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PRIVILEGED AND CONFIDENTIAL DRAFT
10/6/00
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER HIGH INCOME FUND
PAINEWEBBER STRATEGIC INCOME FUND
SUPPLEMENT TO PROSPECTUS DATED MARCH 31, 2000
October 10, 2000
Dear Investor,
This supplement to the Prospectus dated March 31, 2000 for the
above-referenced funds (each a "PW fund") describes important changes affecting
your fund. These changes were proposed by Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") and approved by your fund's board as in the best
interests of fund shareholders. If you have any questions about these changes,
you should contact your Financial Advisor.
The purpose of this supplement is to notify you of
- the proposed merger of each PW fund (other than PaineWebber High Income
Fund) into a series of another mutual fund and
- changes in investment management arrangements for each PW fund (other
than PaineWebber Low Duration U.S. Government Income Fund) and related
investment strategy changes that became effective on October 10, 2000.
The shareholders of each PW fund for which a merger is proposed must approve
the merger before the transaction can be effected. The proposed mergers will be
submitted to shareholders at meetings expected to be held in January or February
2001. If approved by the PW fund's shareholders, the merger for that PW fund is
expected to become effective no later than early March 2001. More information
about the proposed mergers for these PW funds and the new investment management
arrangements and related investment strategy changes is set out below.
The shareholders of PaineWebber High Income Fund will be asked to approve
its new investment management arrangements at a meeting expected to be held in
January or February 2001.
PROPOSED MERGERS
On October 6, 2000, the board of trustees for each of PaineWebber U.S.
Government Income Fund, PaineWebber Low Duration U.S. Government Income Fund,
PaineWebber Investment Grade Income Fund and PaineWebber Strategic Income Fund
approved the submission to the PW fund's shareholders of an Agreement and Plan
of Reorganization and Termination ("Plan") under which the PW fund would
transfer substantially all of its assets and liabilities to a series of
PaineWebber PACE Select Advisors Trust, an open-end mutual fund (each series a
"PACE fund"). The PACE funds' investments are managed by sub-advisers, and the
same sub-adviser for each PACE fund proposed as a merger partner for a PW fund
now serves as sub-adviser for that PW fund. If the PW fund's shareholders
approve the proposed merger, they will receive shares of the applicable PACE
fund in exchange for their shares in the PW fund, and the PW fund will cease
operations.
Each merger is expected to be a tax-free transaction, which means that no
gain or loss will be recognized by either fund and that the PW fund's
shareholders will not realize any gain or loss on their receipt of PACE fund
shares in the merger. More information about the proposed merger for each PW
fund will be provided to its shareholders in proxy solicitation materials that
are expected to be mailed in November 2000.
Item #ZS78
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The parties to each proposed merger are identified below, along with each
fund's investment objective and primary investment strategies. The term
"duration" as used in the table is a measure of a fund's exposure to interest
rate risk. A longer duration means that changes in market interest rates are
likely to have a larger effect on the value of the assets in a portfolio.
<TABLE>
PW Fund PACE Fund Proposed as Merger Partner
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND (A PACE U.S. GOVERNMENT SECURITIES FIXED INCOME
SERIES OF PAINEWEBBER MANAGED INVESTMENTS INVESTMENTS
TRUST)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: Current income.
consistent with the preservation of capital
and liquidity.
Invests primarily in U.S. government bonds, Invests in U.S. government bonds and other
including bonds that are backed by mortgages. bonds of varying maturities, but normally
Invests at least 25% of its total assets in limits its portfolio duration to between one
U.S. government and privately issued bonds and seven years. No policy of concentrating
that are backed by mortgages and other in bonds backed by mortgages and other
assets. No policy limiting portfolio assets.
duration.
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PAINEWEBBER LOW DURATION U.S. GOVERNMENT PACE U.S. GOVERNMENT SECURITIES FIXED INCOME
INCOME FUND (A SERIES OF PAINEWEBBER MANAGED INVESTMENTS
INVESTMENTS TRUST)
INVESTMENT OBJECTIVE: The highest level of INVESTMENT OBJECTIVE: Current income.
income that is consistent with the
preservation of capital and low volatility of
net asset value.
