MERCURY HW FUNDS, 497, 2000-10-11

MERCURY HW FUNDS
497, 2000-10-11

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<PAGE> 1

Mercury HW Large Cap Value Fund

[ARTWORK]

This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for future
reference.

The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
PROSPECTUS - October 6, 2000
<PAGE> 2

Table of Contents

[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Large Cap Value Fund................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 7
Statement of Additional Information......................... 9

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 10
How to Buy, Sell, Transfer and Exchange Shares.............. 12
How Shares are Priced....................................... 16
Fee-Based Programs.......................................... 16
Dividends and Taxes......................................... 17

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 19
Financial Highlights........................................ 20

[TELEPHONE ICON]
TO LEARN MORE
-----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>

MERCURY HW LARGE CAP VALUE FUND
<PAGE> 3

[GLOBE ICON] Fund Facts

ABOUT THE MERCURY HW LARGE CAP VALUE FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in COMMON STOCKS of U.S. companies. At least 65% of
these will be large cap companies -- that is, those with market capitalizations
of $5 billion or more. Normally, the Fund invests at least 80% of its total
assets in stocks that pay dividends.

In investing the Fund's assets, Mercury Advisors (the "Investment Adviser")
follows a value style. This means that the Investment Adviser buys stocks that
it believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go down. These changes may occur because a particular
stock or stock market in which the Fund invests is rising or falling. Also, Fund
management may select securities which underperform the stock market or other
funds with similar investment objectives and investment strategies. If the value
of the Fund's investments goes down, you may lose money. We cannot guarantee
that the Fund will achieve its investment objective.

The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the S&P 500 Index. Also, the return of the
Fund will not necessarily be similar to the return of the S&P 500 Index.

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCKS -- securities representing shares of ownership of a corporation.
PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.
YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.
PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

2 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 4

[GLOBE ICON] Fund Facts

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.
- Are seeking a diversified portfolio of equity securities.
- Want a professionally managed and diversified portfolio.
- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.
- Are prepared to receive taxable dividends.

MERCURY HW LARGE CAP VALUE FUND 3
<PAGE> 5

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1, 5 and 10 years and for the life of the Class compare with those of a
broad measure of market performance. Class I shares now are sold subject to
sales charges, which are not reflected in the bar chart. If sales charges were
reflected, the returns would be less. How the Fund has performed in the past is
not necessarily an indication of how the Fund will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
17.70% (quarter ended March 31, 1991) and the lowest return for a quarter was
-19.94% (quarter ended September 30, 1990). The year-to-date return as of
September 30, 2000 was -0.53%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS TEN YEAR- INCEPTION
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I*+ -7.48% 14.84% 10.88% 10.53%(1)
S&P 500 INDEX 21.14% 28.66% 18.25% 16.32%(1)
------------------------------------------------------------------------------------------
</TABLE>

The S&P 500 Index is a capital weighted, unmanaged index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since June 24, 1987.

4 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 6
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.

MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.

FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers a single class of shares.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS I*
------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b)
------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c)
------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Exchange Fee None
------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.75%
------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees None
------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 0.27%
------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.02%
------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.07%
------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 0.95%
------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* As of October 6, 2000, Investor Class shares were
redesignated Class I shares.
(a) Certain securities dealers or other financial intermediaries
may charge a fee to process a purchase or sale of shares.
See "How to Buy, Sell, Transfer and Exchange Shares."
(b) Some investors may qualify for reductions in the sales
charge (load).
(c) You may pay a deferred sales charge if you purchase $1
million or more and you redeem within one year.
(d) The Investment Adviser has contractually agreed to waive
management fees and/or reimburse expenses through June 30,
2001, as shown in the table.
</TABLE>

MERCURY HW LARGE CAP VALUE FUND 5
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[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, and that the Fund's operating expenses remain the same except for
the expense reimbursement in effect for the first year. This assumption is not
meant to indicate you will receive a 5% annual rate of return. Your annual
return may be more or less than the 5% used in these examples. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:

<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------------------
<S> <C>
ONE YEAR $ 617
-------------------------------------------------------------------------------
THREE YEARS $ 826
-------------------------------------------------------------------------------
FIVE YEARS $1,052
-------------------------------------------------------------------------------
TEN YEARS $1,701
-------------------------------------------------------------------------------
</TABLE>

6 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 8

ABOUT THE PORTFOLIO MANAGERS -- Gail Bardin is a managing director of the
Investment Adviser and began co-managing the Fund in April 1994. She has been a
portfolio manager of the Investment Adviser since 1988.

Sheldon Lieberman joined the Investment Adviser in 1994 as a portfolio manager
and began co-managing the Fund in August 1997. Before joining the Investment
Adviser, Mr. Lieberman was the Chief Investment Officer for the Los Angeles
County Employees Retirement Association.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

[MAGNIFYING GLASS ICON] About the Details
HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to provide current income and long-term
growth of income, accompanied by growth of capital.

The Fund invests at least 65% of its total assets in common stocks of large cap
U.S. companies -- that is, companies with market capitalizations of $5 billion
or more at the time of investment. Normally, the Fund invests at least 80% of
its total assets in stocks that pay dividends.

In addition to these principal investments, the Fund can invest up to 10% of its
total assets in foreign securities. It also may invest in stocks that don't pay
dividends, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential.

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds, money market mutual funds and
other money market instruments. Also, the Fund temporarily can invest up to 100%
of its assets in short-term, investment grade bonds and other money market
instruments in response to adverse market, economic or political conditions. The
Fund may not achieve its objectives using this type of investing.
INVESTMENT RISKS
--------------------------------------------------------------------------------

This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.

The Fund's principal risks are market and selection risks.

MARKET AND SELECTION RISKS

Market risk is the risk that the market will go down in value, including the
possibility that the market will go down sharply and unpredictably. Selection
risk is the risk that the investments that Fund management selects will
underperform the market or other funds with similar investment objectives and
investment strategies.

MERCURY HW LARGE CAP VALUE FUND 7
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[MAGNIFYING GLASS ICON] About the Details

The Fund also may be subject to the following risks:

FOREIGN MARKET RISK

The Fund may invest up to 10% of its total assets in securities of companies
located in foreign countries, including American Depositary Receipts. American
Depositary Receipts are receipts typically issued by an American bank or trust
company that show evidence of underlying securities by a foreign corporation.
Foreign investments involve special risks not present in U.S. investments that
can increase the chances that the Fund will lose money.

- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

CONVERTIBLE SECURITIES

Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.

DEBT SECURITIES

Debt securities, such as bonds, involve credit risk, which is the risk that the
borrower will not make timely payments of principal and interest. The degree of
credit risk depends on the issuer's financial condition and on the terms of the
bonds. These securities are also subject to interest rate risk, which is the
risk that the value of the security may fall when interest rates rise. In
general, the market price of debt securities with longer maturities will go up
or down more in response to changes in interest rates than shorter-term
securities.

8 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 10

[MAGNIFYING GLASS ICON] About the Details

DERIVATIVES

The Fund also may invest in options. Derivatives like options may allow the Fund
to increase or decrease its level of risk exposure more quickly and efficiently
than transactions in other types of instruments. Derivatives, however, are more
volatile and involve significant risks, including:

- LEVERAGE RISK -- Leverage risk is the risk associated with certain
types of investments or trading strategies that relatively small
market movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount
originally invested.

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW LARGE CAP VALUE FUND 9
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[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

To better understand the pricing of the Fund's shares, we have summarized the
information below:

<TABLE>
<CAPTION>
CLASS I*
--------------------------------------------------------------------------------------
<S> <C>
Availability LIMITED TO CERTAIN INVESTORS INCLUDING:
- Investor Class and current Class I beneficial
shareholders.
- Certain retirement plans.
- Participants in certain programs sponsored by
affiliates.
- Certain investors participating in transaction fee
programs.
- Certain employees and affiliates of selected
securities dealers and other financial intermediaries.
--------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES CHARGES
AVAILABLE FOR LARGER INVESTMENTS.
--------------------------------------------------------------------------------------
Deferred Sales Charge? NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION THAT
ARE REDEEMED WITHIN ONE YEAR.)
--------------------------------------------------------------------------------------
Account Maintenance and NO.
Distribution Fees?
--------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares.

10 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 12
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Mercury mutual funds that you agree to buy within a
13 month period. Certain restrictions apply.

CLASS I SHARES*

If you buy shares of the Fund, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
AS A % OF YOUR AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT** OFFERING PRICE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $25,000 5.25% 5.54% 5.00%
---------------------------------------------------------------------------------------
$25,000 BUT LESS THAN
$50,000 4.75% 4.99% 4.50%
---------------------------------------------------------------------------------------
$50,000 BUT LESS THAN
$100,000 4.00% 4.17% 3.75%
---------------------------------------------------------------------------------------
$100,000 BUT LESS THAN
$250,000 3.00% 3.09% 2.75%
---------------------------------------------------------------------------------------
$250,000 BUT LESS THAN
$1,000,000 2.00% 2.04% 1.80%
---------------------------------------------------------------------------------------
$1,000,000 AND OVER*** 0.00% 0.00% 0.00%
---------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I
shares.
** Rounded to the nearest one-hundredth percent.
*** If you invest $1,000,000 or more in Class I shares, you may not pay an
initial sales charge. In that case, the Investment Adviser compensates the
selling dealer or other financial intermediary from its own resources. If
you redeem your shares within one year after purchase, you may be charged a
deferred sales charge. This charge is 1.00% of the lesser of the original
cost of the shares being redeemed or your redemption proceeds. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
I shares by certain employer-sponsored retirement or savings plans.

No initial sales charge applies to shares that you buy through reinvestment of
dividends.

A reduced or waived sales charge on a purchase of Class I shares may apply for:

- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT
- Certain trusts managed by banks, thrifts or trust companies
including those affiliated with the Investment Adviser or its
affiliates
- Certain employer-sponsored retirement or savings plans
- Certain investors, including directors or trustees of mutual funds
sponsored by the Investment Adviser or its affiliates, employees
of the Investment Adviser and its affiliates and employees of
selected securities dealers

MERCURY HW LARGE CAP VALUE FUND 11
<PAGE> 13

[CHECKMARK ICON] Account Choices

- Certain programs of the Investment Adviser or its affiliates
- Certain programs of selected securities dealers and other
financial intermediaries that have an agreement with the
Distributor or its affiliates
- Investor Class beneficial shareholders

If you redeem Class I shares and within 30 days buy new shares of the same
class, you will not pay a sales charge on the new purchase amount. The amount
eligible for this "Reinstatement Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege, contact your financial
consultant, selected securities dealer, other financial intermediary or the
Fund's Transfer Agent at 1-800-236-4479.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through your financial consultant, selected securities dealer,
broker, investment adviser, service provider or other financial intermediary.
You may also buy shares through the Transfer Agent. To learn more about buying
shares through the Transfer Agent, call 1-800-236-4479. Because the selection of
a mutual fund involves many considerations, your financial consultant, selected
securities dealer or other financial intermediary may help you with this
decision. The Fund does not issue share certificates.

Because of the high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account if the net asset value of your account
falls below $500 due to redemptions you have made. You will be notified that the
value of your account is less than $500 before the Fund makes an involuntary
redemption. You will then have 60 days to make an additional investment to bring
the value of your account to at least $500 before the Fund takes any action.
This involuntary redemption does not apply to retirement plans or Uniform Gifts
or Transfers to Minors Act accounts.

12 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 14

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES Determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under certain
circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.

Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary.
The current minimum for such automatic reinvestments is $100.
The minimum may be waived or revised under certain
circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW LARGE CAP VALUE FUND 13
<PAGE> 15

[CHECKMARK ICON] Account Choices

Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.

The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange or registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.

You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

14 MERCURY HW LARGE CAP VALUE FUND
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[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.

If you wish to exchange into a fund in which you have no
Class I shares (and are not eligible to buy Class I shares),
you will exchange into Class A shares. If you wish to
exchange into Summit, you will exchange into Class A shares
of Summit.

Some of the Mercury mutual funds may impose a different
initial sales charge schedule. If you exchange Class I
shares for shares of a fund with a higher initial sales
charge than you originally paid, you may be charged the
difference at the time of exchange.

