--------------------------------------------------------------------------------------------------
Fixed Income II N/A N/A N/A
--------------------------------------------------------------------------------------------------
Global Fixed Income N/A N/A N/A
--------------------------------------------------------------------------------------------------
High Yield N/A N/A N/A
--------------------------------------------------------------------------------------------------
Intermediate Duration N/A N/A N/A
--------------------------------------------------------------------------------------------------
International Fixed N/A N/A N/A
Income
--------------------------------------------------------------------------------------------------
Limited Duration N/A N/A N/A
--------------------------------------------------------------------------------------------------
Multi-Market Fixed N/A N/A N/A
Income
--------------------------------------------------------------------------------------------------
Municipal N/A N/A N/A
--------------------------------------------------------------------------------------------------
NY Municipal N/A N/A N/A
--------------------------------------------------------------------------------------------------
Special Purpose Fixed N/A N/A N/A
Income
--------------------------------------------------------------------------------------------------
Targeted Duration N/A N/A N/A
--------------------------------------------------------------------------------------------------
Balanced 573,940 N/A .03
--------------------------------------------------------------------------------------------------
Balanced Plus N/A N/A N/A
--------------------------------------------------------------------------------------------------
Multi-Asset-Class 333,188 .08 .07
--------------------------------------------------------------------------------------------------
Advisory Foreign N/A N/A N/A
Fixed Income
--------------------------------------------------------------------------------------------------
Advisory Foreign N/A N/A N/A
Fixed Income II
--------------------------------------------------------------------------------------------------
Advisory Mortgage N/A N/A N/A
--------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
GENERAL INFORMATION
Fund History
MAS Funds (formerly MAS Pooled Trust Fund) is an open end management investment
company established under Pennsylvania law as a Pennsylvania business trust
under an Amended and Restated Agreement and Declaration of Trust dated November
18, 1993. The Fund was originally established as The MAS Pooled Trust Fund, a
Pennsylvania business trust, in February, 1984.
Description of Shares and Voting Rights
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value, from an unlimited number of
series ("Portfolios") of shares. Currently the Fund consists of twenty-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 shareholders in which the interests of the shareholders of
that class differ from the interests of holders of any other class.
Meetings of shareholders will not be held except as required by the 1940 Act and
other applicable law. A meeting will be held to vote on the removal of a
Trustee or Trustees of the Fund if requested in writing by the holders of not
less than 10% of the outstanding shares of the Fund. The Fund will assist in
shareholder communication in such matters to the extent required by law.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such Portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
Portfolio and distribute such assets ratably among the shareholders of such
Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
Portfolios into a single Portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), and 3) above, that
Portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that Portfolio.
Dividends and Distributions
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income
53
<PAGE>
(including capital gains) taxes on it and the imposition of the federal excise
tax on undistributed income and capital gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution,
except for the Cash Reserves Portfolio. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes.
Unless the shareholder elects otherwise in writing, all dividends and
distributions are automatically received in additional shares of that Portfolio
of the Fund at net asset value (as of the business day following the record
date). This will remain in effect until the Fund is notified by the shareholder
in writing at least three days prior to the record date that either the Income
Option (income dividends in cash and capital gains distributions in additional
shares at net asset value) or the Cash Option (both income dividends and capital
gain distributions in cash) has been elected. An account statement is sent to
shareholders whenever a dividend or distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence, as a
separate "regulated investment company") for federal tax purposes. Any net
capital gains recognized by a Portfolio are distributed to its investors without
need to offset (for federal income tax purposes) such gains against any net
capital losses of another Portfolio.
In all Portfolios except the Cash Reserves Portfolio, undistributed net
investment income is included in the Portfolio's net assets for the purpose of
calculating NAV. Therefore, on the ex-dividend date, the NAV excludes the
dividend (i.e., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable as ordinary income.
Certain mortgage securities may provide for periodic or unscheduled payments of
principal and interest as the mortgages underlying the securities are paid or
prepaid. However, such principal payments (not otherwise characterized as
ordinary discount income or bond premium expense) will not normally be
considered as income to the Portfolio and therefore will not be distributed as
dividends. Rather, these payments on mortgage-backed securities will be
reinvested on your behalf by the Portfolio.
Special Considerations for the Cash Reserves Portfolio: Net investment income
is computed and dividends declared as of 12:00 noon (Eastern Time), on each day.
Such dividends are payable to Cash Reserves Portfolio shareholders of record as
of 12:00 noon (Eastern Time) on that day, if the Portfolio is open for business.
Shareholders who redeem prior to 12:00 noon (Eastern Time) are not entitled to
dividends for that day. Dividends declared for Saturdays, Sundays and holidays
are payable to shareholders of record as of 12:00 noon (Eastern Time) on the
preceding business day on which the Portfolio was open for business. Net
realized short-term capital gains, if any, of the Cash Reserves Portfolio will
be distributed whenever the Trustees determine that such distributions would be
in the best interest of shareholders, but at least once a year. The Portfolio
does not expect to realize any long-term capital gains. Should any such gains
be realized, they will be distributed annually.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Fund's
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring
54
<PAGE>
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only to
the rights of creditors of the Fund) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act shareholders of any additional series
or class of shares would normally have to approve the adoption of any advisory
contract relating to such series or class and of any changes in the investment
policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
Year 2000 Transition
The Fund and its service providers do not appear to have been adversely affected
by computer problems related to the transition to the year 2000. However, there
remains a risk that such problems could arise or be discovered in the future.
Year 2000 related problems also may negatively affect issuers whose securities
the Fund purchases, which could have an impact on the value of your investment.
TAX CONSIDERATIONS
Each Portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the federal excise tax. To do so,
each Portfolio expects to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year. In order for a
Portfolio to continue to qualify for federal income tax treatment as a regulated
investment company, at least 90% of its gross income for a taxable year must be
derived from qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or foreign
currencies, or other income derived with respect to its business of investing in
such securities or currencies. It is anticipated that any net gain realized from
the closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In addition, (i) a Portfolio must distribute annually to its
shareholders at least the sum of 90% of its net interest income excludable from
gross income and 90% of its investment company taxable income; (ii) at the close
of each quarter of a Portfolio's taxable year, at least 50% of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies and such other securities
with limitations; and (iii) at the close of each quarter of a Portfolio's
taxable year, not more than 25% of the value of its assets may be invested in
securities of any one issuer, or of two or more issuers engaged in same or
similar businesses if the Portfolio owns at least 20% of the voting power of
such issuers.
Each Portfolio of the Fund will distribute to shareholders annually any net
capital gains which have been recognized for federal income tax purposes
including unrealized gains at the end of the Portfolio's fiscal year on certain
futures transactions. Such distributions will be combined with distributions of
capital gains realized on the Portfolio's other investments and shareholders
will be advised of the nature of the payments.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolios may be "Section 1256 contracts." Section 1256
contracts held by a Portfolio at the end of its taxable year (and, for purposes
of the 4% excise tax, on certain other dates as prescribed under the Internal
Revenue Code (the "Code")) are "marked to market" with unrealized gains or
losses treated as though they were
55
<PAGE>
realized. Any gains or losses, including "marked to market" gains or losses, on
Section 1256 contracts other than forward contracts are generally 60% long-term
and 40% short-term capital gains or losses ("60/40") although all foreign
currency gains and losses from such contracts may be treated as ordinary in
character absent a special election.
Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap contracts undertaken by a Portfolio, may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by a Portfolio. In addition,
losses realized by a Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
a Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
A Portfolio may make one or more of the elections available under the Code which
are applicable to straddles. If a Portfolio makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a Portfolio that did not engage in such hedging transactions.
The Code provides constructive sales treatment for appreciated financial
positions such as stock which has increased in value in the hands of a
Portfolio. Under this constructive sales treatment, the Portfolio may be
treated as having sold such stock and be required to recognize gain if it enters
into a short sale, an offsetting notional principal contract, a futures or
forward contract, or a similar transaction with respect to such stock or
substantially identical property.
Each Portfolio of the Fund is treated as a separate entity for federal income
tax purposes and intends to qualify for the special tax treatment afforded
regulated investment companies. As such, each Portfolio will not be subject to
federal income tax to the extent it distributes net investment company taxable
income and net capital gains to shareholders. The Fund will notify you annually
as to the tax classification of all distributions.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, you must certify
on your Account Registration Form that your Social Security Number or Taxpayer
Identification Number is correct, and that you are not subject to backup
withholding.
Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. Each Portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the Portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of a Portfolio by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than twelve
months and short-term if for twelve months or less. Generally, long-term capital
gains are currently taxed at a maximum rate of 20% and short-term gains are
currently taxed at ordinary
56
<PAGE>
income tax rates. If shares held for six months or less are sold or redeemed for
a loss, two special rules apply: First, if shares on which a net capital gain
distribution has been received are subsequently sold or redeemed, and such
shares have been held for six months or less, any loss recognized will be
treated as long-term capital loss to the extent of the long-term capital gain
distributions. Second, any loss recognized by a shareholder upon the sale or
redemption of shares of a municipal Portfolio fund held for six months or less
will be disallowed to the extent of any exempt-interest dividends received by
the Shareholder with respect to such shares.
Foreign Income Taxes: Investment income received by the Portfolios from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Portfolios to a reduced rate of tax or
exemption from tax on such income. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolios' assets to be
invested within various countries is not known. The Portfolios intend to
operate so as to qualify for treaty-reduced rates of tax where applicable.
If at the end of a Portfolio's year, more than 50% of a Portfolio's assets are
represented by foreign securities, then such Portfolio may file an election with
the Internal Revenue Service to pass through to shareholders the amount of
foreign income taxes paid by such Portfolio. A Portfolio will make such an
election only if it is deemed to be in the best interests of such shareholders.
If a Portfolio makes the above-described election, the Portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the Portfolio. The shareholders of
the Portfolios will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
Portfolio; (ii) treat their pro rata share of foreign taxes as paid by them;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the Portfolio
which represents income from sources within foreign countries; and (iv) either
deduct their pro rata share of foreign taxes in computing their taxable income
or use it within the limitations set forth in the Code as a foreign tax credit
against U.S. income taxes (but not both). In no event shall a shareholder be
allowed a foreign tax credit if the shareholder holds shares in a Portfolio for
15 days or less during the 30-day period beginning on the date which is 15 days
before the date on which such shares become ex-dividend with respect to such
dividends.
Each shareholder of a Portfolio will be notified within 60 days after the close
of each taxable (fiscal) year of the Fund if the foreign taxes paid by the
Portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the Portfolio's gross income from foreign sources. The notice from the
Portfolio to shareholders will also include the amount of foreign taxes paid by
the Portfolio which are not allowable as a foreign tax credit because the
Portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because, and to the extent that, the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
State and Local Income Taxes: The Fund is not liable for any corporate income
or franchise tax in the Commonwealth of Pennsylvania. Shareholders should
consult their tax advisers for the state and local income tax consequences of
distributions from the Portfolios.
Special Tax Considerations for the Municipal and NY Municipal Portfolios: Each
of the Municipal and NY Municipal Portfolios intends that at the close of each
quarter of its taxable year, at least 50% of the value of the Portfolio's total
assets will consist of obligations the interest on which is excludable from
gross income (i.e., municipal bonds and notes), so that it may pay "exempt-
interest" dividends to shareholders. Exempt-interest dividends, which are
defined in the Code, are excluded from a shareholder's gross income for federal
income tax purposes, but may nevertheless be subject to the alternative minimum
tax (imposed at a rate of 26%-28% in the case of non-corporate taxpayers and at
the rate of 20% in the case of corporate
57
<PAGE>
taxpayers). A shareholder may, however, lose the federal tax-exempt status of
the accrued income of the Portfolio if the shareholder redeems its shares before
a dividend has been declared. Exempt-interest dividends received by shareholders
from these Portfolios may be subject to state and local taxes, although some
states allow a shareholder to exclude that portion of a portfolio's tax-exempt
income which is accountable to municipal securities issued within the
shareholder's state of residence.
These Portfolios may invest in private activity municipal securities, the
interest on which is subject to the federal alternative minimum tax for
corporations and individuals. These Portfolios may not be an appropriate
investment for persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds. A "substantial user" is defined generally to include
certain persons who regularly use in a trade or business or facility financed
from the proceeds of industrial development bonds or private activity bonds.
Such persons should consult their tax advisors before purchasing shares.
Any distributions paid to shareholders of either Portfolio that are derived from
taxable interest or capital gains will be subject to federal income tax.
Additionally, such distributions are not eligible for the dividends received
deduction for corporations.
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of these Portfolios is not deductible for federal
income tax purposes to the extent that it relates to exempt-interest dividends
distributed to the shareholder during the taxable year.
PRINCIPAL HOLDERS OF SECURITIES
As of January 5, 2000, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of any Class of the
following Portfolios' outstanding shares:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio First Union National Bank 3,319,619.151 7.92
FBO Diocese of Camden
CMG3C4 NC 1151
1525 W WT Harris Blvd
Charlotte, NC 28288
--------------------------------------------------------------------------------------------------------------------------
MAC & Co. A/C VCBF 1770012 2,527,380.284 6.03
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
--------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio Charles Schwab & Co. Inc. 8,924,144.165 21.19
Special Custody Account for the
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
--------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 6,816,264.472 16.18
Operations FFIIOC as Agent for
100 Magellan Way KWIC
Covington, KY 41015
--------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio Charles Schwab & Co. Inc. 4,749,815.997 10.90
Special Custody for the
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MAS Funds Omnibus Account 2,224,144.683 5.10
For TFM and Merged Shareholders C/O CGFSC
8/th/ Floor T/A
73 Tremont Street
Boston, MA 02108
--------------------------------------------------------------------------------------------------------------------------
Fishnet & Company 2,569,201.914 5.90
FBO The Hearst Foundation
C/O State Street Bank & Trust
P.O. Box 1992
Boston, MA 02105
--------------------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank 2,981,030.921 6.84
FAO Hearst Corporation
Global Securities Services
6/th/ Floor
New York, NY 11245
--------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company 4,771,919.442 10.95
FBO Ameren Corp
Defined Cont Plan
P.O. Box 92956
Chicago, IL 60675
--------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio Charles Schwab & Co. Inc. 1,602,272.607 27.75
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
--------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 323,123.560 5.60
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
--------------------------------------------------------------------------------------------------------------------------
National Financial Services FBO Their Customers 501,050.232 8.68
Church Street Station
New York, NY 10008-3908
--------------------------------------------------------------------------------------------------------------------------
The Duke Endowment 683,028.188 11.83
Suite 3500
100 N. Tyron
Charlotte, NC 28202-4012
--------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio Charles Schwab & Co. Inc. 3,742,392.626 7.05
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
--------------------------------------------------------------------------------------------------------------------------
American Red Cross Retirement System 2,951,959.744 5.56
Attn: Christina Samson
8111 Gatehouse Rd., 5/th/ Floor
Falls Church, VA 22042-1203
--------------------------------------------------------------------------------------------------------------------------
The Northern Trust Co. as TTEE 2,793,808.394 5.26
FBO Silicon Graphics
P.O. Box 92956
Chicago, IL 60675
--------------------------------------------------------------------------------------------------------------------------
The Northern Trust Co. as TTEE 3,341,714.745 6.30
FBO Potomac Electric Power Co. Gen R PL
P.O. Box 92956
Chicago, IL 60675
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value Portfolio Charles Schwab & Co. Inc. 16,093,855.213 21.87
Special Custody Account
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
--------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp FBO Their 3,755,546.598 5.10
Customers
Church Street Station
New York, NY 10008-3908
--------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio California Bank & Trust As TTEE OOCL 10,824,869.860 8.11
USA Inc Pension TR
Attn: Robin Ropolo-Trust Dept
300 Lakeside Dr., 8/th/ Floor
Oakland, CA 94612
--------------------------------------------------------------------------------------------------------------------------
Salkeld & Co. 14,096,664.680 10.56
C/O Bankers Trust Company
Church Street Station
New York, NY 10008
--------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company as TTEE 27,366,724.060 20.50
FBO Morgan Stanley Plan 8504
P.O. Box 92956
Chicago, IL 60675
--------------------------------------------------------------------------------------------------------------------------
Bankers Trust Co. FBO CNMC 174351 16,744,953.770 12.54
Attn: M. Bloebaum
P.O. Box 9014
Church Street Station
New York, NY 10008
--------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio Saxon & Company 850,883.719 5.01
FBO 78 Weirton Med Ctr MAS
A/C 20-10-002-1033668
P.O. Box 7780-1888
Philadelphia, PA 19182
--------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 5,533,017.710 32.56
Operations FIIOC as Agent for
100 Magellan Way KWIC
Covington, KY 41015
--------------------------------------------------------------------------------------------------------------------------
Fleet National Bank Custodian for 991,891.929 5.84
Attn: 0006813110
P.O. Box 92800
Rochester, NY 14692-8900
--------------------------------------------------------------------------------------------------------------------------