Invests primarily in U.S. government bonds, Invests in U.S. government bonds and other
including bonds that are backed by mortgages. bonds of varying maturities, but normally
Normally limits its portfolio duration to limits its portfolio duration to between one
between one and three years. Invests at least and seven years. No policy of concentrating
25% of its total assets in U.S. government in bonds backed by mortgages and other
and privately issued bonds that are backed by assets.
mortgages and other assets.
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PAINEWEBBER INVESTMENT GRADE INCOME FUND (A PACE INTERMEDIATE FIXED INCOME INVESTMENTS
SERIES OF PAINEWEBBER MANAGED INVESTMENTS
TRUST)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: Current income,
consistent with the preservation of capital consistent with reasonable stability of
and liquidity. principal.
Invests primarily in a diversified range of Invests in investment grade bonds (U.S. and
investment grade bonds (U.S. government foreign government bonds, U.S. and foreign
bonds, U.S. and foreign corporate bonds and corporate bonds and bonds that are backed by
bonds that are backed by mortgages). May mortgages and other assets) of varying
invest to a lesser extent in corporate bonds maturities, but normally limits its overall
that are below investment grade. No policy portfolio duration to between two and four
limiting portfolio duration. and one-half years.
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PAINEWEBBER STRATEGIC INCOME FUND (A SERIES PACE STRATEGIC FIXED INCOME INVESTMENTS
OF PAINEWEBBER SECURITIES TRUST)
INVESTMENT OBJECTIVE: High level of current INVESTMENT OBJECTIVE: Total return consisting
income and, secondarily, capital of income and capital appreciation.
appreciation.
Allocates its investments among three bond Invests primarily in investment grade bonds
market sectors: U.S. government and of governmental and private issuers in the
investment grade bonds, U.S. high yield bonds United States and foreign countries,
("junk bonds") (including convertible bonds) including bonds that are backed by mortgages
and foreign and emerging market bonds, or other assets and convertible bonds.
including foreign government bonds. The fund Invests in bonds of varying maturities but
has no limit on its investments in bonds that normally limits its portfolio duration to
are below investment grade or bonds that are between three and eight years. Invests, to a
denominated in foreign currencies. No policy limited extent, in bonds that are below
limiting portfolio duration. investment grade and in bonds that are
denominated in foreign currencies.
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You may continue to buy and sell shares in the PW funds and exchange your PW
fund Class A, Class B and Class C shares for shares of the corresponding class
of other PaineWebber funds prior to the shareholder meetings to vote on the
proposed mergers. When you sell or exchange your PW fund shares, you generally
will be subject to federal income tax on any gain you realize. If the merger
proposal is approved for a PW fund, that PW fund expects to close to new
purchases and exchange purchases approximately five business days prior to the
date on which the merger is effected.
NEW INVESTMENT MANAGEMENT ARRANGEMENTS
On October 6, 2000, the board of trustees for each of PaineWebber U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund, PaineWebber
Strategic Income Fund and PaineWebber High Income Fund terminated the existing
Investment Advisory and Administration Contract ("Old Advisory Contract") with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") relating to the PW
fund and approved new interim investment management arrangements that became
effective October 10, 2000.
For each of these PW funds, the interim investment management arrangements
consist of a new Interim Investment Management and Administration Contract
("Interim Management Contract") with Mitchell Hutchins and an Interim
Sub-Advisory Contract with an unaffiliated sub-adviser. Under the Interim
Management Contracts, Mitchell Hutchins' primary portfolio management
responsibility is to identify appropriate sub-advisers to manage the PW funds'
assets and to supervise and monitor the performance of those sub-advisers and
make recommendations about the retention or replacement of sub-advisers. These
new interim contracts terminate automatically 150 days after their effective
dates. The fees payable by each PW fund to Mitchell Hutchins under its Interim
Management Contract are identical to the fees under the Old Advisory Contract.