To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.

Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW LARGE CAP VALUE FUND 15
<PAGE> 17

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of regular trading on the Exchange based on
prices at the time of closing. Regular trading on the Exchange generally closes
at 4:00 p.m. Eastern time. The net asset value used in determining your price is
the next one calculated after your purchase or redemption order is placed. If
market quotations are not available, the Fund may use fair value.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value next
computed by the Fund after such acceptance. If the payment for a purchase order
is not made by a designated later time, the order will be canceled and the
financial intermediary could be held liable for any losses.

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

If you participate in certain fee-based programs offered by the Investment
Adviser or an affiliate of the Investment Adviser, or in certain transaction fee
programs sponsored by selected securities dealers or other financial
intermediaries that have an agreement with the Distributor, you may be able to
buy Class I shares at net asset value, including by exchanges from other share
classes. Sales charges on the shares being exchanged may be reduced or waived
under certain circumstances.

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program. This may be a taxable event and you will pay any applicable sales
charges.

16 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 18
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into the Summit fund. The class you receive may be the class you
originally owned when you entered the program, or in certain cases, a different
class. Any redemption or exchange will be at net asset value. However, if you
participate in the program for less than a specified period, you may be charged
a fee in accordance with the terms of the program.

Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your financial
consultant, selected securities dealer or other financial intermediary.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute any net investment income quarterly and any net
realized long-term or short-term capital gains at least annually. The Fund may
also pay a special distribution at the end of the calendar year to comply with
Federal tax requirements. DIVIDENDS may be reinvested automatically in shares of
the Fund at net asset value without a sales charge or may be taken in cash. If
your account is with a selected securities dealer or other financial
intermediary that has an agreement with the Fund, contact your dealer or
intermediary about which option you would like. If your account is with the
Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent. The Fund anticipates that the majority of its dividends, if any,
will consist of ordinary income. Capital gains, if any, may be taxable to you at
different rates, depending, in part, on how long the Fund has held the assets
sold.

You may be subject to Federal income tax on dividends from the Fund whether you
receive them in cash or additional shares. If you redeem Fund shares or exchange
them for shares of another fund, you generally will be treated as having sold
your shares and any gain on the transaction may be subject to Federal income
tax. Capital gains are generally taxed at different rates than ordinary income
dividends. In addition, dividends from the Fund may be subject to state and
local income taxes.

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax treaties between certain countries
and the U.S. may reduce or eliminate such taxes.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include

MERCURY HW LARGE CAP VALUE FUND 17
<PAGE> 19

[CHECKMARK ICON] Account Choices

distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

By law, the Fund must withhold 31% of your dividends and redemption proceeds if
you have not provided a taxpayer identification number or social security number
or if the number you have provided is incorrect.

This section summarizes some of the consequences under current Federal income
tax law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.

18 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 20

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

Mercury Advisors, the Fund's Investment Adviser, manages the Fund's investments
under the overall supervision of the Board of Trustees. The Investment Adviser
has the responsibility for making all investment decisions for the Fund. For the
fiscal year ended June 30, 2000, the Fund paid an affiliate of the Investment
Adviser a management fee at the annual rate of 0.75% of the average daily net
assets of the Fund.

The Investment Adviser was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
The Investment Adviser and its affiliates had approximately $555 billion in
investment company and other portfolio assets under management as of June 30,
2000.

Although not required to do so, the Investment Adviser has agreed to make
reimbursements so that the regular annual operating expenses of the Fund will be
limited as shown in the table on page 5. The Investment Adviser has agreed to
these expense limits through June 2001, and will thereafter give shareholders at
least 30 days' notice if this reimbursement policy will change.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Equity Income Fund.

MERCURY HW LARGE CAP VALUE FUND 19
<PAGE> 21

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). These
financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Fund's financial statements are included in the
Fund's annual report, which is available upon request. Further performance
information is contained in the annual report.

<TABLE>
<CAPTION>
CLASS I(1)
-----------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -----------------------------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 19.96 $ 22.02 $ 21.25 $ 18.91 $ 17.24
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.39 0.41 0.46 0.49 0.45(2)
-------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (4.14) 0.82 4.02 4.15 2.89
-------------------------------------------------------------------------------------------------------------------------
Total from investment operations (3.75) 1.23 4.48 4.64 3.34
-------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.39) (0.41) (0.46) (0.48) (0.57)
Realized gain on investments -- net (2.80) (2.88) (3.25) (1.82) (1.10)
-------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (3.19) (3.29) (3.71) (2.30) (1.67)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 13.02 $ 19.96 $ 22.02 $ 21.25 $ 18.91
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (19.82)% 7.32% 22.60% 26.15% 20.04%
-------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.95% 0.91% 0.87% 0.88% 0.98%
-------------------------------------------------------------------------------------------------------------------------
Expenses 1.02% 0.91% 0.87% 0.88% 0.98%
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.37% 2.09% 1.99% 2.49% 2.56%
-------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $79.31 $148.73 $175.25 $185.87 $182.54
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 41% 18% 23% 44% 24%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares. No sales loads were charged prior to this time.

(2) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.

* Total investment return excludes the effects of sales charges.

20 MERCURY HW LARGE CAP VALUE FUND
<PAGE> 22

FUND
Mercury HW Large Cap Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 23
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

Additional information about the Fund's investments will be available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report you will find a discussion of the relevant market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year. You may obtain these reports at no cost by calling
1-800-236-4479.

The Fund will send you one copy of each shareholder report and certain other
mailings regardless of the number of Fund accounts you have. To receive separate
shareholder reports for each account, call your financial consultant or other
financial intermediary or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and brokerage or mutual
fund account number. If you have any questions, please call your financial
consultant, other financial intermediary, or the Transfer Agent at
1-800-236-4479.

STATEMENT OF ADDITIONAL INFORMATION

Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by electronic request at the following e-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1040-1000
(C) Mercury Advisors
Mercury HW
Large Cap Value Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 24

Mercury HW Mid-Cap Value Fund

[ARTWORK]

This prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
PROSPECTUS - October 6, 2000
<PAGE> 25

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Mid-Cap Value Fund..................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

MERCURY HW MID-CAP VALUE FUND
<PAGE> 26

[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCKS -- securities representing shares of ownership of a corporation.

PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.

YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.

PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

ABOUT THE MERCURY HW MID-CAP VALUE FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in COMMON STOCKS of U.S. companies with market
capitalizations between $1 billion and $15 billion. Some of these securities may
be purchased in initial public offerings ("IPOs").

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the Russell Midcap Index. Also, the return
of the Fund will not necessarily be similar to the return of the Russell Midcap
Index.

2
MERCURY HW MID-CAP VALUE FUND

<PAGE> 27

[GLOBE ICON] Fund Facts

Securities of mid cap companies generally trade in lower volumes and are subject
to greater and more unpredictable price changes than larger cap securities or
the stock market as a whole. Investing in securities of mid cap companies
requires a long-term view. Securities purchased in IPOs may not be available in
sufficient quantity to affect the Fund's performance, and may produce losses.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.

- Are seeking to diversify a portfolio of equity securities to
include stocks with market capitalizations between $1 billion and
$15 billion.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.

- Are prepared to receive taxable dividends.

MERCURY HW MID-CAP VALUE FUND 3
<PAGE> 28

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 year and for the life of the Class compare with those of a broad measure
of market performance. Class I shares now are sold subject to sales charges,
which are not reflected in the bar chart. If sales charges were reflected, the
returns would be less. How the Fund has performed in the past is not necessarily
an indication of how the Fund will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
26.36% (quarter ended June 30, 1999) and the lowest return for a quarter was
-17.56% (quarter ended September 30, 1998). The year-to-date return as of
September 30, 2000 was 27.21%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR INCEPTION
------------------------------------------------------------------------------------
<S> <C> <C>
CLASS I*+ 10.73% 9.58%(1)
RUSSELL MIDCAP INDEX 18.23% 18.86%(2)
------------------------------------------------------------------------------------
</TABLE>

The Russell Midcap Index is an unmanaged index that measures the performance of
the 800 smallest companies in the Russell 1000 Index, which represents
approximately 26% of the total market capitalization of the Russell 1000 Index.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I shares.

(1) Since January 2, 1997.

(2) Since January 1, 1997.

4
MERCURY HW MID-CAP VALUE FUND
<PAGE> 29
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.

MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.

FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers a single class of shares.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS I*
------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b)
------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c)
------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Exchange Fee None
------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.75%
------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees None
------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 1.17%
------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.92%
------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.77%
------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 1.15%
------------------------------------------------------------------------
</TABLE>

MERCURY HW MID-CAP VALUE FUND 5
<PAGE> 30

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------------------
<S> <C>
ONE YEAR $ 636
-------------------------------------------------------------------------------
THREE YEARS $1,026
-------------------------------------------------------------------------------
FIVE YEARS $1,440
-------------------------------------------------------------------------------
TEN YEARS $2,591
-------------------------------------------------------------------------------
</TABLE>

6 MERCURY HW MID-CAP VALUE FUND
<PAGE> 31
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Jim Miles began co-managing the Fund in May 1995
when he joined the Investment Adviser. Before joining the Investment Adviser,
Mr. Miles was with BT Securities Corporation (an affiliate of Bankers Trust New
York Corporation) as vice president in the BT Securities Finance Group from 1988
to 1995.

Stan Majcher has been a portfolio manager of the Fund since January 1999. Mr.
Majcher joined the Investment Adviser in August 1996 as a domestic equity
analyst. From 1994 to 1996, he was an investment banking analyst at Merrill
Lynch & Co. Inc.

ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------
The Fund's investment objective is to provide current income and long-term
growth of income, accompanied by growth of capital.

The Fund invests at least 65% of its total assets in stocks of mid cap U.S.
companies. A "mid cap company" is one with a market capitalization of between $1
billion and $15 billion at the time of investment. Some of these securities may
be purchased in initial public offerings.

In addition to these principal investments, the Fund can invest up to 20% of its
total assets in foreign securities.

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

MID CAP COMPANIES

The Fund invests in the securities of mid cap companies. Investment in mid cap
companies involves more risk than investing in larger, more established
companies. Mid cap companies may have limited product lines or markets. They may
be less financially secure than larger, more established companies. They may
depend on a small number of key personnel. If a product fails, or if

MERCURY HW MID-CAP VALUE FUND 7
<PAGE> 32

[MAGNIFYING GLASS ICON] About the Details

management changes, or there are other adverse developments, the Fund's
investment in a mid cap company may lose substantial value.

INITIAL PUBLIC OFFERINGS

Securities purchased in initial public offerings may produce gains that
positively affect Fund performance during any given period, but such securities
may not be available during other periods or, even if they are available, may
not be available in sufficient quantity to have a meaningful impact on Fund
performance. They may also, of course, produce losses.

The Fund also may be subject to the following risks:

FOREIGN MARKET RISK

The Fund may invest up to 20% of its total assets in securities of companies
located in foreign countries, including American Depositary Receipts. American
Depositary Receipts are receipts typically issued by an American bank or trust
company that show evidence of underlying securities issued by a foreign
corporation. Foreign investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money.

- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

PORTFOLIO TURNOVER

At times the Fund may purchase securities for short-term profits, which may
result in a high portfolio turnover rate. A high portfolio turnover rate
involves certain tax consequences and correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne by the
Fund.

CONVERTIBLE SECURITIES

8 MERCURY HW MID-CAP VALUE FUND
<PAGE> 33

[MAGNIFYING GLASS ICON] About the Details

reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.

DEBT SECURITIES

DERIVATIVES

- LIQUIDITY RISK -- Liquidity risk is the risk that certain
securities may be difficult or impossible to sell at the time that
the seller would like or at the price that the seller believes the
security is currently worth.
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW MID-CAP VALUE FUND 9
<PAGE> 34

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

To better understand the pricing of the Fund's shares, we have summarized the
information below:

<TABLE>
<CAPTION>
CLASS I*
------------------------------------------------------------------------------------
<S> <C>
Availability LIMITED TO CERTAIN INVESTORS INCLUDING:
- Investor Class and current Class I beneficial
shareholders.
- Certain retirement plans.
- Participants in certain programs sponsored by
affiliates.
- Certain investors participating in transaction fee
programs.
- Certain employees and affiliates of selected securities
dealers and other financial intermediaries.
------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES CHARGES
AVAILABLE FOR LARGER INVESTMENTS.
------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION THAT
Charge? ARE REDEEMED WITHIN ONE YEAR.)
------------------------------------------------------------------------------------
Account Maintenance NO.
and Distribution
Fees?
------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares.