Fidelity Management Trust Co. as Trustee for US 2,304,541.703 13.56
Airways Inc- Cap Growth
Attn: Trust Operations- H10C
82 Devonshire St.
Boston, MA 02109
--------------------------------------------------------------------------------------------------------------------------
HSBC Bank USA TTEE for 1,080,265.810 6.36
Highland Hospital Ret Plan
P.O. Box 1329
Buffalo, NY 14240
--------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio The Northern Trust Co. as TTEE 22,378,207.258 5.72
FBO Morgan Stanley Plan 8504
P.O. Box 92956
Chicago, IL 60675
--------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio First Union National Bank 3,780,912.174 11.12
FBO Diocese of Camden
CMG 3C4 NC 1151
1525 W. WT Harris Blvd
Charlotte, NC 28288
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
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<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regions Bank as TTEE for Infirmary 4,144,490.087 12.19
Health Systems Pension
P.O. Box 2527
Mobile, AL 36622-0001
--------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio Rockefeller Family Fund Inc 348,912.244 6.54
437 Madison Avenue 37/th/ Floor
New York, NY 10022
--------------------------------------------------------------------------------------------------------------------------
State Street Bank & Trust Trustee 582,378.968 10.91
Attn: Dorothy G McNeil
P.O. Box 1992
Boston, MA 02105
--------------------------------------------------------------------------------------------------------------------------
All for Her Fund 957,859.645 17.94
Attn: Mary Borthwick Controller
4 Pine West Plaza
Albany, NY 12205-5520
--------------------------------------------------------------------------------------------------------------------------
The Charles A. Dana Foundation Inc. 2,214,278.110 41.48
Attn: Herbert Vine
745 Fifth Ave Suite 700
New York, NY 10151
--------------------------------------------------------------------------------------------------------------------------
Hudson-Webber Foundation 927,576.719 17.37
Attn: Leslie R. Malcolmson
333 West Fort St. Suite 1310
Detroit, MI 48226-3134
--------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio KPMG Peat Marwick 9,102,924.727 7.55
Attn: Michael Lynskey
Three Chestnut Ridge Road
Montvale, NJ 07645
--------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 6,065,607.298 5.03
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
--------------------------------------------------------------------------------------------------------------------------
Minnesota Life Insurance Co. 6,459,528.602 5.36
C/O Advantus Capital Management Inc
Station 16-4202
400 Robert St.
St. Paul, MN 55101
--------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio FNB Nominee Co 427,040.869 8.53
C/O First Commonwealth Co
614 Philadelphia St.
Indiana, PA 15701
--------------------------------------------------------------------------------------------------------------------------
Union Bank of California TR Nominee 1,543,322.837 30.84
FBO Los Angeles Hotel Restaurant
610001264 00
P.O. Box 85484
San Diego, CA 92186
--------------------------------------------------------------------------------------------------------------------------
Mariposa Foundation 323,747.551 6.47
C/O Morgan Stanley
1251 Ave of the Americas 23/rd/ Floor
New York, NY 10020
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NYACK Hospital 647,552.197 12.94
Attn: Ms. Susan Popowick Controller
160 North Midland Ave.
NYACK, NY 10960
-----------------------------------------------------------------------------------------------------------------------------
Curtis L Carlson Family Foundation 269,711.973 5.39
Attn: Brenda Sallstrom
P.O. Box 59159
Minneapolis, MN 55459-8215
-----------------------------------------------------------------------------------------------------------------------------
International Fixed Income Charles Schwab & Co. Inc 1,206,966.232 9.09
Portfolio Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
-----------------------------------------------------------------------------------------------------------------------------
Syntex USA Inc 2,028,720.071 15.27
Pension Trust
Attn: Sue Griswold
P.O. Box 10850
Palo Alto, CA 94303
-----------------------------------------------------------------------------------------------------------------------------
ARMCO Master Pension Trust 1,893,381.799 14.26
Mr. Christopher Motley
Treasurer
703 Curtis St.
Middletown, OH 45044-3999
-----------------------------------------------------------------------------------------------------------------------------
Chemical Bank as Custodian For 1,045,584.672 7.87
Smithsonian Institution
Attn: Hazel Drinkard
4 New York Plaza 4/th/ Floor
New York, NY 10004
-----------------------------------------------------------------------------------------------------------------------------
Western Metal Industry Pension Fund 2,221,685.984 16.73
C/O Miller Anderson & Sherrerd
One Tower Bridge
West Conshohocken, PA 19428
-----------------------------------------------------------------------------------------------------------------------------
MAC & Co. CFZF5031172 2,537,835.653 19.11
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
-----------------------------------------------------------------------------------------------------------------------------
Wellesley College 1,157,008.575 8.71
Attn: Robert Bower Controller
106 Central St.
Wellesley, MA 02481
-----------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio Citibank NA TTEE for Fieldcrest 1,783,365.702 11.78
Cannon Hourly Retirement Plan
Acct Unit Building B Floor 3 Zone 8
3800 Citibank Center Tampa
Tampa, FL 33610-9122
-----------------------------------------------------------------------------------------------------------------------------
Northern California Bakery Drivers 1,660,622.049 10.97
Security Fund c/o ATPA
1640 South Loop Rd
Alameda, CA 94502
-----------------------------------------------------------------------------------------------------------------------------
Union Bank of California TR 2,221,748.332 14.67
FBO Los Angeles Hotel Restaurant
610001264 00
P.O. Box 85484
San Diego, CA 92186
-----------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Y & H Soda Foundation 556,737.004 5.49
Portfolio Attn: Judy Murphy
2 Theatre Sq Suite 211
Orinda, CA 94563-3346
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Connelly Foundation 5,563,274.766 54.87
Attn: Lawrence Mangan
One Tower Bridge Suite 1450
West Conshohocken, PA 19428
-----------------------------------------------------------------------------------------------------------------------------
The Greenwall Foundation 1,034,479.755 10.20
Attn: William C. Stubing
Two Park Avenue
New York, NY 10016-5603
-----------------------------------------------------------------------------------------------------------------------------
National City Bank FBO 695,775.960 6.86
Jeannette Memorial Hospital
Attn: Mutual Funds
46 PO9258016
P.O. Box 94984
Cleveland, OH 44101-4984
-----------------------------------------------------------------------------------------------------------------------------
The Healthcare Fund of New Jersey 1,717,143.711 16.94
Attn: Dr. Mark S. Hockberg
75 Livingston Ave.
Roseland, NJ 07068
-----------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio Charles Schwab Co. Inc 1,119,506.296 10.55
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104
-----------------------------------------------------------------------------------------------------------------------------
Robert A Fox 637,713.457 6.01
C/o RAF Industries
165 Township Line Rd
Suite 2100
Jenkintown, PA 19046
-----------------------------------------------------------------------------------------------------------------------------
Wachovia Bank NA 635,853.908 5.99
TTEE U/A 6/20/95
P.O. Box 3073
301 N. Main St MC NC31057
Winston-Salem, NC 27150
-----------------------------------------------------------------------------------------------------------------------------
JR Trueman Qualified Subchapter S Trust 1,446,430.129 13.63
Attn: Barbara Trueman
5490 Hayden Rd
Amlin, OH 43002
-----------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Robertson Research Fund 3,048,977.788 8.20
Portfolio Cold Spring Harbor Laboratory
Attn: Alison McDermott
P.O. Box 100
Cold Springs Harbor, NY 11724-0100
-----------------------------------------------------------------------------------------------------------------------------
The Cold Spring Harbor Fund 1,907,372.882 5.13
Attn: Alison McDermott
P.O. Box 100 Burgtown Rd
Cold Springs Harbor, NY 11724
-----------------------------------------------------------------------------------------------------------------------------
Key Trust Co. as Custodian for Taft Hart/PL 1,965,218.957 5.29
P.O. Box 94871
Cleveland, OH 44101-4871
-----------------------------------------------------------------------------------------------------------------------------
Fleet National Bank 2,723,288.523 7.33
FBO Hartford Hospital
P.O. Box 92800
Rochester, NY 14692-8900
-----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio Scholle Corporation Employees 1,509,226.077 5.35
Retirement Trust
Attn: William Borkett VP FIN
200 W North Ave
Northlake, IL 60164-2490
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Northern Trust Co. as TTEE 10,063,219.958 35.66
FBO Allianz Defined Cont Plan
P.O. Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
Wendel & Co 507415 3,279,123.978 11.62
Trustee for A&P Savings Plan
C/O The Bank of New York
P.O. Box 1066 Wall Street Station
New York, NY 10268
-----------------------------------------------------------------------------------------------------------------------------
Wendel & Co A/C 018768 2,878,844.264 10.20
P.O. Box 1066
Wall Street Station
New York, NY 10268
-----------------------------------------------------------------------------------------------------------------------------
Wendel & Co A/C 017735 2,443,683.795 8.66
P.O. Box 1066
Wall Street Station
New York, NY 10268
-----------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio Albany Medical College A-29 3,684,312.617 25.81
Combined Funds
Attn: Paul Pennell
47 New Scotland Ave.
Albany, NY 12208
-----------------------------------------------------------------------------------------------------------------------------
Albany Medical Center Hospital 734,316.294 5.15
Combined Funds
Attn: Controller
New Scotland Ave.