Mitchell Hutchins (not the funds) pays the sub-advisers for their services under
the Interim Sub-Advisory Contracts. The new sub-advisers for the PW funds are
identified below:
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PW Fund Sub-Adviser
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PaineWebber U.S. Government Income Fund Pacific Investment Management Company LLC
PaineWebber Investment Grade Income Fund Metropolitan West Asset Management, LLC
PaineWebber High Income Fund Massachusetts Financial Services Company
PaineWebber Strategic Income Fund Pacific Investment Management Company LLC
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These arrangements and some related changes in these PW funds' investment
strategies are described in greater detail below. The new sub-advisers expect to
realign their funds' portfolios to reflect their proprietary investment
strategies over the next several weeks. As a result, during this period, these
PW funds may experience higher portfolio turnover than normal and higher related
transaction costs, including brokerage commissions. In addition, a fund may
realize capital gains when portfolio positions are sold by a new sub-adviser.
These realized capital gains may increase a fund's taxable dividends for the
current year.
PaineWebber Low Duration U.S. Government Income Fund has been sub-advised by
Pacific Investment Management Company LLC since 1994, and no change is proposed
to its current investment management arrangments.
AS A RESULT OF THESE CHANGES, THE PROSPECTUS DATED MARCH 31, 2000 IS REVISED AS
FOLLOWS:
FOR PAINEWEBBER U.S. GOVERNMENT INCOME FUND, THE SECTION CAPTIONED "PRINCIPAL
INVESTMENT STRATEGIES" ON P. 3 OF THE PROSPECTUS IS REVISED BY REPLACING ALL
TEXT IN THE SECTION AFTER THE INITIAL PARAGRAPH WITH THE FOLLOWING:
Mitchell Hutchins Asset Management Inc., the fund's
manager, has appointed Pacific Investment Management
Company LLC ("PIMCO") as the fund's sub-adviser. PIMCO
establishes duration targets for the fund's portfolio
based on its expectations for changes in interest rates
and then positions the fund to take advantage of yield
curve shifts. PIMCO decides to buy or sell specific bonds
based on an analysis of their values relative to other
similar bonds. PIMCO monitors the prepayment experience of
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the fund's mortgage-backed bonds and will also buy and
sell securities to adjust the fund's average portfolio
duration, yield curve and sector and prepayment exposure,
as appropriate.
FOR PAINEWEBBER INVESTMENT GRADE INCOME FUND, THE SECTION CAPTIONED "PRINCIPAL
INVESTMENT STRATEGIES" ON P. 9 OF THE PROSPECTUS IS REVISED BY REPLACING ALL
TEXT IN THE SECTION AFTER THE INITIAL PARAGRAPH WITH THE FOLLOWING:
Mitchell Hutchins Asset Management Inc., the fund's
manager, has appointed Metropolitan West Asset Management,
LLC ("MWAM") as the fund's sub-adviser. MWAM decides to
buy and sell specific bonds for the fund based on its
value added strategies, with the goal of outperforming the
Lehman Brothers Intermediate Government Credit Index while
maintaining below average volatility. These strategies are
anchored by MWAM's long-term economic outlook and include
managing interest rate risk through limited duration
shifts, yield curve management, diversifying the fund's
investments across all permitted investment sectors while
overweighting the most attractive sectors, identifying
undervalued securities and aggressive execution.
FOR PAINEWEBBER HIGH INCOME FUND, THE SECTION CAPTIONED "PRINCIPAL INVESTMENT
STRATEGIES" ON P. 12 OF THE PROSPECTUS IS REVISED BY REPLACING ALL TEXT IN THE
SECTION AFTER THE INITIAL PARAGRAPH WITH THE FOLLOWING:
PRINCIPAL INVESTMENT STRATEGIES
Mitchell Hutchins Asset Management Inc., the fund's
investment adviser, has appointed Massachusetts Financial
Services Company ("MFS") as the fund's sub-adviser. In
deciding which bonds to buy or sell for the fund, MFS
considers the views of its large group of fixed income
portfolio managers and research analysts. This group
periodically assesses the three month total return outlook
for various segments of the fixed income markets. This
three month "horizon" outlook is used by the fund's
portfolio manager as a tool in making or adjusting the
fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit
ratings assigned by credit rating agencies, but rather
performs its own independent credit analysis.
