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July 12, 1999
Supplement to the PaineWebber Tax-Managed Equity Fund
Prospectus Dated October 4, 1998 (as revised October 23, 1998)
Dear Investor,
This is a supplement to the Prospectus of PaineWebber Tax-Managed Equity Fund
("Fund"). The principal purposes of the supplement are to notify shareholders
and prospective investors of changes to the Fund's expected portfolio turnover
and its description of its investment policies, of a new co-portfolio manager
and of circumstances under which the Fund may refuse to accept purchase orders
and exchanges into the Fund.
The following replaces the first paragraph on the cover page:
The Fund is designed for long-term investors who seek to maximize after-tax
total return by investing primarily in a diversified portfolio of equity
securities believed by Mitchell Hutchins to have reasonable valuations and
favorable earnings forecasts.
The following replaces the information concerning the Fund's Goal in "The Fund
at a Glance" section on Prospectus p. 3:
To maximize the after-tax value of your investment by investing primarily in
equity securities believed to have reasonable valuations and favorable earnings
forecasts.
The following replaces the information concerning the Fund's Risks in "The
Fund at a Glance" section on Prospectus p. 3:
Risks: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
The Fund may invest in U.S. dollar-denominated securities of foreign companies,
which involve more risk than investing in the securities of U.S. companies. The
Fund may use derivatives, such as options and futures, which may involve special
risks. The Fund may also invest up to 10% of its total assets in high-yield,
high-risk convertible bonds, which are predominantly speculative and may involve
major risk exposure to adverse conditions. Investors may lose money by investing
in the Fund; the investment is not guaranteed. Mitchell Hutchins expects to
minimize taxes on realized capital gains primarily by minimizing short-term
capital gains and by realizing capital losses that can offset capital gains.
Notwithstanding the Fund's use of tax management strategies, the Fund may have
taxable income and may realize taxable capital gains from time to time.
Investors may realize capital gains when they sell their shares.
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The following replaces the information concerning the risks in the "Who Should
Invest" section on Prospectus p. 3:
The Fund is designed for investors seeking to maximize after-tax total return by
investing primarily in equity securities believed to have reasonable valuations
and favorable earnings forecasts. In addition, the Fund can invest in high-
yield, high-risk convertible bonds. These investments offer the potential for
greater returns, but also entail a substantial degree of volatility and risk.
Accordingly, the Fund is designed for investors who are able to bear the risks
that come with investments in the stocks and bonds of such companies.
Tax-exempt institutions or investors funding qualified retirement plans or
individual retirement accounts ("IRAs") will not benefit from the Fund's tax-
management strategies. These investors are not subject to tax on their income
and, therefore, are generally not required to pay taxes on fund distributions.
The following replaces the information in the "Investment Objective &
Policies" section on Prospectus p. 7:
The Fund's investment objective may not be changed without shareholder approval.
Its other investment policies, except where noted, are not fundamental and may
be changed by the Fund's board.
The Fund's investment objective is to maximize after-tax total return. The Fund
seeks to achieve this objective by investing primarily in a diversified
portfolio of equity securities believed by Mitchell Hutchins to have reasonable
valuations and favorable earnings forecasts.
The Fund seeks to invest substantially all of its assets in equity securities
and, except under unusual market conditions, invests at least 65% of its total
assets in these securities. Up to 25% of the Fund's total assets may be invested
in U.S. dollar-denominated equity securities of foreign issuers that are traded
on recognized U.S. exchanges or in the U.S. over-the-counter ("OTC") market. Up
to 10% of the Fund's total assets may be invested in convertible bonds that are
rated below investment grade.
The following replaces the information in the "Investment Philosophy &
Process" section on Prospectus p. 7:
Mitchell Hutchins manages the Fund to maximize after-tax total return by
minimizing the taxes the shareholders incur in connection with the Fund's
realized capital gains. Mitchell Hutchins expects to minimize taxes on realized
capital gains primarily by minimizing short-term capital gains and by realizing
capital losses that can offset capital gains. Mitchell Hutchins expects to
invest the Fund's assets primarily in equity securities that have reasonable
valuations and favorable earnings forecasts. The Fund seeks to hold individual
securities for the long term, although the Fund may hold securities for shorter
periods. If Mitchell Hutchins decides to sell a
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particular appreciated security, under normal conditions management will attempt
to sell share lots that qualify for long-term capital gains treatment and, among
those, the share lots with the highest cost basis. When Mitchell Hutchins
believes it is prudent to do so, it may sell securities to realize capital
losses that can be used to offset realized capital gains.