10 MERCURY HW MID-CAP VALUE FUND
<PAGE> 35
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in Mercury mutual
funds.

CLASS I Shares*

If you buy shares of the Fund, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

No initial sales charge applies to Class I shares that you buy through
reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I shares may apply for:

MERCURY HW MID-CAP VALUE FUND 11
<PAGE> 36

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

12 MERCURY HW MID-CAP VALUE FUND
<PAGE> 37

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES Determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under certain
circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.

Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under certain
circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary.

The current minimum for such automatic reinvestments is $100.

The minimum may be waived or revised under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW MID-CAP VALUE FUND 13
<PAGE> 38

[CHECKMARK ICON] Account Choices

14 MERCURY HW MID-CAP VALUE FUND
<PAGE> 39

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.

To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.

MERCURY HW MID-CAP VALUE FUND 15
<PAGE> 40

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

16 MERCURY HW MID-CAP VALUE FUND

<PAGE> 41
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute any net investment income and any net realized long-
term or short-term capital gains at least annually. The Fund may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. DIVIDENDS may be reinvested automatically in shares of the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a selected securities dealer or other financial intermediary that has an
agreement with the Fund, contact your dealer or intermediary about which option
you would like. If your account is with the Transfer Agent and you would like to
receive dividends in cash, contact the Transfer Agent. The Fund anticipates that
the majority of its dividends, if any, will consist of ordinary income. Capital
gains, if any, may be taxable to you at different rates, depending, in part, on
how long the Fund has held the assets sold.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

MERCURY HW MID-CAP VALUE FUND 17
<PAGE> 42

[CHECKMARK ICON] Account Choices

18 MERCURY HW MID-CAP VALUE FUND
<PAGE> 43

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Mid-Cap Fund.

MERCURY HW MID-CAP VALUE FUND 19
<PAGE> 44

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance since its inception. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). These financial
highlights were audited by PricewaterhouseCoopers LLP. The accountants' report
and the Fund's financial statements are included in the Fund's annual report,
which is available upon request. Further performance information is contained in
the annual report.

<TABLE>
<CAPTION>
CLASS I(1)
-----------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -----------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997(2)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
-------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.03 $12.92 $11.65 $10.00
-------------------------------------------------------------------------------------------------------
Investment income -- net 0.18 0.16 0.13 0.07
-------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net 0.97 0.46 1.60 1.64
-------------------------------------------------------------------------------------------------------
Total from investment operations 1.15 0.62 1.73 1.71
-------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.14) -- (0.14) (0.06)
Realized gain on investments -- net (0.29) (1.51) (0.32) --
-------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.43) (1.51) (0.46) (0.06)
-------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.75 $12.03 $12.92 $11.65
-------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------
Based on net asset value per share 10.41% 7.66% 15.00% 17.15%++
-------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.15% 1.05% 1.00% 1.00%+
-------------------------------------------------------------------------------------------------------
Expenses 1.92% 2.02% 2.72% 8.26%+
-------------------------------------------------------------------------------------------------------
Investment income -- net 2.12% 1.43% 1.20% 1.87%+
-------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $10.26 $6.87 $7.54 $1.99
-------------------------------------------------------------------------------------------------------
Portfolio turnover 179% 113% 71% 23%++
-------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

No sales loads were charged prior to this time.

(2) The Fund commenced operations on January 2, 1997.

* Total investment return excludes the effects of sales charges.

+ Annualized.

++ Not annualized.

20 MERCURY HW MID-CAP VALUE FUND
<PAGE> 45

FUND

Mercury HW Mid-Cap Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER

Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT

Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR

FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN

Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL

Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 46
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1050-1000
(C) Mercury Advisors

Mercury HW
Mid-Cap Value Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 47

Mercury HW Small Cap Value Fund

[ARTWORK]

This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for future
reference.

The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
PROSPECTUS - October 6, 2000
<PAGE> 48

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Small Cap Value Fund................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 10
How to Buy, Sell, Transfer and Exchange Shares.............. 13
How Shares are Priced....................................... 17
Fee-Based Programs.......................................... 17
Dividends and Taxes......................................... 18

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 20
Financial Highlights........................................ 21

MERCURY HW SMALL CAP VALUE FUND
<PAGE> 49

[GLOBE ICON] Fund Facts
ABOUT THE MERCURY HW SMALL CAP VALUE FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek capital appreciation.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in COMMON STOCKS of U.S. companies with market
capitalizations of less than $2 billion. Some of these securities may be
purchased in initial public offerings ("IPOs").

- low PRICE-TO-EARNINGS RATIO relative to the market
- low price-to-earnings ratio relative to expected growth rate
- financial strength

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go down. These changes may occur because a particular
stock or stock market in which the Fund invests is rising or falling. Also, Fund
management may select securities which underperform the stock market or other
funds with similar investment objectives and investment strategies. Generally,
the stock prices of small companies vary more than the stock prices of large
companies and may present above average risk. If the value of the Fund's
investments goes down, you may lose money. We cannot guarantee that the Fund
will achieve its investment objective.

The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the Russell 2000 Index. Also, the return of
the Fund will not necessarily be similar to the return of the Russell 2000
Index.

Securities of small companies generally trade in lower volumes and are subject
to greater and more unpredictable price changes than larger cap securities or
the stock market as a whole. Investing in securities of small companies requires

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCKS -- securities representing shares of ownership of a corporation.
PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.

2 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 50

[GLOBE ICON] Fund Facts

a long-term view. Securities purchased in IPOs may not be available in
sufficient quantity to affect the Fund's performance, and may produce losses.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking capital appreciation and can withstand the share price
volatility of equity investing.

- Are seeking to diversify a portfolio of equity securities to
include small capitalization stocks.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline in order to seek capital appreciation.

- Are not looking for current income.

- Are prepared to receive taxable dividends.

MERCURY HW SMALL CAP VALUE FUND 3
<PAGE> 51

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

During the period shown in the bar chart, the highest return for a quarter was
25.72% (quarter ended June 30, 1999) and the lowest return for a quarter was
-27.51% (quarter ended June 30, 1990). The year-to-date return as of September
30, 2000 was 16.26%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED PAST PAST PAST SINCE
DECEMBER 31, 1999) ONE YEAR FIVE YEARS TEN YEARS INCEPTION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I*+ -17.12% 5.73% 8.72% 9.64%(1)
RUSSELL 2000 INDEX 21.26% 16.69% 13.40% 12.88%(1)
------------------------------------------------------------------------------
</TABLE>

The Russell 2000 Index is a stock market index comprised of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 8% of the
total market capitalization of the Russell 3000 Index.
* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since September 20, 1985.

4 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 52
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate selected
securities dealers or other financial intermediaries for account maintenance
activities.

FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers two different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. Your financial consultant, selected securities
dealer or other financial intermediary can help you determine which classes you
are eligible to buy.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A): CLASS I* CLASS A*
----------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b) 5.25%(b)
----------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c) None(c)
----------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None None
----------------------------------------------------------------------------------------
Redemption Fee None None
----------------------------------------------------------------------------------------
Exchange Fee None None
----------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
----------------------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.75% 0.75%
----------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12B-1) FEES(E) None 0.25%
----------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 0.57% 0.57%
----------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.32% 1.57%
----------------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.07% 0.07%
----------------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 1.25% 1.50%
----------------------------------------------------------------------------------------
</TABLE>

MERCURY HW SMALL CAP VALUE FUND 5
<PAGE> 53

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same except for the expense reimbursement in
effect for the first year. This assumption is not meant to indicate you will
receive a 5% annual rate of return. Your annual return may be more or less than
the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
CLASS I CLASS A
--------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR $ 646 $ 670
--------------------------------------------------------------------------------------
THREE YEARS $ 915 $ 988
--------------------------------------------------------------------------------------
FIVE YEARS $1,204 $1,329
--------------------------------------------------------------------------------------
TEN YEARS $2,026 $2,289
--------------------------------------------------------------------------------------
</TABLE>

6 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 54
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Jim Miles has served as a portfolio manager of
the Fund since it began in January 1997. Mr. Miles joined the Investment Adviser
in 1995 as a portfolio manager. Before joining the Investment Adviser, Mr. Miles
was with BT Securities Corporation (an affiliate of Bankers Trust New York
Corporation) as vice president in the BT Securities Finance Group from 1988 to
1995.
David Green became a co-manager of the Fund when he joined the Investment
Adviser in 1997. Before that, Mr. Green was associated with Goldman Sachs Asset
Management, where he worked as an investment analyst from November 1995. Before
that, he was an investment manager and analyst with Prudential Investment
Advisors.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is capital appreciation.

The Fund invests at least 65% of its total assets in stocks of small U.S.
companies. A "small company" is one with a market capitalization of less than $2
billion at the time of investment. Some of these securities may be purchased in
initial public offerings.

In addition to these principal investments, the Fund can invest up to 20% of its
total assets in foreign securities.

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

SMALL COMPANIES

The Fund invests in the securities of small companies. Investment in small
companies involves more risk than investing in larger, more established
companies. Small companies may have limited product lines or markets. They may
be less financially secure than larger, more established companies. They

MERCURY HW SMALL CAP VALUE FUND 7
<PAGE> 55

[MAGNIFYING GLASS ICON] About the Details

may depend on a small number of key personnel. If a product fails, or if
management changes, or there are other adverse developments, the Fund's
investment in a small cap company may lose substantial value.

INITIAL PUBLIC OFFERINGS

The Fund also may be subject to the following risks:

FOREIGN MARKET RISK

- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

CONVERTIBLE SECURITIES

8 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 56

[MAGNIFYING GLASS ICON] About the Details

DEBT SECURITIES

DERIVATIVES

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW SMALL CAP VALUE FUND 9
<PAGE> 57

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers two classes of shares, each with its own sales charge and
expense structure. Each share class represents an ownership interest in the same
investment portfolio.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

Holders of Class I or A shares generally pay the Distributor a sales charge at
the time of purchase. If you buy Class A shares, you also pay out of Fund assets
an ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge reduction or waiver.

To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:

<TABLE>
<CAPTION>
CLASS I* CLASS A*
-------------------------------------------------------------------------------------------
<S> <C> <C>
Availability LIMITED TO CERTAIN INVESTORS GENERALLY AVAILABLE THROUGH
INCLUDING: SELECTED SECURITIES DEALERS
- Investor Class and current AND OTHER FINANCIAL
Class I beneficial INTERMEDIARIES.
shareholders. DISTRIBUTOR CLASS
- Certain retirement plans. SHAREHOLDERS.
- Participants in certain
programs sponsored by
affiliates.
- Certain investors
participating in
transaction fee programs.
- Certain employees and
affiliates of selected
securities dealers and
other financial
intermediaries.
-------------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF
PURCHASE. LOWER SALES CHARGES PURCHASE. LOWER SALES CHARGES
AVAILABLE FOR LARGER AVAILABLE FOR LARGER
INVESTMENTS. INVESTMENTS.
-------------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR
Charge? PURCHASES OVER $1 MILLION PURCHASES OVER $1 MILLION
THAT ARE REDEEMED WITHIN ONE THAT ARE REDEEMED WITHIN ONE
YEAR.) YEAR.)
-------------------------------------------------------------------------------------------
Account Maintenance NO. 0.25% ACCOUNT MAINTENANCE
and Distribution FEE. NO DISTRIBUTION FEE.
Fees?
-------------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares
and Distributor Class shares were redesignated Class A shares.