FOR PAINEWEBBER STRATEGIC INCOME FUND, THE SECTION CAPTIONED "PRINCIPAL
INVESTMENT STRATEGIES" ON P. 15 OF THE PROSPECTUS IS REVISED BY REPLACING THE
FOURTH PARAGRAPH IN THIS SECTION WITH THE FOLLOWING:
The fund invests in when-issued and delayed delivery bonds
as a leveraging technique to increase its returns.
Mitchell Hutchins Asset Management Inc., the fund's
investment adviser, has appointed Pacific Investment
Management Company LLC ("PIMCO") as the fund's
sub-adviser. PIMCO seeks to invest the fund's assets in
those areas of the bond market that it considers
undervalued, based on such factors as quality, sector,
coupon and maturity. PIMCO establishes duration targets
for the fund's portfolio based on its expectations for
changes in interest rates and then positions the fund to
take advantage of yield curve shifts. PIMCO decides to buy
or sell specific bonds based on an analysis of their
values relative to other similar bonds. PIMCO monitors the
prepayment experience of the fund's mortgage-backed bonds
and will also buy and sell securities to adjust the fund's
average portfolio duration, yield curve, sector and
prepayment exposure, as appropriate.
FOR PAINEWEBBER STRATEGIC INCOME FUND, THE SECTION CAPTIONED "PRINCIPAL RISKS"
ON P. 15 OF THE PROSPECTUS IS REVISED BY ADDING THE FOLLOWING TO THE LIST OF
PRINCIPAL RISKS:
LEVERAGE RISK. Leverage magnifies the effect of changes in
market values. While leverage can increase the fund's
income and potential for gain, it also can increase
expenses and the risk of loss. The fund attempts to limit
the magnifying effect of its leverage by managing its
portfolio duration.
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THE SECTION AT PP. 18-19 OF THE PROSPECTUS CAPTIONED "MORE ABOUT RISKS AND
INVESTMENT STRATEGIES" IS REVISED BY REPLACING THE PARAGRAPH CAPTIONED "INTEREST
RATE RISK" WITH THE FOLLOWING:
INTEREST RATE RISK. The value of bonds generally can be
expected to fall when interest rates rise and to rise when
interest rates fall. Interest rate risk is the risk that
interest rates will rise so that the value of a fund's
investments in bonds will fall. Interest rate risk is the
primary source of risk for U.S. government and usually for
other very high quality bonds. The impact of changes in
the general level of interest rates on lower quality bonds
may be greater or less than the impact on higher quality
bonds.
Some corporate bonds provide that the issuer may repay
them earlier than the maturity date, particularly those
bonds issued at relatively high interest rates. When
interest rates are falling, the issuers of these bonds may
exercise their right to repay prior to maturity. A fund
then may have to reinvest the repayments at lower interest
rates. These "call" provisions can adversely affect the
market value of bonds subject to them so that these bonds
do not benefit fully from the rise in value that generally
occurs for bonds when interest rates fall.
THE SECTIONS AT PP. 26-27 OF THE PROSPECTUS CAPTIONED "INVESTMENT ADVISERS" AND
"PORTFOLIO MANAGERS" ARE REPLACED IN THEIR ENTIRETY BY THE FOLLOWING:
MANAGER
Mitchell Hutchins Asset Management Inc. is the investment
adviser and administrator for Low Duration Fund and the
manager and administrator for each of the other funds.
Mitchell Hutchins is located at 51 West 52nd Street, New
York, New York, 10019-6114, and is a wholly owned asset
management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc. ("PW Group"), a
publicly owned financial services holding company. On
August 31, 2000, Mitchell Hutchins was adviser or
sub-adviser of 31 investment companies with 75 separate
portfolios and aggregate assets of approximately $57.7
billion.
On July 12, 2000, PW Group and UBS AG ("UBS") announced
that they had entered into an agreement and plan of merger
under which PW Group will merge into a wholly owned
subsidiary of UBS. If all required approvals are obtained
and the required conditions are satisfied, PW Group and
UBS expect to complete the transaction in November 2000.
UBS, with headquarters in Zurich, Switzerland, is an
internationally diversified organization with operations
in many areas of the financial services industry.
Mitchell Hutchins, with the approval of each fund's board,
has selected investment sub-advisers for the funds and
reviews the performance of those investment advisers.