Albany, NY 12208
-----------------------------------------------------------------------------------------------------------------------------
The National Center for State Courts 959,008.368 6.72
Attn: Gwen W. Williams CPA CIA Controller
300 Newport Ave.
Williamsburg, VA 23185
-----------------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank as Trustee for Milbank 1,674,831.857 11.73
Tweed Hadley & McCloy
Attn : Jeff Salazar 5/th/ Floor
3 Chase Metrotech Center
Brooklyn, NY 11245
-----------------------------------------------------------------------------------------------------------------------------
Northern Trust as TTEE FBO 1,003,007.680 7.03
Scotsman Industries
P.O Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
Fifth Third Bank Custodian 858,029.729 6.01
Indianapolis Symphony Orchestra
P.O. Box 630074
Cincinnati, OH 45263
-----------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio Northern Trust Company Trustee FBO Ford Motor Co. 56,334,816.148 6.70
A/C 22-01854
P.O. Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
Pacific Gas & Electric Company 48,098,290.543 5.72
Attn: Carolyn Margiotti
Mail Code B24K
San Francisco, CA 94177
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Foreign Fixed Income Kaiser Foundation DB Plan 218,865.727 5.65
Portfolio Attn: Ms. Janice Murphy
One Kaiser Plaza
Oakland, CA 94612
-----------------------------------------------------------------------------------------------------------------------------
Chemical Bank as Custodian for Smithsonian 325,487.507 8.40
Institution
Attn: Hazel Drinkard
4 New York Plaza 4/th/ Floor
New York, NY 10004
-----------------------------------------------------------------------------------------------------------------------------
Minnesota State Board of Investments 293,096.261 7.56
Attn: Jason Matz
Suite 105 MEA Building
55 Sherburne Ave.
St. Paul, MN 55155
-----------------------------------------------------------------------------------------------------------------------------
Northern Trust Company Trustee FBO Ford Motor Co. 263,003.074 6.78
A/C 22-01854
P.O. Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
Bost & Co.A/C LCRF0391002 346,948.468 8.95
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio Shadyside Presbyterian Church 50,981.079 82.52
William E Saul Endowment Fund
Attn: Ms. Nancy M. Shaytar
5121 Westminster Pl
Pittsburgh, PA 15232
-----------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio Northern Trust Trustee 253,878.158 23.75
A/C 22-00012
P.O. Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
First National Bank of Shelby Custodian for 296,367.702 27.72
Gardner Webb University
P.O. Box 168
Shelby, NC 28151-0168
-----------------------------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. 55,848.435 5.22
Specialized Trust Services Division
Acct IX1A-FDN
Attn: Jack McCorkle
200 Newport Ave- JQB7
North Quincy, MA 02171
-----------------------------------------------------------------------------------------------------------------------------
BMMSA P&PS 85,369.675 7.99
Attn: Lawrence M. Werner
933 Haverford Rd
Bryn Mawr, PA 19010
-----------------------------------------------------------------------------------------------------------------------------
Value Portfolio Doctors Community Hospital 115,037.472 15.55
Cash Balance Pension Plan
Attn: Dennis P. Scanlon
8118 Good Luck Rd
Lanham, MD 20706-3596
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IBEW Local 223 Deferred Income Fund 78,458.055 10.61
111 Rhode Island Rd
P.O. Box 1238
Lakeville, MA 02347
-----------------------------------------------------------------------------------------------------------------------------
Southwest Guaranty Trust Co. 39,937.745 5.40
Attn: Fiduciary-Cash-Mutual Funds
2121 Sage Rd Suite 150
Houston, TX 77056
-----------------------------------------------------------------------------------------------------------------------------
Employees Pension Plan of United Conveyor 51,805.860 7.00
Corporation
Attn: DS Hoyem
2100 Norman Dr. West
Waukegan, IL 60085
-----------------------------------------------------------------------------------------------------------------------------
First Union National Bank 82,326.517 11.13
Attn: Funds Group- Rich Sapienza
1525 West WT Harris Blvd
Charlotte, NC 28288-1151
-----------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co Custodian 40,626.695 5.49
U/A 5/22/97 AC 42102-0 C/O Mutual Funds
P.O. Box 8882
Wilmington, DE 19898-8882
-----------------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank TTEE For NY State Deferred 252,584.840 34.15
Comp Plan
Attn: Gladstone Stephenson
2/nd/ Floor
New York, NY 10004
-----------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio MSDW Stable Value Plan- SEI Trustee 1,057,584.730 100.00
Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
-----------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio Lasalle National Bank TTEE 246,820.739 6.18
FBO Woodlawn Cemetary Care Fund
P.O. Box 1443
Chicago, IL 60690
-----------------------------------------------------------------------------------------------------------------------------
Pennsylvania League of Cities and 272,833.901 6.84
Municipalities- Penn Prime Workers
Attn: Mr. Allen L. Loomis, Jr
414 North Second St.
Harrisburg, PA 17101
-----------------------------------------------------------------------------------------------------------------------------
Testa and Co. 447,820.574 11.22
Attn: Patty Genesky
P.O. Box 1412
Rochester, NY 14603-1412
-----------------------------------------------------------------------------------------------------------------------------
Zoological Society of Philadelphia Endowment 310,347.321 7.78
Attn: Anita Primo
3400 West Girard Ave.
Philadelphia, PA 19104-1196
-----------------------------------------------------------------------------------------------------------------------------
MSDW Stable Value Plan- SEI Trustee 1,024,337.078 25.67
Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
-----------------------------------------------------------------------------------------------------------------------------
ACMP Foundation 295,398.841 7.40
5 Riverfield Dr.
Westport, CT 068800
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Portfolio Attn 14723100 283,794.347 32.61
P.O. Box 92800
Rochester, NY 14692-8900
-----------------------------------------------------------------------------------------------------------------------------
Northern Trust Co. as Custodian for Noblehouse 92,999.719 10.69
International Ltd.
P.O. Box 92956
Chicago, IL 60675
-----------------------------------------------------------------------------------------------------------------------------
The Philadelphia Foundation 166,405.935 19.12
Attn: Julia R. Dutton
1234 Market St.
Suite 1900
Philadelphia, PA 19102
-----------------------------------------------------------------------------------------------------------------------------
Byrd & Co. 294,163.190 33.80
C/O First Union National Bank
530 Walnut St.
Philadelphia, PA 19101
-----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio Anne Laura Marcoux 3,909.803 22.18
P.O. Box 3898
Incline Village, NV 89450
-----------------------------------------------------------------------------------------------------------------------------
Nabank & Co./ DRK 13,716.672 77.82
Attn: Trust Securities
P.O. Box 2180
Tulsa, OK 74101-2180
-----------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio English Speaking Union 254,234.109 48.63
Central Florida Branch
Attn: Robert Hostetter Jr.