10 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 58
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I AND A SHARES*

If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

* As of October 6, 2000, Investor Class shares were redesignated Class I
shares and Distributor Class shares were redesignated Class A shares.
** Rounded to the nearest one-hundredth percent.
*** If you invest $1,000,000 or more in Class I or A shares, you may not pay an
initial sales charge. In that case, the Investment Adviser compensates the
selling dealer or other financial intermediary from its own resources. If
you redeem your shares within one year after purchase, you may be charged a
deferred sales charge. This charge is 1.00% of the lesser of the original
cost of the shares being redeemed or your redemption proceeds. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
I and A shares by certain employer-sponsored retirement or savings plans.

No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:

MERCURY HW SMALL CAP VALUE FUND 11
<PAGE> 59

[CHECKMARK ICON] Account Choices

of the Investment Adviser and its affiliates and employees of
selected securities dealers
- Certain programs of the Investment Adviser or its affiliates
- Certain programs of selected securities dealers and other
financial intermediaries that have an agreement with the
Distributor or its affiliates
- Investor Class beneficial shareholders

Only certain investors are eligible to buy Class I shares, including former
Investor Class beneficial shareholders of the Fund, existing Class I beneficial
shareholders of the Fund, certain retirement plans, participants in certain
programs sponsored by the Investment Adviser or its affiliates and certain
investors participating in transaction fee programs. Your financial consultant,
selected securities dealer or other financial intermediary can help you
determine whether you are eligible to buy Class I shares or to participate in
any of these programs.

If you are eligible to buy both Class I and Class A shares, you should buy Class
I shares since Class A shares are subject to a 0.25% account maintenance fee,
while Class I shares are not.

If you redeem Class I or Class A shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your financial
consultant, selected securities dealer, other financial intermediary or the
Fund's Transfer Agent at 1-800-236-4479.

12 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 60

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

MERCURY HW SMALL CAP VALUE FUND 13
<PAGE> 61

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 10. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

14 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 62

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SECURITIES securities dealer or other securities dealer or other financial intermediary if
DEALER OR OTHER financial intermediary authorized dealer agreements are in place between the
FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these shares must be coordinated by the receiving
intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer or other - Transfer your shares to an account with the Transfer Agent;
financial intermediary or
- Sell your shares, paying any applicable deferred sales
charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular trading on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW SMALL CAP VALUE FUND 15
<PAGE> 63

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit.
Some of the Mercury mutual funds may impose a different
initial sales charge schedule. If you exchange Class I or A
shares for shares of a fund with a higher initial sales
charge than you originally paid, you may be charged the
difference at the time of exchange.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

16 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 64

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

Generally, Class I shares will have the higher net asset value because that
class has lower expenses.

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase Class A shares, which are subject to account maintenance
fees. This may be a taxable event and you will pay any applicable sales charges.

MERCURY HW SMALL CAP VALUE FUND 17
<PAGE> 65
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the Fund's shares or into the Summit fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. Any redemption or exchange will
be at net asset value. However, if you participate in the program for less than
a specified period, you may be charged a fee in accordance with the terms of the
program.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include

18 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 66

[CHECKMARK ICON] Account Choices

distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

MERCURY HW SMALL CAP VALUE FUND 19
<PAGE> 67

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Small Cap Fund.

20 MERCURY HW SMALL CAP VALUE FUND
<PAGE> 68

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS I(1)
-----------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -----------------------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
-------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 21.02 $ 26.48 $23.83 $21.33 $ 21.53
-------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.02(3) (0.05)(3) (0.06)(2) 0.03 0.05(2)
-------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (3.93) (3.88) 5.13 5.62 2.80
-------------------------------------------------------------------------------------------------------------------
Total from investment operations (3.91) (3.93) 5.07 5.65 2.85
-------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net -- -- (0.05) (0.09) --
Realized gain on investments -- net -- (1.53) (2.37) (3.06) (3.05)
-------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (1.53) (2.42) (3.15) (3.05)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 17.11 $ 21.02 $26.48 $23.83 $ 21.33
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (18.60)% (14.26)% 22.24% 29.74% 14.24%
-------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.32% 1.05% 0.94% 1.00% 1.00%
-------------------------------------------------------------------------------------------------------------------
Expenses 1.32% 1.19% 0.94% 1.30% 1.21%
-------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.11% (0.26)% (0.23)% 0.10% 0.24%
-------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $32.25 $53.38 $94.91 $27.53 $ 16.48
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover 97% 105% 85% 88% 119%
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares. No Distributor Class shares, which were redesignated Class A
shares, were outstanding on such date. No sales loads were charged prior to
this time.

(2) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

(3) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.

* Total investment return excludes the effects of sales charges.

MERCURY HW SMALL CAP VALUE FUND 21
<PAGE> 69

FUND
Mercury HW Small Cap Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 70
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1060-1000
(C) Mercury Advisors

Mercury HW
Small Cap Value Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 71

Mercury HW International Value Fund

ARTWORK

This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for future
reference.

The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
PROSPECTUS - October 6, 2000
<PAGE> 72
Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW International Value Fund............... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 12
How to Buy, Sell, Transfer and Exchange Shares.............. 18
How Shares are Priced....................................... 22
Fee-Based Programs.......................................... 22
Dividends and Taxes......................................... 23

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 25
Financial Highlights........................................ 26

MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 73

[GLOBE ICON] Fund Facts

ABOUT THE MERCURY HW INTERNATIONAL VALUE FUND
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in stocks of companies in developed countries located
outside the U.S. The Fund may purchase COMMON STOCK, PREFERRED STOCK and
CONVERTIBLE SECURITIES. Normally, the Fund invests at least 80% of its total
assets in stocks that pay dividends.

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and therefore the
value of your Fund shares, may go down. These changes may occur because a
particular stock or stock market in which the Fund invests is rising or falling.
Also, Fund management may select securities which underperform the stock market
or other funds with similar investment objectives and investment strategies. If
the value of the Fund's investments goes down, you may lose money. We cannot
guarantee that the Fund will achieve its investment objective.

The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the MSCI EAFE Index. Also, the return of
the Fund will not necessarily be similar to the return of the MSCI EAFE Index.

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCK -- securities representing shares of ownership of a corporation.

PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets. Preferred stock may also be convertible into common stock.

CONVERTIBLE SECURITIES -- fixed-income securities, such as corporate bonds or
preferred stock, that are exchangeable for shares of common stock of the issuer
or another company.

PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.

YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.

PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

2 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 74

[GLOBE ICON] Fund Facts

In addition, because the Fund invests most of its assets in foreign securities,
the Fund is subject to additional risks. For example, the Fund's securities may
go up or down in value depending on foreign exchange rates, political and
economic developments and U.S. and foreign laws relating to foreign investment.
Foreign securities may also be less liquid, more volatile and harder to value
than U.S. securities.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.

- Are seeking to diversify a portfolio of equity securities to
include foreign securities.

- Can tolerate the increased volatility and currency fluctuations
associated with investments in foreign securities.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.

- Are prepared to receive taxable dividends.

MERCURY HW INTERNATIONAL VALUE FUND 3
<PAGE> 75

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 and 5 years and for the life of the Class compare with those of a broad
measure of market performance. Class I shares now are sold subject to sales
charges, which are not reflected in the bar chart. If sales charges were
reflected, the returns would be less. How the Fund has performed in the past is
not necessarily an indication of how the Fund will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
15.50% (quarter ended December 31, 1998) and the lowest return for a quarter
was -18.36% (quarter ended September 30, 1998). The year-to-date return as of
September 30, 2000 was -2.08%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS INCEPTION
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I*+ 16.93% 13.21% 12.99%(1)
MSCI EAFE INDEX 27.30% 13.15% 12.30%(1)
----------------------------------------------------------------------------------------
</TABLE>

The Morgan Stanley Capital International Europe, Australia, Far East Index (MSCI
EAFE) is an arithmetical average weighted by market value of the performance of
over 1,000 non-U.S. companies representing 20 stock markets in Europe,
Australia, New Zealand and the Far East.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since October 1, 1990.

4 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 76
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.

MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.

DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants and other financial
intermediaries, advertising and promotion.

SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate selected
securities dealers or other financial intermediaries for account maintenance
activities.

FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your financial consultant,
selected securities dealer or other financial intermediary can help you with
this decision.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY
FROM YOUR INVESTMENT)(a): CLASS I* CLASS A* CLASS B(b) CLASS C
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering
price) 5.25%(c) 5.25%(c) None None
----------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price
or redemption proceeds, whichever is
lower) None(d) None(d) 4.00%(c) 1.00%(c)
----------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
----------------------------------------------------------------------------------
Redemption Fee None None None None
----------------------------------------------------------------------------------
Exchange Fee None None None None
----------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM THE FUND'S TOTAL
ASSETS):
----------------------------------------------------------------------------------
MANAGEMENT FEES 0.75% 0.75% 0.75% 0.75%
----------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1)
FEES(e) None 0.25% 1.00% 1.00%
----------------------------------------------------------------------------------
Other Expenses (including transfer
agency fees) 0.31% 0.31% 0.31% 0.31%
----------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.06% 1.31% 2.06% 2.06%
----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* As of October 6, 2000, Investor Class shares were
redesignated Class I shares and Distributor Class shares
were redesignated Class A shares.
(a) Certain securities dealers or other financial intermediaries
may charge a fee to process a purchase or sale of shares.
See "How to Buy, Sell, Transfer and Exchange Shares."
(b) Class B shares automatically convert to Class A shares about
eight years after you buy them and will no longer be subject
to distribution fees.
(c) Some investors may qualify for reductions in the sales
charge (load).
(d) You may pay a deferred sales charge if you purchase $1
million or more and you redeem within one year.
(e) The Fund calls the "Service Fee" an "Account Maintenance
Fee." Account Maintenance Fee is the term used elsewhere in
this prospectus and in all other Fund materials. If you hold
Class B or C shares for a long time, it may cost you more in
distribution (12b-1) fees than the maximum sales charge that
you would have paid if you had bought one of the other
classes.
</TABLE>

MERCURY HW INTERNATIONAL VALUE FUND 5
<PAGE> 77

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:

Expenses if you did redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 627 $ 651 $ 609 $ 309
-----------------------------------------------------------------------------------------
THREE YEARS $ 845 $ 918 $ 946 $ 646
-----------------------------------------------------------------------------------------
FIVE YEARS $ 1,079 $ 1,205 $ 1,308 $ 1,108
-----------------------------------------------------------------------------------------
TEN YEARS $ 1,751 $ 2,021 $ 2,197* $ 2,390
-----------------------------------------------------------------------------------------
</TABLE>

Expenses if you did not redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 627 $ 651 $ 209 $ 209
-----------------------------------------------------------------------------------------
THREE YEARS $ 845 $ 918 $ 646 $ 646
-----------------------------------------------------------------------------------------
FIVE YEARS $ 1,079 $ 1,205 $ 1,108 $ 1,108
-----------------------------------------------------------------------------------------
TEN YEARS $ 1,751 $ 2,021 $ 2,197* $ 2,390
-----------------------------------------------------------------------------------------
</TABLE>

* Assumes conversion to Class A shares approximately eight years after purchase.
See note (b) to the Fees and Expenses table on page 5.

6 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 78
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Sarah Ketterer is a managing director of the
Investment Adviser and has served as portfolio manager of the Fund since it
began in October 1990. Before joining the Investment Adviser, Ms. Ketterer was
with Bankers Trust Company as an associate from 1987 to 1990 and a financial
analyst with Dean Witter Reynolds from 1983 to 1985.

Harry Hartford is a managing director of the Investment Adviser and has served
as a portfolio manager of the Fund since May 1994. Before joining the Investment
Adviser, Mr. Hartford was with the Investment Bank of Ireland (now Bank of
Ireland Asset Management) as a senior manager of International and Global
Equities from 1985 to 1994.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to provide current income and long-term
growth of income, accompanied by growth of capital.

The Fund invests at least 65% of its total assets in stocks in at least ten
foreign markets. Ordinarily, the Fund invests in stocks of companies located in
the developed foreign markets and invests at least 80% of its total assets in
stocks that pay dividends.

In addition to these principal investments, the Fund also may invest in stocks
that don't pay dividends, but have growth potential unrecognized by the market
or changes in business or management that indicate growth potential.

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds, money market mutual funds and
other money market instruments. Also, the Fund temporarily can invest up to 100%
of its assets in short-term, investment grade bonds, and other money market
instruments in response to adverse market, economic or political conditions. The
Fund may not achieve its objective using this type of investing.