SUB-ADVISERS AND PORTFOLIO MANAGERS
U.S. GOVERNMENT INCOME FUND
LOW DURATION FUND
STRATEGIC INCOME FUND
Pacific Investment Management Company LLC ("PIMCO") serves
as sub-adviser for these funds. PIMCO is located at
840 Newport Center Drive, Suite 300, Newport Beach,
California 92660.
Scott Mather, an executive vice president of PIMCO, has
been primarily responsible for the day-to-day management
of U.S. Government Income Fund since October 10, 2000 and
of Low Duration U.S. Government Income Fund since January
2000. Prior to joining PIMCO in 1998, he was associated
with Goldman Sachs Funds Management, LP, where he was a
trader in the fixed income division and specialized in
structuring and trading a broad range of mortgage-backed
securities as well as managing proprietary derivatives
positions.
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William C. Powers, a managing director of PIMCO, has been
primarily responsible for the day-to-day portfolio
management for Strategic Income Fund since October 10,
2000. Mr. Powers has been associated with PIMCO since 1991
as a senior member of the fixed income portfolio
management group.
HIGH INCOME FUND
Massachusetts Financial Services Company ("MFS") serves as
investment adviser for this fund. MFS is located at
500 Boylston Street, Boston, Massachusetts 02116. As of
August 31, 2000, MFS had approximately $163 billion in
assets under management, including approximately
$5.7 billion in municipal bond fund assets.
Robert J. Manning and John Addeo will be responsible for
the day-to-day portfolio management of High Income Fund.
Mr. Manning is a senior vice president of MFS and the
director of fixed income research. Mr. Manning has been
employed in the investment management area of MFS since
1984. Mr. Addeo, a Vice President of MFS, has been
employed in the investment management area of MFS since
1998. Prior to joining MFS, Mr. Addeo was a vice president
in the high yield department at Eaton Vance from 1997 to
1998, and a vice president in the high yield department of
Keystone Investments from 1995 to 1997.
INVESTMENT GRADE INCOME FUND
Metropolitan West Asset Management, LLC ("MWAM") serves as
investment adviser for this fund. MWAM is located at
11766 Wilshire Blvd., Suite 1580, Los Angeles, California
90025. MWAM was formed in 1996 and, as of September 30,
2000, had approximately $8.7 billion in fixed income
investments under management.
MWAM uses a team approach in advising Investment Grade
Income Fund. The team members are Scott B. Dubchansky,
Stephen Kane, Laird R. Landmann, Tad Rivelle and Brian H.
Loo. All team members have held their fund
responsibilities since October 10, 2000.
Mr. Dubchansky has been chief executive officer of MWAM
since August 1996. From August 1992 through August 1996,
he was a senior vice president of Donaldson Lufkin &
Jenrette in the fixed income division. Prior to August
1992, Mr. Dubchansky was senior vice president, fixed
income sales, at Kidder Peabody and responsible for fixed
income sales to institutional clients.
Mr. Kane has been a portfolio manager with MWAM since
August 1996. From November 1995 until July 1996, he was an
account manager with PIMCO in Newport Beach, California.
Before then, Mr. Kane was a merchant banking associate
with Union Bank in Los Angeles, California.
Mr. Landmann has been a managing director and portfolio
manager with MWAM since August 1996. From November 1992
until July 1996, he was a principal and co-director of
fixed income with Hotchkis and Wiley in Los Angeles,
California. Before then, he was a portfolio manager with
PIMCO in Newport Beach, California.
Mr. Rivelle has been the chief investment officer and a
managing director with MWAM since August 1996. From
November 1992 until July 1996, he was a principal and
co-director of fixed income with Hotchkis and Wiley in Los
Angeles, California. Before then, he was a portfolio
manager with PIMCO in Newport Beach, California.
Mr. Loo has been a portfolio manager and analyst with MWAM
since August 1996. From June 1996 until July 1996,
Mr. Loo worked as an analyst with Hotchkis and Wiley in
Los Angeles, California. Before then, he worked as an
analyst with Trust Company of the West (starting in May
1994 while completing a graduate finance degree at
Carnegie Mellon University).
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