1330 Mayfield Ave.
Winter Park, FL 32789
-----------------------------------------------------------------------------------------------------------------------------
Kano-Zimmerman Profit Sharing Plan 233,166.186 44.60
Attn: Rhoads Zimmerman
P.O. Box 110098
Nashville, TN 37222
-----------------------------------------------------------------------------------------------------------------------------
Noble Inc. DBA Noble of Indiana 33,107.026 6.33
Attn: Paul J. Lang
201 S. Capitol Suite 800
Indianapolis, IN 46225
-----------------------------------------------------------------------------------------------------------------------------
Intermediate Duration MSDW Stable Value Plan- SEI Trustee 1,171,220.576 100.00
Portfolio Attn: Jeff Ryan
530 E. Swedesford Road
Wayne, PA 19087-1693
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio Nationwide Asset Allocation Trust 11,319.312 7.65
Moderate Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
-----------------------------------------------------------------------------------------------------------------------------
Nationwide Asset Allocation Trust 17,669.215 11.95
Moderately Aggressive Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nationwide Asset Allocation Trust 25,570.716 17.29
Aggressive Portfolio
C/O Nationwide Advisory Services Inc
Three Nationwide Plaza
Columbus, OH 43215
-----------------------------------------------------------------------------------------------------------------------------
United States Equestrian Team, Inc. 17,803.608 12.04
Attn: Robert C. Standish
Pottersville Road
Gladstone, NJ 07934
-----------------------------------------------------------------------------------------------------------------------------
Resources Trust Co. For the Exclusive Benefit of 68,190.441 46.10
Various IMS Customers
P.O. Box 3865
Englewood, CO 80155-3865
-----------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio Fidelity Investments Institutional 8,056,050.906 52.11
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
Merrill Lynch Trust Co TTEE 3,967,768.876 25.66
FBO Qualified Retirement Plans
Attn: Jerry Stone
265 Davidson Ave.
Somerset, NJ 08873
-----------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio Mellon Bank as Agent/Omnibus Account 1,393,442.339 58.03
Omnibus AIM 0027
135 Santilli Highway
Everett, MA 02149-1950
-----------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 167,026.066 6.96
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
MAS Funds Omnibus Acct for TFM and Merged 172,980.650 7.20
Shareholders
C/O CGFSC 8/th/ Floor T/A
73 Tremont St.
Boston, MA 02108
-----------------------------------------------------------------------------------------------------------------------------
Memphis Commerce Square 240,084.273 10.00
Attn: Ramona COE/Trust Division
One Commerce Square
Memphis, TN 38150
-----------------------------------------------------------------------------------------------------------------------------
The Union Central Life Insurance Company 266,672.933 11.11
Group Separate Account
Attn: Roberta Ujuary
1876 Waycorss Rd
Cincinnati, OH 45240
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio Fidelity Investments Institutional 135,107.803 10.15
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
UMB Bank NA 678,166.297 50.97
Attn: Employee Benefits Division
1010 Grand Avenue
Kansas City, MO 64141-6692
-----------------------------------------------------------------------------------------------------------------------------
Wachovia Bank NA Custodian for The Community 99,278.170 7.46
Foundation of Western North Carolina
301 N Main St.
P.O. Box 3073
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Winston-Salem, NC 27150
-----------------------------------------------------------------------------------------------------------------------------
Value Portfolio Fidelity Investments Institutional 6,723,196.161 37.86
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
State Street Bank TTEE FBO 7,131,808.392 40.16
200 Newport Avenue
JQ6N
North Quincy, MA 02171
-----------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio American Express Trust Company 116,424.880 100.00
FBO American Express Retirement Services
Attn: Chris Hunt N10/996
P.O. Box 534
Minneapolis, MN 55440-0534
-----------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio Fidelity Investments Institutional 3,991,986.255 30.91
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
Fidelity Management Trust Company 1,027,415.455 7.96
Attn: Ben Branham
Mail Zone H10C
82 Devonshire St.
Boston, MA 02109
-----------------------------------------------------------------------------------------------------------------------------
The Queen's Health Systems 1,116,813.573 8.65
Attn: Robert H. Ozaki
1099 Alakea St. 1100
Honolulu, HI 96813
-----------------------------------------------------------------------------------------------------------------------------
Transco & Co. 2,470,899.938 19.13
Attn: Wealth Management 10/th/ Floor
P.O. Box 48698
Wichita, KS 67201
-----------------------------------------------------------------------------------------------------------------------------
Transco & Co. 2,586,544.882 20.03
Attn: Wealth Management 10/th/ Floor
P.O. Box 48698
Wichita, KS 67201
-----------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio Fidelity Investments Institutional 1,041,946.039 42.58
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 251,519.478 10.28
SECS Corp
Attn: Mutual Fund Trading
P.O. Box 2052
Jersey City, NJ 07303
-----------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional 214,158.829 8.75
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015-1987
-----------------------------------------------------------------------------------------------------------------------------
HUD & Co. 126,184.056 5.16
Attn: Trust Operations
40 Court St.
Boston, MA 02108
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Investors Service Corp. 496,673.295 20.30
55 Water St. 32/nd/ Floor
New York, NY 10041-3299
-----------------------------------------------------------------------------------------------------------------------------
Resources Trust Co. 187,907.302 7.68
For the Exclusive Benefit of Various IMS
Customers
P.O. Box 3865
Englewood, CO 80155-3865
-----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio Fidelity Investments Institutional 2,357,452.033 97.79
Operations CO FIIOC as agent for
100 Magellan Way KW1C
Covington, KY 41015
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The persons listed above as owning 25% or more of the outstanding shares of each
Portfolio may be presumed to "control" (as that term is defined in the 1940 Act)
such Portfolios. As a result, those persons would have the ability to vote a
majority of the shares of the Portfolios on any matter requiring the approval of
shareholders of such Portfolios.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of its Portfolios. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods for computing performance follows.
Total Return
A Portfolio's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5, and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5, and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
When considering average total return figures for periods longer than one year,
it is important to note that a Portfolio's annual total return for any one
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
P (1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the stated period
The average annual total return of the Institutional Class Shares of each
Portfolio for the periods noted is set forth below:
70
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<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years ended 10 Years ended Inception to Inception Date
9/30/99 9/30/99 9/30/99 9/30/99 ----
------- ------- ------- -------
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 30.15 20.85 15.20 16.87 11/14/84
------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 64.27 29.26 N/A 23.08 3/30/90
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.44 N/A N/A 27.73 12/30/94
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 276.66 N/A N/A 154.96 6/30/98
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 23.83 17.33 16.12 13.06 7/1/86
------------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.30 14.96 13.01 15.13 11/5/84
------------------------------------------------------------------------------------------------------------------------------------
Value II Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 4.93 5.33 N/A 4.85 8/29/90
------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio -1.12 7.39 8.67 9.02 9/29/87
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .33 8.20 8.82 10.01 11/14/84
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio -.57 7.78 N/A 8.76 8/31/90
------------------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio -.05 6.88 N/A 6.45 4/30/93
------------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.81 10.76 11.26 10.70 2/28/89
------------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio .64 N/A N/A 7.11 10/3/94
------------------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio -.93 6.29 N/A 5.98 4/29/94
------------------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 3.61 6.02 N/A 5.69 3/31/92
------------------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio .11 7.64 N/A 6.69 10/1/92
------------------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 2.36 N/A N/A 2.54 10/1/97
------------------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio .71 8.38 N/A 8.23 3/31/92
------------------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.99 16.13 N/A 13.07 12/31/92
------------------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 17.71 14.80 N/A 14.21 7/29/94
------------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 2.87 N/A N/A 11.09 10/7/94
------------------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio -.32 N/A N/A 7.48 4/12/95
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Growth, Value II, NY Municipal, Targeted Duration, Balanced Plus and
Advisory Foreign Fixed Income II Portfolios had not commenced operations as of
September 30, 1999.
71
<PAGE>
The average annual total return of the Investment Class shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years ended 10 Years ended Inception to Inception Date
9/30/99 9/30/99 9/30/99 9/30/99 ----
------- ------- ------- -------
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 29.92 N/A N/A 19.37 4/10/96
----------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.30 N/A N/A 23.30 5/10/96
----------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.20 N/A N/A 8.84 5/6/96
----------------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio N/A N/A N/A .60 8/16/99
----------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio * N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .24 N/A N/A 6.01 10/15/96
----------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.67 N/A N/A 9.39 5/21/96
----------------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio N/A N/A N/A 1.49 8/16/99
----------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.84 N/A N/A 15.06 4/4/97
----------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 17.53 N/A N/A 13.08 6/10/96
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Domestic Fixed Income Portfolio had not commenced operations as of
September 30, 1999.
The average annual total return of the Adviser Class Shares of each Portfolio
for the periods noted is set forth below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 Year ended 5 Years ended 10 Years ended Inception to Inception
9/30/99 9/30/99 9/30/99 9/30/99 Date
------- ------- ------- ------- ----
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 29.80 N/A N/A 16.53 1/16/98
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 63.87 N/A N/A 32.95 1/31/97
------------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio 29.12 N/A N/A 5.96 7/17/98
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio N/A N/A N/A 7.51 1/22/99
------------------------------------------------------------------------------------------------------------------------------------
Value Portfolio 8.10 N/A N/A 11.17 7/17/96
------------------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio N/A N/A N/A -.40 3/1/99
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio .07 N/A N/A 5.29 11/7/96
------------------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 8.44 N/A N/A 7.24 1/31/97
------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 16.76 N/A N/A 14.45 11/1/96
------------------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio * N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Multi-Asset-Class Portfolio had not commenced operations as of September
30, 1999.
The Portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
Aggregate total returns may be shown by means
72
<PAGE>
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 aggregate total return of each Portfolio for the periods noted is set forth
below. One year aggregate total return figures and Portfolio inception dates are
reflected under the average annual total return figures provided above.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
5 Years Ended 10 Years Ended Inception to
Portfolio 9/30/99 * 9/30/99 * 9/30/99 *
--------- --------- --------- ---------
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio 157.75 311.59 917.14
-----------------------------------------------------------------------------------------------------------------------------
Growth Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 260.80 N/A 619.55
-----------------------------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio N/A N/A 219.88
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio N/A N/A 222.80
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 122.38 345.61 408.74
-----------------------------------------------------------------------------------------------------------------------------
Value Portfolio 100.75 239.62 716.59
-----------------------------------------------------------------------------------------------------------------------------
Value II Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio 29.63 N/A 53.83
-----------------------------------------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 42.86 129.65 182.06
-----------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 48.30 132.77 313.26
-----------------------------------------------------------------------------------------------------------------------------
Fixed Income II Portfolio 45.45 N/A 114.46
-----------------------------------------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 39.45 N/A 49.39
-----------------------------------------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio N/A N/A 5.14
-----------------------------------------------------------------------------------------------------------------------------
High Yield Portfolio 66.68 190.75 193.40
-----------------------------------------------------------------------------------------------------------------------------
Intermediate Duration Portfolio N/A N/A 40.90
-----------------------------------------------------------------------------------------------------------------------------
International Fixed Income Portfolio 35.65 N/A 37.02
-----------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 33.93 N/A 51.41
-----------------------------------------------------------------------------------------------------------------------------
Municipal Portfolio 44.47 N/A 57.33
-----------------------------------------------------------------------------------------------------------------------------
NY Municipal Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 49.64 N/A 81.15
-----------------------------------------------------------------------------------------------------------------------------
Targeted Duration Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
5 Years Ended 10 Years Ended Inception to
Portfolio 9/30/99 * 9/30/99 * 9/30/99 *
--------- --------- --------- ---------
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Portfolio 111.17 N/A 129.14
-----------------------------------------------------------------------------------------------------------------------------
Balanced Plus Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 99.43 N/A 98.83
-----------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio N/A N/A 68.86
-----------------------------------------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio ** N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio N/A N/A 38.01
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively.
** The Growth, Value II, NY Municipal, Targeted Duration, Balanced Plus and
Advisory Foreign Fixed Income II Portfolios had not commenced operations as of
September 30, 1999.
The Portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Institutional Class
-------------------
Portfolios are set forth below:
----------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Portfolio Total Return (%)
--------- ----------------
-------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 17.58
-------------------------------------------------------------------------------------
Growth Portfolio * N/A
-------------------------------------------------------------------------------------
Mid Cap Growth Portfolio 23.80
-------------------------------------------------------------------------------------
Mid Cap Value Portfolio 28.79
-------------------------------------------------------------------------------------
Small Cap Growth Portfolio 157.47
-------------------------------------------------------------------------------------
Small Cap Value Portfolio 14.03
-------------------------------------------------------------------------------------
Value Portfolio 15.84
-------------------------------------------------------------------------------------
Value II Portfolio * N/A
-------------------------------------------------------------------------------------
Cash Reserves Portfolio 5.16
-------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 9.57
-------------------------------------------------------------------------------------
Fixed Income Portfolio 10.53
-------------------------------------------------------------------------------------
Fixed Income II Portfolio 9.28
-------------------------------------------------------------------------------------
Global Fixed Income Portfolio 7.07
-------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Portfolio Total Return (%)
--------- ----------------
--------------------------------------------------------------------------------------------
<S> <C>
Multi-Market Fixed Income Portfolio 3.12
--------------------------------------------------------------------------------------------
High Yield Portfolio 11.33
--------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 7.65
--------------------------------------------------------------------------------------------
International Fixed Income Portfolio 6.54
--------------------------------------------------------------------------------------------
Limited Duration Portfolio 6.12
--------------------------------------------------------------------------------------------
Municipal Portfolio 7.28
--------------------------------------------------------------------------------------------
NY Municipal Portfolio * N/A
--------------------------------------------------------------------------------------------
Special Purpose Fixed Income Portfolio 8.76
--------------------------------------------------------------------------------------------
Targeted Duration Portfolio * N/A
--------------------------------------------------------------------------------------------
Balanced Portfolio 13.71
--------------------------------------------------------------------------------------------
Balanced Plus Portfolio * N/A
--------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 14.98
--------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 11.26
--------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A
--------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 7.56
--------------------------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Growth, Value II, NY Municipal, Targeted
Duration, Balanced Plus and Advisory Foreign Fixed Income II Portfolios had not
commenced operations.
The annualized since inception gross of fees returns of the Investment Class
----------------
Portfolios are set forth below:
----------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Portfolio Total Return (%)
--------- ----------------
<S> <C>
--------------------------------------------------------------------------
Equity Portfolio 20.27
--------------------------------------------------------------------------
Mid Cap Value 24.04
--------------------------------------------------------------------------
Value 9.63
--------------------------------------------------------------------------
Cash Reserves * 0.65
--------------------------------------------------------------------------
Domestic Fixed Income ** N/A
--------------------------------------------------------------------------
Fixed Income 6.66
--------------------------------------------------------------------------
High Yield 10.08
--------------------------------------------------------------------------
Intermediate Duration 1.16
--------------------------------------------------------------------------
Balanced 16.01
--------------------------------------------------------------------------
Multi-Asset-Class 14.10
--------------------------------------------------------------------------
</TABLE>
* Cumulative Return Since Inception (8/16/99)
75
<PAGE>
** As of September 30, 1999, the Domestic Fixed Income Portfolio had not
commenced operations.
The annualized since inception gross of fees returns of the Adviser Class
-------------
Portfolios are set forth below:
----------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Portfolio Total Return (%)
------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 17.42
------------------------------------------------------------------------------
Mid Cap Growth 33.98
------------------------------------------------------------------------------
Mid Cap Value 10.53
------------------------------------------------------------------------------
Small Cap Value 8.04
------------------------------------------------------------------------------
Value 12.06
------------------------------------------------------------------------------
Domestic Fixed Income -.44
------------------------------------------------------------------------------
Fixed Income 6.03
------------------------------------------------------------------------------
High Yield 8.00
------------------------------------------------------------------------------
Balanced 15.36
------------------------------------------------------------------------------
Multi-Asset-Class * N/A
------------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Multi-Asset Class Portfolio had not commenced
operations.
The Municipal and NY Municipal Portfolio may also calculate a total return which
reflects the cumulative percentage change in value over the measuring period
after the deduction of income taxes. The formula for calculating the total after
tax return can be expressed as follows:
Total After Tax Return = (((((ERV-M)/P) x T) + (M/P)) -1)
M = Portion of ending redeemable value which was derived from tax exempt income.
T = Applicable tax rate.
The after tax returns are as follows for the Municipal Portfolio for the period
10/1/92 (inception) through 9/30/99:
Pre-tax return Post-tax return
Municipal Portfolio 6.69 * / 57.33 ** 6.79 */ 58.34**
------- ------- ------ -----
* Annualized
** Cumulative
The federal tax rate used was 31%. All municipal interest was considered exempt
from federal taxes.
Yield
In addition to total return, each Portfolio of the Fund (except the Cash
Reserves Portfolio) may quote performance in terms of a 30-day yield. The yield
formula provides for semiannual compounding, which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to maintain its books and
records, therefore the advertised 30-day yield may not reflect the income paid
to your own account or the yield reported in the Portfolio's reports to
shareholders. A Portfolio may also advertise or quote a yield which is gross of
expenses.