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

FOREIGN MARKET RISK

Since the Fund invests in foreign securities, it offers the potential for more
diversification than an investment only in the U.S. This is because stocks
traded on foreign markets have often (though not always) performed differently
than

MERCURY HW INTERNATIONAL VALUE FUND 7
<PAGE> 79
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS (CONTINUED) -- David Chambers is a managing
director of the Investment Adviser and has served as a portfolio manager of the
Fund since October 1996. He has been associated with Merrill Lynch Investment
Managers International Limited in London since July 1998. Before joining the
Investment Adviser, Mr. Chambers was with Baring Asset Management, Inc. as
senior vice president of Global Equities from 1992 to 1995 and Baring Brothers,
London, as assistant director of Corporate Finance from 1990 to 1991.

ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

ABOUT THE SUBADVISERS -- Merrill Lynch Investment Managers International Limited
and Merrill Lynch Asset Management U.K. Limited are subadvisers to the Fund and
provide investment research, recommendations and other investment-related
services.

stocks in the U.S. However, such investments involve special risks not present
in U.S. investments that can increase the chances that the Fund will lose money.
In particular, investments in foreign securities involve the following risks:

- The economies of some foreign markets often do not compare
favorably with that of the U.S. in areas such as growth of gross
national product, reinvestment of capital, resources, and balance
of payments. Some of these economies may rely heavily on
particular industries or foreign capital. They may be more
vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.

- Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes.

- The governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital
markets or in certain industries. Any of these actions could
severely affect security prices. They could also impair the Fund's
ability to purchase or sell foreign securities or transfer its
assets or income back into the U.S., or otherwise adversely affect
the Fund's operations.

- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in
foreign courts and political and social instability. Legal
remedies available to investors in some foreign countries may be
less extensive than those available to investors in the U.S.

- Because there are generally fewer investors on foreign exchanges
and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up and
down more than prices of securities traded in the U.S.

- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to

8 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 80

[MAGNIFYING GLASS ICON] About the Details

keep pace with the volume of securities transactions. If this
occurs, settlement may be delayed and the Fund's assets may be
uninvested and not earning returns. The Fund also may miss
investment opportunities or be unable to sell an investment
because of these delays.

- The value of the Fund's foreign holdings (and hedging transactions
in foreign currencies) will be affected by changes in currency
exchange rates.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect the Fund's foreign
holdings.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

A number of European countries have entered into EMU in an effort to reduce
trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro.
These securities trade and make dividend and other payments only in euros. Like
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected if the
transition to the euro, or EMU as a whole, does not take effect as planned or if
a participating country withdraws from EMU.

The Fund also may be subject to the following risks:

CONVERTIBLE SECURITIES

MERCURY HW INTERNATIONAL VALUE FUND 9
<PAGE> 81

[MAGNIFYING GLASS ICON] About the Details

DEBT SECURITIES

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

When-issued securities, delayed-delivery securities and forward commitments
involve the risk that the security the Fund buys will lose value prior to its
delivery to the Fund. There also is the risk that the security will not be
issued or that the other party will not meet its obligation, in which case the
Fund loses the investment opportunity of the assets it has set aside to pay for
the security and any gain in the security's price.

DERIVATIVES

The Fund also may invest in derivatives including forward currency contracts and
options. Derivatives may allow the Fund to increase or decrease its level of
risk exposure more quickly and efficiently than transactions in other types of
instruments. If the Fund invests in derivatives, the investments may not be
effective as a hedge against price movements and can limit potential for growth
in the value of an interest in the Fund. Derivatives are volatile and involve
significant risks, including:

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial
obligation to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.

10 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 82

[MAGNIFYING GLASS ICON] About the Details

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW INTERNATIONAL VALUE FUND 11
<PAGE> 83

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers four classes of shares, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
Each share class represents an ownership interest in the same investment
portfolio. When you choose your class of shares, you should consider the size of
your investment and how long you plan to hold your shares. Your financial
consultant or other financial intermediary can help you determine which share
class is best suited to your personal financial goals.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

For example, if you select Class I or A shares, you generally pay the
Distributor a sales charge at the time of purchase. If you buy Class A shares,
you also pay out of Fund assets an ongoing account maintenance fee of 0.25%. You
may be eligible for a sales charge reduction or waiver.

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.

Certain financial institutions may charge you additional fees in connection with
transactions in fund shares. The Investment Adviser, the Distributor or their
affiliates may make payments out of their own resources to securities dealers
and other financial intermediaries for providing services intended to result in
the sale of Fund shares or for shareholder servicing activities.

12 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 84

[CHECKMARK ICON] Account Choices

To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:
<TABLE>
<CAPTION>
CLASS I* CLASS A* CLASS B
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Availability LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH SELECTED THROUGH SELECTED
- Investor Class and SECURITIES DEALERS AND SECURITIES DEALERS AND
current Class I OTHER FINANCIAL OTHER FINANCIAL
beneficial shareholders. INTERMEDIARIES. INTERMEDIARIES.
- Certain retirement
plans. DISTRIBUTOR CLASS
- Participants in SHAREHOLDERS.
certain programs
sponsored by
affiliates.
- Certain investors
participating in
transaction fee
programs.
- Certain employees and
affiliates of selected
securities dealers and
other financial
intermediaries.
---------------------------------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PURCHASE. LOWER SALES PRICE IS INVESTED IN
CHARGES AVAILABLE FOR CHARGES AVAILABLE FOR SHARES OF THE FUND.
LARGER INVESTMENTS. LARGER INVESTMENTS.
---------------------------------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR YES. PAYABLE IF YOU
Charge? PURCHASES OVER $1 PURCHASES OVER $1 REDEEM WITHIN SIX YEARS
MILLION THAT ARE MILLION THAT ARE OF PURCHASE.
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
---------------------------------------------------------------------------------------------------------------
Account Maintenance NO. 0.25% ACCOUNT 0.25% ACCOUNT
and Distribution MAINTENANCE FEE NO MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE. DISTRIBUTION FEE.
---------------------------------------------------------------------------------------------------------------
Conversion to Class A NO. NO. YES, AUTOMATICALLY AFTER
shares? APPROXIMATELY EIGHT
YEARS.
---------------------------------------------------------------------------------------------------------------

<CAPTION>
CLASS C
<S> <C>
Availability GENERALLY AVAILABLE
THROUGH SELECTED
SECURITIES DEALERS AND
OTHER FINANCIAL
INTERMEDIARIES.
------------------------------------------------------------------------
Initial Sales Charge? NO. ENTIRE PURCHASE
PRICE IS INVESTED IN
SHARES OF THE FUND.
-------------------------------------------------------------------------------------------------
Deferred Sales YES. PAYABLE IF YOU
Charge? REDEEM WITHIN ONE YEAR
OF PURCHASE.
---------------------------------------------------------------------------------------------------------------
Account Maintenance 0.25% ACCOUNT
and Distribution MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE.
---------------------------------------------------------------------------------------------------------------
Conversion to Class A NO.
shares?
---------------------------------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares
and Distributor Class shares were redesignated Class A shares.

MERCURY HW INTERNATIONAL VALUE FUND 13
<PAGE> 85
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I AND A SHARES* -- INITIAL SALES CHARGE OPTIONS

If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:

14 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 86

[CHECKMARK ICON] Account Choices

If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class I and Class A shares, you should buy Class I
shares since Class A shares are subject to a 0.25% account maintenance fee,
while Class I shares are not.

CLASS B AND C SHARES -- DEFERRED SALES CHARGE OPTIONS

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that the Fund has adopted under Rule 12b-1 of the Investment Company Act of
1940. Because these fees are paid out of the Fund's assets on an ongoing basis,
over time these fees increase the cost of your investment and may cost you more
than paying an initial sales charge. The Distributor uses the money that it
receives from the deferred sales charges and the distribution fees to cover the
costs of marketing, advertising and compensating the financial

MERCURY HW INTERNATIONAL VALUE FUND 15
<PAGE> 87

[CHECKMARK ICON] Account Choices

consultant, selected securities dealer or other financial intermediary who
assists you in purchasing Fund shares.

CLASS B SHARES

If you redeem Class B shares within six years after purchase, you may be charged
a deferred sales charge. The amount of the charge gradually decreases as you
hold your shares over time, according to the following schedule:

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE SALES CHARGE*
------------------------------------------
<S> <C>
0 - 1 4.00%
------------------------------------------
1 - 2 4.00%
------------------------------------------
2 - 3 3.00%
------------------------------------------
3 - 4 3.00%
------------------------------------------
4 - 5 2.00%
------------------------------------------
5 - 6 1.00%
------------------------------------------
6 AND THEREAFTER 0.00%
------------------------------------------
</TABLE>

* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Mercury funds have identical deferred sales charge schedules. If you
exchange your shares for shares of another Mercury fund, the higher charge
will apply, if any would apply.

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old

- Redemption by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers

- Redemption in connection with participation in certain fee-based
programs managed by the Investment Adviser or its affiliates

- Redemption in connection with participation in certain fee-based
programs managed by selected securities dealers or other financial
intermediaries that have agreements with the Distributor or its
affiliates

- Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year after death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held

16 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 88

[CHECKMARK ICON] Account Choices

- Withdrawal through the Systematic Withdrawal Plan of up to 10% per
year of your Class B account value at the time the plan is
established

Your Class B shares convert automatically into Class A shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class A
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B shares to Class A shares is not a taxable event for Federal income
tax purposes.

Different conversion schedules may apply to Class B shares of different Mercury
mutual funds. If you acquire your Class B shares in an exchange from another
fund with a longer conversion schedule, the other fund's conversion schedule
will apply. If you exchange your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.

CLASS C SHARES

If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

MERCURY HW INTERNATIONAL VALUE FUND 17

<PAGE> 89

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

Because of the high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will then
have 60 days to make an additional investment to bring the value of your account
to at least $500 before the Fund takes any action. This involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act
accounts.

18 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 90

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 13. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW INTERNATIONAL VALUE FUND 19

<PAGE> 91

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SELECTED securities dealer or other securities dealer or other financial intermediary if
SECURITIES DEALER financial intermediary authorized dealer agreements are in place between the
OR OTHER FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these shares must be coordinated by the receiving
intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer or other - Transfer your shares to an account with the Transfer
financial intermediary Agent; or
- Sell your shares, paying any applicable deferred sales
charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular business on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

20 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 92

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested.
For Class B and C shares, your total annual withdrawals
cannot be more than 10% per year of the value of your shares
at the time your plan is established. The deferred sales
charge is waived for systematic redemptions. Ask your
financial intermediary for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit. Class B or
Class C shares can be exchanged for Class B shares of
Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or A shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B or Class C shares for shares of a fund with
a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. Your time in both funds will also count when
determining the holding period for a conversion from Class B
to Class A shares.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW INTERNATIONAL VALUE FUND 21
<PAGE> 93

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

Generally, Class I shares will have the highest net asset value because that
class has the lowest expenses, and Class A shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class I and Class A
shares will generally be higher than dividends paid on Class B and Class C
shares because Class I and Class A shares have lower expenses.

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

22 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 94
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the Fund's shares or into the Summit fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class A shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

MERCURY HW INTERNATIONAL VALUE FUND 23
<PAGE> 95

[CHECKMARK ICON] Account Choices

24 MERCURY HW INTERNATIONAL VALUE FUND
<PAGE> 96

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Investment Adviser has entered into subadvisory agreements with Merrill
Lynch Investment Managers International Limited, 33 King William Street, London,
England EC4R 9AS, and Merrill Lynch Asset Management U.K. Limited, Ropemaker
Place, 25 Ropemaker Street, London, England E2Y 9LY, affiliated investment
advisers that are indirect wholly-owned subsidiaries of Merrill Lynch & Co.,
Inc. The subadvisory arrangements are for investment research, recommendations
and other investment-related services. There is no increase in the aggregate
fees paid by the Fund for these services.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the International Fund.

MERCURY HW INTERNATIONAL VALUE FUND 25

<PAGE> 97

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). These financial
highlights were audited by PricewaterhouseCoopers LLP. The accountants' report
and the Fund's financial statements are included in the Fund's annual report,
which is available upon request. Further performance information is contained in
the annual report.