In selecting securities for the Fund, Mitchell Hutchins follows a disciplined
investment process that relies on a tax-advantaged valuation model. The model
screens a universe of companies and ranks them based on a combination of
measures. Mitchell Hutchins uses this model to identify companies with low
price-to-earnings, price-to-cash flow and price-to-book ratios and favorable
earnings forecasts. In doing so, Mitchell Hutchins may apply a number of
factors, which may include cash flow, forecasted earnings, revenues, price
momentum, profitability, financial leverage, price of the security, return on
equity and projected dividends. The model seeks to determine the reasonableness
of the valuation of individual securities by comparing their relative valuation
with other individual securities or the U.S. equity securities market. Mitchell
Hutchins may make changes to the model or investment process over time,
consistent with the Fund's investment objective.
Mitchell Hutchins then applies traditional fundamental analysis to securities
that rank in the model's top 20%, focusing on factors such as company history
and forecasts, and industry and economic forecasts. Based on the Mitchell
Hutchins Equity Research Team's findings in the context of these forecasts,
Mitchell Hutchins decides whether to purchase or sell securities for the Fund.
Members of the Team may speak to the management of individual companies, as well
as their competitors.
The following replaces the information concerning the risks of tax management
strategies in "The Fund's Investments" section on Prospectus p. 8.
Risks of Tax Management Strategies. Over time, securities with unrealized gains
may comprise a substantial portion of the Fund's assets. While the Fund may use
a number of strategies to avoid having to recognize large capital gains, these
strategies may not be successful.
Notwithstanding the Fund's use of tax management strategies, the Fund may have
taxable income and may realize taxable capital gains from time to time. In
addition, investors who purchase Fund shares when the Fund has large accumulated
capital gains could receive a significant part of the purchase price of their
shares back as a taxable capital gain distribution. State or federal tax laws
or regulations may be amended at any time, including adverse changes to
applicable tax rates or capital gains holding periods.
The following replaces the information concerning the Fund's portfolio
turnover in the "The Fund's Investments" section on Prospectus p. 10.
Portfolio Turnover. The Fund estimates that portfolio turnover will not exceed
100% during its first fiscal year, but portfolio turnover will not be a limiting
factor in the Fund's operations. The
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Fund may have higher portfolio turnover if Mitchell Hutchins believes that
market conditions warrant or if Mitchell Hutchins believes that opportunities
exist to sell securities and realize capital losses that can be used to offset
capital gains.
The following text is added to the information in the "How To Buy Shares"
section on Prospectus pp. 14-16:
Frequent Trading. The interests of the Fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the Fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
Fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's Fund shares. These factors may hurt the Fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on the Fund's ability to manage its
investments, Mitchell Hutchins and the Fund may reject purchase orders and
exchanges into the Fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. The Fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
The following replaces the information concerning the portfolio manager of
the Fund in the third paragraph under the heading "About the Investment
Adviser," in the "Management" section, on Prospectus p. 17:
Mark A. Tincher and Christopher G. Altschul are primarily responsible for the
day-to-day portfolio management of the Fund. Mr. Tincher is a managing director
and chief investment officer of equities of Mitchell Hutchins, responsible for
overseeing the management of equity investments. Prior to March 1995, Mr.
Tincher worked for Chase Manhattan Private Bank ("Chase"), where he was a vice
president. Mr. Tincher directed the U.S. funds management and equity research
area at Chase, and oversaw the management of all Chase U.S. equity funds. Mr.
Altschul is a first vice president of Mitchell Hutchins. He is currently
responsible for the quantitative equity valuation model and has various
analytical responsibilities. Prior to joining Mitchell Hutchins in April 1995,
Mr. Altschul worked as an equity analyst at Chase. Upon his arrival at Mitchell
Hutchins, Mr. Tincher formed the Mitchell Hutchins Equity Research Team. Each
analyst on the Team focuses on different industries. As a result, the Team
provides the PaineWebber Stock Funds with more specialized knowledge of the
various industries in which the Funds generally invest. The Equity Research
Team is also assisted by members of Mitchell Hutchins' fixed income groups, who
provide input on market outlook, interest rate forecasts and other
considerations pertaining to domestic equity and fixed income investments.
This supplement supersedes prior Prospectus supplements.
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