76
<PAGE>
The yield figures provided will be calculated according to a formula prescribed
by the SEC and can be expressed as follows:
Yield = 2 [ ( (a-b/cd) + 1) /6/ - 1 ]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Portfolio at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations. The 30-day yield figures for each of the Fund's
fixed income and equity Portfolios is set forth below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Institutional Class Portfolios Period Ending
------------------------------ 9/30/99
-------
------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio .54
------------------------------------------------------------------------------------------
Growth Portfolio * N/A
------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio (.06)
------------------------------------------------------------------------------------------
Mid Cap Value Portfolio .45
------------------------------------------------------------------------------------------
Small Cap Growth Portfolio (.53)
------------------------------------------------------------------------------------------
Small Cap Value Portfolio .59
------------------------------------------------------------------------------------------
Value Portfolio 1.53
------------------------------------------------------------------------------------------
Value II Portfolio * N/A
------------------------------------------------------------------------------------------
Domestic Fixed Income Portfolio 6.20
------------------------------------------------------------------------------------------
Fixed Income Portfolio 6.58
------------------------------------------------------------------------------------------
Fixed Income II Portfolio 6.65
------------------------------------------------------------------------------------------
Global Fixed Income Portfolio 4.94
------------------------------------------------------------------------------------------
Multi-Market Fixed Income Portfolio 7.35
------------------------------------------------------------------------------------------
High Yield Portfolio 10.06
------------------------------------------------------------------------------------------
Intermediate Duration Portfolio 6.97
------------------------------------------------------------------------------------------
International Fixed Income Portfolio 4.08
------------------------------------------------------------------------------------------
Limited Duration Portfolio 6.18
------------------------------------------------------------------------------------------
Municipal Portfolio 5.36
------------------------------------------------------------------------------------------
NY Municipal Portfolio * N/A
------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Institutional Class Portfolios Period Ending
------------------------------ 9/30/99
-------
------------------------------------------------------------------------------------------
<S> <C>
Special Purpose Fixed Income Portfolio 6.85
------------------------------------------------------------------------------------------
Targeted Duration Portfolio * N/A
------------------------------------------------------------------------------------------
Balanced Portfolio 3.56
------------------------------------------------------------------------------------------
Balanced Plus Portfolio * N/A
------------------------------------------------------------------------------------------
Multi-Asset-Class Portfolio 3.24
------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income Portfolio 4.53
------------------------------------------------------------------------------------------
Advisory Foreign Fixed Income II Portfolio * N/A
------------------------------------------------------------------------------------------
Advisory Mortgage Portfolio 6.38
------------------------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Growth, Value II, NY Municipal, Targeted
Duration, the Balanced Plus and the Advisory Foreign Fixed Income II Portfolios
had not commenced operations.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Investment Class Portfolios Period Ending
--------------------------- 9/30/99
-------
------------------------------------------------------------------------
<S> <C>
Equity Portfolio .39
------------------------------------------------------------------------
Mid Cap Value Portfolio .29
------------------------------------------------------------------------
Value Portfolio 1.37
------------------------------------------------------------------------
Domestic Fixed Income * N/A
------------------------------------------------------------------------
Fixed Income 6.43
------------------------------------------------------------------------
High Yield 9.90
------------------------------------------------------------------------
Intermediate Duration 6.83
------------------------------------------------------------------------
Balanced 3.42
------------------------------------------------------------------------
Multi-Asset-Class 3.09
------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Domestic Fixed Income Portfolio had not
commenced operations.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Adviser Class Portfolios Period Ending
9/30/99
-------
------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio .31
------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio (.31)
------------------------------------------------------------------------------------------
Mid Cap Value Portfolio .19
------------------------------------------------------------------------------------------
Small Cap Value .34
------------------------------------------------------------------------------------------
Value Portfolio 1.27
------------------------------------------------------------------------------------------
Domestic Fixed Income 5.95
------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Adviser Class Portfolios Period Ending
9/30/99
-------
------------------------------------------------------------------------------------------
<S> <C>
Fixed Income 6.33
------------------------------------------------------------------------------------------
High Yield 9.80
------------------------------------------------------------------------------------------
Balanced 3.32
------------------------------------------------------------------------------------------
Multi-Asset-Class * N/A
------------------------------------------------------------------------------------------
</TABLE>
* As of September 30, 1999, the Multi-Asset-Class Portfolio had not commenced
operations.
Yield of the Cash Reserves Portfolio
The current yield of the Cash Reserves Portfolio is calculated daily on a base
period return of a hypothetical account having a beginning balance of one share
for a particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
the value of the account at the beginning of the period and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualizing of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by dividing the base period return by
7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the results.
Set forth below is an example, for purposes of illustration only, of the current
and effective yield calculations for the Cash Reserves Portfolio for the 7 day
base period ending September 30, 1999.
Period ending Period ending
9/30/99 9/30/99
------- --------
Institutional Class Investment Class
Value at beginning of period $ 1.00 $ 1.00
Value at end of period $ 1.00 $ 1.00
Current yield 5.10% 4.95%
Effective yield 5.23% 5.07%
The net asset value per share of the Cash Reserves Portfolio is $1.00 and has
remained at that amount since the initial offering of the Portfolio. The yield
of the Portfolio will fluctuate. The annualizing of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio
invests in, changes in interest rates on instruments, changes in the expenses of
the Fund and other factors. Yields are one basis investors may use to analyze
the Portfolios of the Fund and other investment vehicles; however, yields of
other investment vehicles may not be comparable because of the factors set forth
in the preceding sentence, differences in the time periods compared and
differences in the methods used in valuing Portfolio instruments, computing net
asset value and calculating yield.
Other Performance Information
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable
79
<PAGE>
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, a Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
the Funds to one another in appropriate categories over specific periods of time
may also be quoted in advertising. The performance of a Portfolio, as well as
the composite performance of all fixed income Portfolios and all equity
Portfolios, may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue
Organization, Inc. or other independent services which monitor the performance
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Fund may use performance
data reported in financial and industry publications, including Barron's,
Business Week, Forbes, Fortune, Investor's Business Daily, IBC/Donoghue's Money
Fund Report, Money Magazine, The Wall Street Journal and USA Today.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types
in any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.
The Portfolios may include in its advertisements, discussions or illustrations
of the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Portfolio (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Portfolio may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers by Morgan Stanley; and the portfolio
manager's goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Portfolios may include
80
<PAGE>
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
COMPARATIVE INDICES
Each Portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
Consumer Price Index
--------------------
The Consumer Price Index is published by the US Department of Labor and is a
measure of inflation.
Financial Times Actuaries World Ex US Index
-------------------------------------------
The FT-A World Ex US Index is a capitalization-weighted price index, expressed
in dollars, after dividend withholding taxes, of foreign stock prices. This
Index is calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
Co., and County NatWest/Wood Mackenzie in conjunction with the Institute of
Actuaries and the Faculty of Actuaries.
CS First Boston High Yield Index
--------------------------------
The CS First Boston High Yield Index was constructed to mirror the public high
yield debt market. The Index is a market weighted, trader priced index, tracked
by the First Boston Corporation. There are approximately 475 securities in the
index with a total market value of approximately $93 billion.
JP Morgan Traded Government Bond Index
--------------------------------------
The JP Morgan Traded Government Bond Index is designed to provide a
comprehensive measure of total return performance of the domestic Government
bond market of 13 countries. The Index is maintained by JP Morgan Securities,
Inc. and includes only liquid issues.
81
<PAGE>
J.P. Morgan Emerging Markets Bond Global Index (EMBI Global)
------------------------------------------------------------
The EMBI Global tracks total returns for U.S.-dollar denominated debt
instruments issued by emerging market sovereign and quasi-sovereign entities:
Brady bonds, loans, Eurobonds, and local market instruments. Countries covered
are Algeria, Argentina, Brazil, Bulgaria, Chile, China, Colombia, Cote d'Ivoire,
Croatia, Ecuador, Greece, Hungary, Lebanon, Malaysia, Mexico, Morocco, Nigeria,
Panama, Peru, the Philippines, Poland, Russia, South Africa, South Korea,
Thailand, Turkey, and Venezuela.
Lehman Brothers 5-Year Municipal Bond Index
-------------------------------------------
Lehman Brothers 5-Year Municipal Bond Index is a total return performance
benchmark for the intermediate investment grade tax exempt bond market. The
Index includes general obligation bonds, revenue bonds, insured bonds and
prefunded bonds with maturities between 4 and 6 years.
Lehman Brothers 10-Year Municipal Bond Index
--------------------------------------------
Lehman Brothers 10-Year Municipal Bond Index is a total return performance
benchmark for the long term, investment grade tax exempt bond market. The Index
includes general obligation bonds, revenue bonds, insured bonds and prefunded
bonds with maturities between 8 and 12 years.
Lehman Brothers Aggregate Index
-------------------------------
The Lehman Brothers Aggregate Index is a fixed-income market value-weighted
Index that combines the Lehman Brothers Government/Credit Index and the Lehman
Brothers Mortgage-Backed Securities Index. It includes fixed rate issues of
investment grade (BBB) or higher, with maturities of at least one year and
outstanding par values of at least $150 million.