<TABLE>
<CAPTION>
CLASS I(1)
------------------------------------------------------------- CLASS A(1)
FOR THE YEAR ENDED JUNE 30, ----------------------------
------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN ----------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996 2000 1999(2)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
year $ 25.73 $ 25.33 $ 24.17 $ 20.44 $ 17.70 $25.72 $ 25.20
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.43(3) 0.59 0.59 0.59(3) 0.56(3) 0.39(3) 0.05
---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net 3.43 0.40 1.23 3.78 2.51 3.41 0.47
---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.86 0.99 1.82 4.37 3.07 3.80 0.52
---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.76) (0.25) (0.66) (0.48) (0.14) (0.74) --
Realized gain on
investments -- net (1.50) (0.34) -- (0.16) (0.19) (1.51) --
---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.26) (0.59) (0.66) (0.64) (0.33) (2.25) --
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 27.33 $ 25.73 $ 25.33 $ 24.17 $ 20.44 $27.27 $ 25.72
---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per
share 15.60% 4.22% 7.77% 21.59% 18.61% 15.36% 2.06%++
---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.06% 0.95% 0.89% 1.00% 1.00% 1.31% 1.30%+
---------------------------------------------------------------------------------------------------------------------------------
Expenses 1.06% 0.95% 0.89% 1.07% 1.11% 1.31% 1.30%+
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.62% 1.98% 2.32% 2.66% 2.78% 1.37% 2.77%+
---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in
millions) $1,393.91 $1,378.90 $1,476.81 $888.53 $330.99 $4.92 $1.15
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 50% 41% 20% 18% 12% 50% 41%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares and Distributor Class shares were redesignated Class A shares.

No sales loads were charged prior to this time.

(2) Class A commenced operations on June 2, 1999.

(3) Net investment income per share represents net investment income divided by
average shares outstanding throughout the year.

* Total investment return excludes the effects of sales charges.

+ Annualized.

++ Not annualized.

26 MERCURY HW INTERNATIONAL VALUE FUND

<PAGE> 98

FUND
Mercury HW International Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 99
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing or calling the Fund
at Financial Data Services, Inc., P.O. Box 41621, Jacksonville, Florida
32232-1621 or by calling 1-800-236-4479.
Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by electronic request at the following e-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1030-1000
(C) Mercury Advisors

Mercury HW
International Value Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 100

Mercury HW Global Value Fund

[ARTWORK]

This prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.

PROSPECTUS - October 6, 2000
<PAGE> 101

Table of Contents

[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Global Value Fund...................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 12
How to Buy, Sell, Transfer and Exchange Shares.............. 14
How Shares are Priced....................................... 18
Fee-Based Programs.......................................... 18
Dividends and Taxes......................................... 19

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 20
Financial Highlights........................................ 21

MERCURY HW GLOBAL VALUE FUND
<PAGE> 102

[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCK -- securities representing shares of ownership of a corporation.
PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets. Preferred stock may also be convertible into common stock.
CONVERTIBLE SECURITIES -- fixed - income securities, such as corporate bonds or
preferred stock, that are exchangeable for shares of common stock of the issuer
or another company.
PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.
YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.
PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

ABOUT THE MERCURY HW GLOBAL VALUE FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests in U.S. and international stocks. The Fund may purchase COMMON
STOCK, PREFERRED STOCK and CONVERTIBLE SECURITIES. Normally, the Fund invests at
least 80% of its total assets in stocks that pay dividends.

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the MSCI World Index. Also, the return of
the Fund will not necessarily be similar to the return of the MSCI World Index.

2 MERCURY HW GLOBAL VALUE FUND
<PAGE> 103

[GLOBE ICON] Fund Facts

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.
- Are seeking to diversify a portfolio of equity securities to
include foreign securities.
- Can tolerate the increased volatility and currency fluctuations
associated with investments in foreign securities.
- Want a professionally managed and diversified portfolio.
- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.
- Are prepared to receive taxable dividends.

MERCURY HW GLOBAL VALUE FUND 3
<PAGE> 104

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 year and for the life of the Class compare with those of a broad measure
of market performance. Class I shares now are sold subject to sales charges,
which are not reflected in the bar chart. If sales charges were reflected, the
returns would be less. How the Fund has performed in the past is not necessarily
an indication of how the Fund will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
15.83% (quarter ended December 31, 1998) and the lowest return for a quarter was
-17.84% (quarter ended September 30, 1998). The year-to-date return as of
September 30, 2000 was -7.60%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR INCEPTION
-------------------------------------------------------------------------------------
<S> <C> <C>
CLASS I*+ 6.47% 6.99%(1)
MSCI WORLD INDEX 25.34% 22.05%(2)
-------------------------------------------------------------------------------------
</TABLE>

The Morgan Stanley Capital International World Index (MSCI World Index) is an
arithmetical average weighted by market value of the performance of over 1,400
companies listed on stock exchanges in the 22 countries that make up the MSCI
Network Indexes.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since January 2, 1997.

(2) Since January 1, 1997.

4 MERCURY HW GLOBAL VALUE FUND
<PAGE> 105
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

FEES AND EXPENSES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS I*
------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b)
------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c)
------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Exchange Fee None
------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.75%
------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees None
------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 1.38%
------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 2.13%
------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.88%
------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 1.25%
------------------------------------------------------------------------
</TABLE>

MERCURY HW GLOBAL VALUE FUND 5
<PAGE> 106

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------------
<S> <C>
ONE YEAR $ 646
------------------------------------------------------------------------------
THREE YEARS $1,077
------------------------------------------------------------------------------
FIVE YEARS $1,532
------------------------------------------------------------------------------
TEN YEARS $2,792
------------------------------------------------------------------------------
</TABLE>

6 MERCURY HW GLOBAL VALUE FUND
<PAGE> 107

[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- James Doyle became a portfolio manager of the
Fund effective July 1, 2000. Mr. Doyle is a vice president of the Investment
Adviser and has been an investment professional with the Investment Adviser
since 1997. From 1992 to 1995, Mr. Doyle was a financial analyst at LaSalle
Partners, a real estate investment firm.
Mark Morris became a portfolio manager of the Fund effective July 1, 2000. Mr.
Morris is a director of the Investment Adviser and has been with the Investment
Adviser as a portfolio manager since 1998. Mr. Morris was a portfolio manager
with Trust Company of the West from 1996 to 1998, and a technology analyst from
1991 to 1998.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.
ABOUT THE SUBADVISERS -- Merrill Lynch Investment Managers International Limited
and Merrill Lynch Asset Management U.K. Limited are subadvisers to the Fund and
provide investment research, recommendations and other investment-related
services.

The Fund invests in stocks in at least ten different countries with developed
stock markets, including the U.S. No country other than the U.S. will represent
more than 30% of assets. Normally, the Fund invests at least 80% of its total
assets in stocks that pay dividends.

In addition to these principal investments, the Fund also may invest in stocks
that don't pay dividends or interest, but have growth potential unrecognized by
the market or changes in business or management that indicate growth potential.

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

FOREIGN MARKET RISK

Since the Fund invests in foreign securities, it offers the potential for more
diversification than an investment only in the U.S. This is because stocks
traded

MERCURY HW GLOBAL VALUE FUND 7
<PAGE> 108

[MAGNIFYING GLASS ICON] About the Details

on foreign markets have often (though not always) performed differently than
stocks in the U.S. However, such investments involve special risks not present
in U.S. investments that can increase the chances that the Fund will lose money.
In particular, investments in foreign securities involve the following risks:

8 MERCURY HW GLOBAL VALUE FUND
<PAGE> 109

[MAGNIFYING GLASS ICON] About the Details

- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to keep
pace with the volume of securities transactions. If this occurs,
settlement may be delayed and the Fund's assets may be uninvested
and not earning returns. The Fund also may miss investment
opportunities or be unable to sell an investment because of these
delays.

- The value of the Fund's foreign holdings (and hedging transactions
in foreign currencies) will be affected by changes in currency
exchange rates.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect the Fund's foreign
holdings.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

The Fund also may be subject to the following risks:

CONVERTIBLE SECURITIES

MERCURY HW GLOBAL VALUE FUND 9
<PAGE> 110

[MAGNIFYING GLASS ICON] About the Details

usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.

DEBT SECURITIES

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

DERIVATIVES

The Fund also may invest in derivatives, including forward currency contracts
and options. Derivatives may allow the Fund to increase or decrease its level of
risk exposure more quickly and efficiently than transactions in other types of
instruments. If the Fund invests in derivatives, the investments may not be as
effective as a hedge against price movements and can limit potential for growth
in the value of an interest in the Fund. Derivatives are volatile and involve
significant risks, including:

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial
obligation to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.

10 MERCURY HW GLOBAL VALUE FUND
<PAGE> 111

[MAGNIFYING GLASS ICON] About the Details

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW GLOBAL VALUE FUND 11
<PAGE> 112

[CHECKMARK ICON] Account Choices
PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

To better understand the pricing of the Fund's shares, we have summarized the
information below:

<TABLE>
<CAPTION>
CLASS I*
-------------------------------------------------------------------------------------
<S> <C>
Availability LIMITED TO CERTAIN INVESTORS INCLUDING: - Investor
Class and current Class I beneficial shareholders.
- Certain retirement plans.
- Participants in certain programs sponsored by
affiliates.
- Certain investors participating in transaction fee
programs.
- Certain employees and affiliates of selected
securities dealers and other financial intermediaries.
-------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES CHARGES
AVAILABLE FOR LARGER INVESTMENTS.
-------------------------------------------------------------------------------------
Deferred Sales Charge? NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION THAT
ARE REDEEMED WITHIN ONE YEAR.)
-------------------------------------------------------------------------------------
Account Maintenance and NO.
Distribution Fees?
-------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares.

12 MERCURY HW GLOBAL VALUE FUND
<PAGE> 113
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I SHARES*

If you buy shares of the Fund, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

* As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

** Rounded to the nearest one-hundredth percent.

*** If you invest $1,000,000 or more in Class I shares, you may not pay an
initial sales charge. In that case, the Investment Adviser compensates the
selling dealer or other financial intermediary from its own resources. If
you redeem your shares within one year after purchase, you may be charged a
deferred sales charge. This charge is 1.00% of the lesser of the original
cost of the shares being redeemed or your redemption proceeds. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
I shares by certain employer-sponsored retirement or savings plans.

No initial sales charge applies to shares that you buy through reinvestment of
dividends.

A reduced or waived sales charge on a purchase of Class I shares may apply for:

MERCURY HW GLOBAL VALUE FUND 13
<PAGE> 114

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

14 MERCURY HW GLOBAL VALUE FUND
<PAGE> 115

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES Determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW GLOBAL VALUE FUND 15
<PAGE> 116

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SECURITIES securities dealer or other securities dealer or other financial intermediary if
DEALER OR OTHER financial intermediary authorized dealer agreements are in place between the
FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these shares must be coordinated by the receiving
intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer or other - Transfer your shares to an account with the Transfer Agent;
financial intermediary or
- Sell your shares, paying any applicable deferred sales
charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular trading on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

16 MERCURY HW GLOBAL VALUE FUND
<PAGE> 117

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
If you wish to exchange into a fund in which you have no
Class I shares (and are not eligible to buy Class I shares),
you will exchange into Class A shares. If you wish to
exchange into Summit, you will exchange into Class A shares
of Summit.
Some of the Mercury mutual funds may impose a different
initial sales charge schedule. If you exchange Class I
shares for shares of a fund with a higher initial sales
charge than you originally paid, you may be charged the
difference at the time of exchange.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW GLOBAL VALUE FUND 17
<PAGE> 118

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

18 MERCURY HW GLOBAL VALUE FUND
<PAGE> 119
[CHECKMARK ICON] Account Choices

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

MERCURY HW GLOBAL VALUE FUND 19
<PAGE> 120

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

For the fiscal year ended June 30, 2000, the Fund paid an affiliate of the
Investment Adviser a management fee at the annual rate of 0.75% of the average
daily net assets of the Fund. Although not required to do so, the Investment
Adviser has agreed to make reimbursements so that the regular annual operating
expenses of the Fund will be limited as shown in the table on page 5. The
Investment Adviser has agreed to these expense limits through June 2001, and
will thereafter give shareholders at least 30 days' notice if this reimbursement
policy will change.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Global Equity Fund.

20 MERCURY HW GLOBAL VALUE FUND
<PAGE> 121

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS I(1)
-------------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -------------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997(2)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $11.84 $11.38 $11.09 $10.00
---------------------------------------------------------------------------------------------------------
Investment income -- net 0.17(3) 0.35 0.28 0.14
---------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (0.32) 0.24 0.51 1.09
---------------------------------------------------------------------------------------------------------
Total from investment operations (0.15) 0.59 0.79 1.23
---------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.33) (0.11) (0.32) (0.14)
Realized gain on investments -- net (0.47) (0.02) (0.18) --
---------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.80) (0.13) (0.50) (0.14)
---------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.89 $11.84 $11.38 $11.09
---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
---------------------------------------------------------------------------------------------------------
Based on net asset value per share (1.37)% 5.40% 7.61% 12.32%++
---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.25% 1.09% 1.00% 1.00%+
---------------------------------------------------------------------------------------------------------
Expenses 2.13% 2.07% 2.88% 4.43%+
---------------------------------------------------------------------------------------------------------
Investment income -- net 1.45% 2.76% 1.88% 3.50%+
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $6.41 $7.56 $7.35 $3.73
---------------------------------------------------------------------------------------------------------
Portfolio turnover 64% 40% 54% 18%++
---------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares. No sales loads were charged prior to this time.

(2) The Fund commenced operations on January 2, 1997.

(3) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.

* Total investment return excludes the effects of sales charges.

+ Annualized.

++ Not annualized.

MERCURY HW GLOBAL VALUE FUND 21
<PAGE> 122

FUND
Mercury HW Global Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 44062
Jacksonville, Florida 32232-4062
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 123
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1020-1000
(C) Mercury Advisors
Mercury HW
Global Value Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 124

Mercury HW Balanced Fund

This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for future
reference.

The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
PROSPECTUS - October 6, 2000
<PAGE> 125

Table of Contents

[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Balanced Fund.......................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 9
Statement of Additional Information......................... 13

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 14
How to Buy, Sell, Transfer and Exchange Shares.............. 18
How Shares are Priced....................................... 22
Fee-Based Programs.......................................... 22
Dividends and Taxes......................................... 23

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 25
Financial Highlights........................................ 26

MERCURY HW BALANCED FUND
<PAGE> 126
[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

COMMON STOCK -- securities representing shares of ownership of a corporation.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.

CORPORATE BONDS -- debt securities issued by corporations, as distinct from
bonds issued by a government or its agencies or instrumentalities.

ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies, or other providers of
credit.

MORTGAGE-BACKED SECURITIES -- securities that give the holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed by
government agencies.

PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.

ABOUT THE MERCURY HW BALANCED FUND
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to preserve capital while producing a high
total return.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in COMMON STOCKS of U.S. companies and investment
grade bonds -- that is, those rated in the top four categories by a major rating
agency -- including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED
SECURITIES and MORTGAGE-BACKED SECURITIES. The Fund's assets are allocated among
stocks and bonds. Generally, stocks will be at least 20% of the Fund's total
assets and bonds at least 25%.

In investing the Fund's assets in stocks, Mercury Advisors (the "Investment
Adviser") follows a value style. This means that the Investment Adviser buys
stocks that it believes are currently undervalued by the market and thus have a
lower price than their true worth. Typical value characteristics include:

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

The Fund invests in bonds with a portfolio duration of two to five years. The
average credit quality of the Fund's bonds is expected to be in the top two
categories of a major rating agency (that is, AA/Aa or higher).

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go down. These changes may occur because the stock
market is rising or falling. The Fund is also subject to the risk that the
stocks the Fund's Investment Adviser selects will underperform the stock markets
or other funds with similar investment objectives and investment strategies.
Changes in the value of Fund investments also may occur in response

2 MERCURY HW BALANCED FUND
<PAGE> 127

[GLOBE ICON] Fund Facts

YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.

PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

PREPAYMENT RISK -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the value of these securities will
fall.

EXTENSION RISK -- the risk that certain obligations will be paid off more slowly
by the obligor than anticipated and the value of these securities will fall.

VOLATILITY -- the amount and frequency of changes in a security's value.

to interest rate changes or other factors that may affect a particular issuer or
obligation. Generally, when interest rates go up, the value of bonds goes down.
The value of the Fund's bonds also may be affected by market conditions and
economic and political developments. If the value of the Fund's investments goes
down, you may lose money. We cannot guarantee that the Fund will achieve its
investment objective.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are investing with long-term goals in mind, such as retirement or
funding a child's education.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline in order to seek high total return while preserving
capital.

- Are seeking a diversified portfolio including stocks and bonds.

- Are prepared to receive taxable dividends.

MERCURY HW BALANCED FUND 3
<PAGE> 128

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

During the period shown in the bar chart, the highest return for a quarter was
10.28% (quarter ended March 31, 1991) and the lowest return for a quarter was
-8.32% (quarter ended September 30, 1990). The year-to-date return as of
September 30, 2000 was 3.50%.

<TABLE>
<CAPTION>
PAST PAST PAST
AVERAGE ANNUAL TOTAL RETURNS ONE FIVE TEN SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

CLASS I*+ -7.43% 9.65% 8.98% 10.43%(1)
S&P 500 INDEX 21.14% 28.66% 18.25% 18.55%(1)
LEHMAN BROTHERS GOVERNMENT/CREDIT INTERMEDIATE BOND 0.39% 7.10% 7.26% 8.52%(1)
INDEX
----------------------------------------------------------------------------------------------------
</TABLE>

The S&P 500 Index is a capital weighted, unmanaged index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.

The Lehman Brothers Government/Credit Intermediate Bond Index is a weighted
index comprised of publicly-traded intermediate-term government and corporate
debt with maturities between 1 and 9.99 years.
* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since August 13, 1985.

4 MERCURY HW BALANCED FUND
<PAGE> 129
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate selected
securities dealers or other financial intermediaries for account maintenance
activities.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A): CLASS I* CLASS A*
------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b) 5.25%(b)
------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c) None(c)
------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None None
------------------------------------------------------------------------------------
Redemption Fee None None
------------------------------------------------------------------------------------
Exchange Fee None None
------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
------------------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.75% 0.75%
------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1) FEES(e) None 0.25%
------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 0.40% 0.40%
------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.15% 1.40%
------------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.20% 0.20%
------------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 0.95% 1.20%
------------------------------------------------------------------------------------
</TABLE>

MERCURY HW BALANCED FUND 5
<PAGE> 130

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
CLASS I CLASS A
-----------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR $ 617 $ 641
-----------------------------------------------------------------------------------
THREE YEARS $ 852 $ 926
-----------------------------------------------------------------------------------
FIVE YEARS $ 1,106 $ 1,233
-----------------------------------------------------------------------------------
TEN YEARS $ 1,832 $ 2,100
-----------------------------------------------------------------------------------
</TABLE>

6 MERCURY HW BALANCED FUND
<PAGE> 131
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Michael Sanchez has served as a portfolio
manager of the Fund since joining the Investment Adviser in 1996. Mr. Sanchez is
the portfolio manager with responsibility for the day-to-day management of the
bond portion of the Fund's portfolio. Before joining the Investment Adviser, Mr.
Sanchez was with Provident Investment Counsel as senior vice president and
portfolio manager from 1991 to 1995 and with ARCO Investment Management Company
as Director of Fixed Income Investments from 1988 to 1991.

Sheldon Lieberman is responsible for the day-to-day management of the equity
portion of the Fund's portfolio and the asset allocation strategy. Mr. Lieberman
joined the Investment Adviser as a portfolio manager in 1994 and became a
portfolio manager of the Fund in July 2000. Before joining the Investment
Adviser, Mr. Lieberman was the Chief Investment Officer for the Los Angeles
County Employees Retirement Association.

ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------
The Fund's investment objective is to preserve capital while producing a high
total return.

TYPES OF INVESTMENTS

The Fund's assets are allocated among stocks and bonds. The Investment Adviser
uses a proprietary model to set the amount invested in each category. Generally
stocks will be at least 20% of the Fund's total assets and bonds at least 25%.
Historically, the Fund's allocation to stocks has ranged from 27% to 59%, and to
bonds from 41% to 73%.

The Fund seeks to achieve growth of capital through its investment in stocks. It
may purchase common stocks or securities with common stock characteristics (like
convertible preferred stocks, convertible bonds or warrants).

The Fund seeks to earn income and reduce fluctuation in the value of its shares
through its investments in bonds and preferred stocks. The Fund invests in bonds
with a portfolio duration of two to five years. The Fund purchases investment
grade bonds and preferred stocks as follows:

- U.S. government securities

- preferred stocks

- mortgage-backed and other asset-backed securities

- corporate bonds

- bonds that are convertible into stocks

The Investment Adviser sells bonds to manage portfolio duration, yield curve
exposure, sector exposure, diversification and credit quality.

In addition to these principal bond investments, the Fund also may invest in:

- bank certificates of deposit, fixed time deposits and bankers'
acceptances

- repurchase agreements, reverse repurchase agreements and dollar
rolls

- obligations of foreign governments or their subdivisions, agencies
and instrumentalities

- obligations of international agencies or supra-national entities

- municipal bonds

MERCURY HW BALANCED FUND 7
<PAGE> 132

[MAGNIFYING GLASS ICON] About the Details

After the Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Investment Adviser
will consider the change in rating in deciding whether to keep the security. It
is expected that the average credit quality of the Fund's bonds will be AA/Aa or
higher.

Because the Fund allocates its assets among stocks and bonds, it may not be able
to achieve a total return as high as a fund with complete freedom to invest its
assets in any one type of security. Likewise, because at least 25% of the Fund's
portfolio will normally consist of bonds, the Fund may not achieve as much
capital appreciation as a portfolio investing only in stocks. Although the Fund
intends to invest in bonds to keep the price of the Fund's shares more stable,
it can invest in intermediate- and long-term bonds, which fluctuate in price
more than money market obligations.

While not part of its principal strategy, the Fund can invest up to 20% of its
total assets in foreign securities.

MATURITY AND DURATION REQUIREMENTS

Maturity. The effective maturity of a bond is the weighted average period over
which principal is expected to be repaid. Stated maturity is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.

Duration. Duration measures the potential volatility of the price of a bond or
a portfolio of bonds prior to maturity. Duration is the magnitude of the change
in price of a bond relative to a given change in the market interest rate.
Duration incorporates a bond's yield, coupon interest payments, final maturity,
call and put features and prepayment exposure into one measure.

For any bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.

Duration is a tool to measure interest rate risk.

Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity can affect the price of the Fund and may correlate
with changes in interest rates. These factors can increase swings in the Fund's
share price during periods of volatile interest rate changes.

8 MERCURY HW BALANCED FUND
<PAGE> 133

[MAGNIFYING GLASS ICON] About the Details

MONEY MARKET INVESTMENTS

PORTFOLIO TURNOVER

As a result of the strategies described above, the Fund may have an annual
portfolio turnover rate above 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher mark ups and other transaction costs and can affect the Fund's
performance. It also can result in a greater amount of distributions as ordinary
income rather than long-term capital gains.

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are the right to receive a portion of principal
and/or interest payments made on a pool of residential or commercial mortgage
loans. When interest rates fall, borrowers may refinance or otherwise repay
principal on their mortgages earlier than scheduled. When this happens, certain
types of mortgage-backed securities will be paid off more quickly than
originally anticipated. Prepayment reduces the yield to maturity and average
life of the mortgage-backed securities. In addition, when the Fund reinvests the
proceeds

MERCURY HW BALANCED FUND 9
<PAGE> 134

[MAGNIFYING GLASS ICON] About the Details

of a prepayment, it may receive a lower interest rate than the rate on the
security that was prepaid. This risk is known as "prepayment risk." When
interest rates rise, certain types of mortgage-backed securities will be paid
off more slowly than originally anticipated and the value of these securities
will fall. This risk is known as extension risk.