Lehman Brothers Government/Credit Index
---------------------------------------
The Lehman Brothers Government/Credit Index is a combination of the Government
and Credit Bond Indices. The Government Index includes public obligations of
the U. S. Treasury, issues of Government agencies, and corporate debt backed by
the U. S. Government. The Credit Bond Index includes fixed-rate nonconvertible
corporate debt, asset-backed securities and commercial mortgage-backed
securitites. Also included are Yankee Bonds and nonconvertible debt issued by or
guaranteed by foreign or international governments and agencies. All issues are
investment grade (BBB) or higher, with maturities of at least one year and an
outstanding par value of at least $150 million. Any security downgraded during
the month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
Lehman Brothers Intermediate Government/Credit Index
----------------------------------------------------
The Lehman Brothers Intermediate Government/Credit Index is a combination of the
Government and Credit Bond Indices. All issues are investment grade (BBB) or
higher, with maturities of one to ten years and an outstanding par value of at
least $150 million. The Government Index includes public obligations of the U.S.
Treasury, issues of Government agencies, and corporate debt backed by the U.S.
Government. The Credit Bond Index includes fixed-rate nonconvertible
corporate debt, asset-backed securities and commercial mortgage-backed
securities. Also included are Yankee Bonds and nonconvertible debt issued by or
guaranteed by foreign or international governments and agencies. Any security
downgraded during the month is held in the index until month-end and then
removed. All returns are market value weighted inclusive of accrued income.
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Lehman Brothers Long Municipal Bond Index
-----------------------------------------
The Lehman Brothers Long Municipal Bond Index is a total return for the long-
term, investment-grade tax-exempt bond market for bonds. The Index includes
municipal bonds with maturities of 22 years or more.
Lehman Brothers Mortgage-Backed Securities Index
------------------------------------------------
The Lehman Brothers Mortgage-Backed Securities Index includes fixed rate
mortgage securities backed by GNMA, FHLMC, and FNMA. Graduated Payment Mortgages
(GPM's) are included. All issues are AAA, with maturities of at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
Lipper Growth & Income Fund Index
---------------------------------
The Lipper Growth & Income Fund Index is a net asset value weighted Index of the
30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
Lipper High Current Yield Fund Average
--------------------------------------
The Lipper High Current Yield Fund Average reports the average return of all the
Funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of Funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
Salomon World Government Bond Index ex US
-----------------------------------------
The Salomon World Government Bond Index ex US is designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the U.S. The index has been constructed
with the aim of choosing "an inclusive" universe of institutionally traded fixed
rate bonds. The selection of security types to be included in the index is made
with the aim of being as comprehensive as possible, while satisfying the
criterion of reasonable availability to domestic and international institutions
and the existence of complete pricing and market profile data.
International Finance Corporation Emerging Markets Index
--------------------------------------------------------
The International Finance Corporation Emerging Markets Index is an Index
designed to measure the total return in either US or local currency terms of
developing markets as defined by the World Bank. The selection of stocks is made
based on size, liquidity and industry. The weight given to any stock is
determined by its market capitalization.
Lipper Money Market Average
---------------------------
The Lipper Money Market Average reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market funds
for any given period. The number of funds tracked varies. As a result, reported
returns for longer time periods do not always match the linked product of
shorter period returns.
Merrill Lynch Corporate & Government Bond Index
-----------------------------------------------
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
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Morgan Stanley Capital International World ex USA Index
-------------------------------------------------------
The Morgan Stanley Capital International World ex USA Index is a capitalization-
weighted price index expressed in dollars. The Index reflects the performance of
over 1,100 companies in 19 foreign equity markets. The Index includes dividends,
net of foreign withholding taxes.
Morgan Stanley Capital International EAFE Index
-----------------------------------------------
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morgan Stanley Capital International EAFE-GDP Weighted Index
------------------------------------------------------------
The Morgan Stanley Capital International EAFE-GDP index is an arithmetic average
of the performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East. The Index is weighted by the
Gross Domestic Product of the various countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
----------------------------------------------------------------
The Morgan Stanley Capital International Emerging Markets Free Index is a
capitalization weighted Index of over 800 stocks from 17 different emerging
market countries.
Nasdaq Industrials Index
------------------------
The Nasdaq Industrials Index is a measure of all Nasdaq National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The Index is exclusive of
warrants, and all domestic common stocks traded in the regular Nasdaq market
which are not part of the Nasdaq National Market System. The Nasdaq Industrials
Index is market value weighted.
Russell 1000
------------
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
Russell 2000
------------
The Russell 2000 Index consists of the 2,000 smallest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,000 stocks in the Russell 2000 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
Russell 2500
------------
The Russell 2500 Index consists of the 2,500 smallest of the 3,000 largest
stocks. Market capitalization is typically between $1.7 billion and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,500 stocks in the Russell 2500 Index. The Index is an equity market
capitalization weighted Index available from Frank Russell & Co. on a monthly
basis.
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Russell 3000
------------
The Russell 3000 Index is a combination of the Russell 1000 Index and the
Russell 2000 Index.
Salomon 1-3 Year Treasury/Government Sponsored Index
----------------------------------------------------
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the Index.
Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index
--------------------------------------------------------------
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the Index.
Salomon Broad Index
-------------------
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed-income market capitalization-weighted index, including U. S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government Index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U. S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the Index is published monthly.
Salomon High-Yield Market Index
-------------------------------
The Salomon High-Yield Market Index includes public, non-convertible corporate
bond issues with at least one year remaining to maturity and $50 million in par
amount outstanding which carry a below investment-grade quality rating from
either Standard & Poor's or Moody's rating services.
Salomon Mortgage Index
----------------------
The Salomon Mortgage Index includes agency pass-throughs (GNMA, FHLMC, FNMA) and
FHA and GNMA project loans. Pools with remaining terms shorter than 25 years are
seasoned; pools with longer terms are classified as new. The Index is published
monthly.
Salomon One To Three Year Treasury Index
----------------------------------------
The Salomon One To Three Year Treasury Index includes only U.S. Treasury Notes
and Bonds with maturities one year or greater and less than three years.
Salomon World Government Bond Index
-----------------------------------
The Salomon World Government Bond Index is designed to provide a comprehensive
measure of total return performance of the domestic Government bond market of
thirteen countries. The Index has been constructed with the aim of choosing an
"all inclusive" universe of institutionally traded fixed-rate bonds. The
selection of security types to be included in the Index is made with the aim of
being as comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
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S&P 500
-------
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the Index. The
list is maintained by Standard & Poor's Corporation. It is market capitalization
weighted. Unlike the Russell indices, there are always 500 names in the S&P 500.
Changes are made by Standard & Poor's as needed.
S&P Mid Cap 400 Index
---------------------
The S&P Mid Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is also a market-value
weighted Index and was the first benchmark of mid cap stock price movement.
S&P/BARRA Mid Cap 400 Growth Index
----------------------------------
The S&P/BARRA Mid Cap 400 Growth Index is constructed by dividing the stocks in
the S&P MidCap 400 Index according to a single attribute: price-to-book ratios.
The MidCap 400 Growth Index is composed of firms with higher price-to-book
ratios. Like the MidCap 400, the MidCap 400 Growth Index is capitalization-
weighted, meaning that each stock is weighted in the appropriate index in
proportion to its market value.
S&P 500 Ex South Africa Index
-----------------------------
The S&P 500 Ex South Africa Index is the same as the S&P 500 Index excluding
companies that are on the Investor Responsibility Research Center ("IRRC") list
of companies doing business in South Africa. This Index is maintained by
Wilshire Associates.
Wilshire 5000 Equity Index
--------------------------
The Wilshire 5000 Equity Index measures performance of all US headquartered
equity securities with readily available price data. Approximately 6,000
capitalization weighted security returns are used to calculate the Index.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1999,
including notes thereto and the report of PricewaterhouseCoopers LLP thereon are
incorporated herein by reference. A copy of the 1999 Annual Report will
accompany the delivery of this Statement of Additional Information.
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APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings Excerpts from Moody's Investors Service, Inc.'s
Corporate Bond Ratings:
Aaa: judged to be the best quality; carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; Ba: B: protection of interest and
principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection as to
principal and interest; AA: also qualify as high grade obligations, and in the
majority of instances differs from AAA issues only in small degree; A: regarded
as upper medium grade; have considerable investment strength but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe; BBB: regarded as borderline between
definitely sound obligations and those where the speculative element begins to
predominate; this group is the lowest which qualifies for commercial bank
investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch IBCA Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
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A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
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B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA. A: An
issue rated A is backed by a sound capacity to pay the preferred stock
obligations , although it is somewhat more susceptible to the adverse effect of
the changes in circumstances and economic conditions. BBB: An issue rated BBB is
regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameter, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. Bb indicates the lowest
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degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch IBCA Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
D: Issuer is in default on its debt obligations and has filed for reorganization
or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
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