Because of prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other bonds. Small movements in
interest rates (both up and down) may quickly and significantly reduce the value
of certain mortgage-backed securities.

Mortgage-backed securities are issued by Federal government agencies like the
Government National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Association ("Freddie Mac") or the Federal National Mortgage
Association ("Fannie Mae"). Principal and interest payments on mortgage-backed
securities issued by Federal government agencies are guaranteed by either the
Federal government or the government agency. This means that such securities
have very little credit risk. Other mortgage-backed securities are issued by
private corporations rather than Federal agencies. Private mortgage-backed
securities have credit risk as well as prepayment risk and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations ("CMOs"). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams ("tranches") with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only ("IOs"), principal only
("POs") or an amount that remains after other floating-rate tranches are paid
(an "inverse floater"). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If a
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by Fund
management, it is possible that the Fund could lose all or substantially all of
its investment.

ASSET-BACKED SECURITIES

10 MERCURY HW BALANCED FUND
<PAGE> 135

[MAGNIFYING GLASS ICON] About the Details

and the average life of the asset-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. In a period of rising interest
rates, prepayments may occur at a slower rate than expected. As a result, the
average maturity of the Fund's portfolio will increase. The value of long-term
securities changes more widely in response to changes in interest rates than
shorter-term securities.

CREDIT RISK

Credit risk is the risk that the issuer of bonds will be unable to pay the
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and on the terms of the specific bonds.

INTEREST RATE RISK

Interest rate risk is the risk that prices of bonds generally increase when
interest rates decline and decrease when interest rates increase. Prices of
longer-term securities generally change more in response to interest rate
changes than do prices of shorter-term securities.

CALL AND REDEMPTION RISK

Investments in bonds carry the risk that a bond's issuer will call the bond for
redemption prior to the bond's maturity. If there is an early call of a bond,
the Fund may lose income and may have to invest the proceeds of the redemption
in bonds with lower yields than the called bond.

The Fund also may be subject to the following risks:

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

These types of securities involve the risk that the security the Fund buys will
lose value prior to its delivery to the Fund. There also is the risk that the
security will not be issued or that the other party will not meet its
obligation, in which case the Fund loses the investment opportunity of the
assets it has set aside to pay for the security and any gain in the security's
price.

VARIABLE RATE DEMAND OBLIGATIONS

These are floating rate securities that consist of an interest in a long-term
bond and the conditional right to demand payment prior to the bond's maturity
from a bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, the Fund may be adversely affected. In
addition, these securities are subject to credit risk.

MERCURY HW BALANCED FUND 11
<PAGE> 136

[MAGNIFYING GLASS ICON] About the Details

CORPORATE LOANS

Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the value of
the collateral may not completely cover the borrower's obligations at the time
of a default. If a borrower files for protection from its creditors under the
U.S. bankruptcy laws, these laws may limit the Fund's rights to its collateral.
In addition, the value of collateral may erode during a bankruptcy case. In the
event of a bankruptcy, the holder of a corporate loan may not recover its
principal, may experience a long delay in recovering its investment and may not
receive interest during the delay.

CONVERTIBLE SECURITIES

FOREIGN MARKET RISK

- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

DERIVATIVES

The Fund also may invest in options. Derivatives like options may allow the Fund
to increase or decrease its level of risk exposure more quickly and

12 MERCURY HW BALANCED FUND
<PAGE> 137

[MAGNIFYING GLASS ICON] About the Details

efficiently than transactions in other types of instruments. Derivatives,
however, are more volatile and involve significant risks, including:

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW BALANCED FUND 13
<PAGE> 138

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers two classes of shares, each with its own sales charge and
expense structure. Each share class represents an ownership interest in the same
investment portfolio.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

14 MERCURY HW BALANCED FUND
<PAGE> 139

[CHECKMARK ICON] Account Choices

To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:

<TABLE>
<CAPTION>
CLASS I*
------------------------------------------------------------------------------
<S> <C>
Availability LIMITED TO CERTAIN INVESTORS INCLUDING:
- Investor Class and current Class I beneficial
shareholders.
- Certain retirement plans.
- Participants in certain programs sponsored by
affiliates.
- Certain investors participating in transaction
fee programs.
- Certain employees and affiliates of selected
securities dealers and other financial
intermediaries.
------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES
CHARGES AVAILABLE FOR LARGER INVESTMENTS.
------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION
Charge? THAT ARE REDEEMED WITHIN ONE YEAR.)
------------------------------------------------------------------------------
Account Maintenance NO.
and Distribution
Fees?
------------------------------------------------------------------------------

<CAPTION>
CLASS A*
------------------------------------------------------------------------------
<S> <C>
Availability GENERALLY AVAILABLE THROUGH SELECTED SECURITIES
DEALERS AND OTHER FINANCIAL INTERMEDIARIES.

DISTRIBUTOR CLASS SHAREHOLDERS.
------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES
CHARGES AVAILABLE FOR LARGER INVESTMENTS.
------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION
Charge? THAT ARE REDEEMED WITHIN ONE YEAR.)
------------------------------------------------------------------------------
Account Maintenance 0.25% ACCOUNT MAINTENANCE FEE NO DISTRIBUTION FEE.
and Distribution
Fees?
------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares
and Distributor Class shares were redesignated Class A shares.
MERCURY HW BALANCED FUND 15
<PAGE> 140
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I AND A SHARES*

If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:

16 MERCURY HW BALANCED FUND
<PAGE> 141

[CHECKMARK ICON] Account Choices

If you are eligible to buy both Class I and Class A shares, you should buy Class
I shares since Class A shares are subject to a 0.25% account maintenance fee,
while Class I shares are not.

MERCURY HW BALANCED FUND 17
<PAGE> 142

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

18 MERCURY HW BALANCED FUND
<PAGE> 143

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 15. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer, or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.

The current minimum for such automatic reinvestments is $100.

The minimum may be waived or revised under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY HW BALANCED FUND 19
<PAGE> 144

[CHECKMARK ICON] Account Choices

The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.

20 MERCURY HW BALANCED FUND
<PAGE> 145

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.

Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit.

Some of the Mercury mutual funds may impose a different
initial sales charge schedule. If you exchange Class I or A
shares for shares of a fund with a higher initial sales
charge than you originally paid, you may be charged the
difference at the time of exchange.

To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.

MERCURY HW BALANCED FUND 21
<PAGE> 146

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

Generally, Class I shares will have the higher net asset value because that
class has lower expenses.

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

22 MERCURY HW BALANCED FUND
<PAGE> 147
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include

MERCURY HW BALANCED FUND 23
<PAGE> 148

[CHECKMARK ICON] Account Choices

distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

24 MERCURY HW BALANCED FUND
<PAGE> 149

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Balanced Fund.

MERCURY HW BALANCED FUND 25
<PAGE> 150

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS I(1) CLASS A(1)
------------------------------------------------------- -----------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE PERIOD ENDED JUNE 30,
INCREASE (DECREASE) IN ------------------------------------------------------- -----------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996 2000(2)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $19.00 $19.84 $ 19.38 $18.27 $16.74 $17.61
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.79 0.77 0.89 0.90(3) 0.94 0.47
---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investments -- net (2.52) (0.04) 1.58 1.86 1.53 (1.09)
---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (1.73) 0.73 2.47 2.76 2.47 (0.62)
---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.80) (0.75) (0.90) (0.99) (0.92) (0.57)
Realized gain on investments -- net (0.93) (0.82) (1.11) (0.66) (0.02) (0.93)
---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.73) (1.57) (2.01) (1.65) (0.94) (1.50)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.54 $19.00 $ 19.84 $19.38 $18.27 $15.49
---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (9.30)% 4.04% 13.29% 15.75% 15.04% (3.63)%++
---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.95% 0.95% 0.93% 0.98% 1.00% 1.20%+
---------------------------------------------------------------------------------------------------------------------------------
Expenses 1.14% 0.98% 0.93% 0.98% 1.06% 1.42%+
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.47% 4.02% 4.49% 4.77% 5.26% 4.52%+
---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $65.07 $97.90 $104.60 $90.16 $70.60 $0.02
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 96% 135% 121% 117% 92% 96%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares and Distributor Class shares were redesignated Class A shares.
No sales loads were charged prior to this time.

(2) Class A commenced operations on October 12, 1999.

(3) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

* Total investment return excludes the effects of sales charges.

+ Annualized.

++ Not annualized.

26 MERCURY HW BALANCED FUND
<PAGE> 151
FUND
Mercury HW Balanced Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
<PAGE> 152

[TELEPHONE ICON] To Learn More

Mercury HW
Balanced Fund

[ARTWORK]
PROSPECTUS - October 6, 2000

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1000-1000
(C) Mercury Advisors

<PAGE> 153

Mercury Total Return Bond Fund

This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury Total Return Bond Fund.................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 9
Statement of Additional Information......................... 16

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 17
How to Buy, Sell, Transfer and Exchange Shares.............. 23
How Shares are Priced....................................... 27
Fee-Based Programs.......................................... 27
Dividends and Taxes......................................... 28

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 30
Master/Feeder Structure..................................... 30
Financial Highlights........................................ 32

MERCURY TOTAL RETURN BOND FUND
<PAGE> 155

[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.
CORPORATE BONDS -- debt securities issued by corporations, as distinct from
bonds issued by a government or its agencies or instrumentalities.
ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies or other providers of
credit.
MORTGAGE-BACKED SECURITIES -- securities that give the holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed by
government agencies.

ABOUT THE MERCURY TOTAL RETURN BOND FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to maximize long-term total return.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund is a "feeder" fund that invests all of its assets in a corresponding
"master" portfolio (the "Total Return Bond Master Portfolio") of the Fund Asset
Management Master Trust (the "Trust") which has the same objective as the Fund.
All investments will be made at the Trust level. This structure is sometimes
called a "master/feeder" structure. The Fund's investment results will
correspond directly to the investment results of the Total Return Bond Master
Portfolio in which it invests. For simplicity, this prospectus uses the term
"Fund" to include the Total Return Bond Master Portfolio of the Trust.

The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED SECURITIES
and MORTGAGE-BACKED SECURITIES. At least 85% of its investments are investment
grade -- that is, rated in the top four categories by a major rating agency. Up
to 15% of its investments may be rated below investment grade (none below B).
The Fund's DURATION will be from two to eight years. The Fund may actively and
frequently trade its portfolio securities.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go down. These changes may occur in response to
interest rate changes or other factors that may affect a particular issuer or
obligation. Generally, when interest rates go up, the value of bonds goes down.
The value of the Fund's shares also may be affected by market conditions and
economic or political developments. The longer the duration of the Fund, the
more the Fund's price will go down if interest rates go up. If the value of the
Fund's investments goes down, you may lose money. We cannot guarantee that the
Fund will achieve its investment objective.

The Fund invests in mortgage-backed and asset-backed securities. In addition to
normal bond risks, these securities are subject to PREPAYMENT RISK and EXTENSION
RISK, and may involve more VOLATILITY than other bonds of similar maturities.
The Fund also may invest in "JUNK" BONDS, which have more CREDIT RISK and tend
to be less liquid than higher-rated securities.

2 MERCURY TOTAL RETURN BOND FUND
<PAGE> 156

[GLOBE ICON] Fund Facts

DURATION -- a measure of how much the price of a bond would change compared to a
change in market interest rates. See page 8 for an example.
PREPAYMENT RISK -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the value of these securities will
fall.
EXTENSION RISK -- the risk that certain obligations will be paid off more slowly
by the obligor than anticipated and the value of these securities will fall.
VOLATILITY -- the amount and frequency of changes in a security's value.
"JUNK" BONDS -- bonds with a credit rating of BB/Ba or lower by rating agencies.
CREDIT RISK -- the risk that the issuer of bonds will be unable to pay the
interest or principal when due.

High portfolio turnover resulting from active and frequent trading results in
higher mark ups and other transactions costs and can result in a greater amount
of dividends from ordinary income rather than capital gains.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are looking for an investment that provides income.
- Want a professionally managed and diversified portfolio.
- Are willing to accept the risk that the value of your investment
may decline as a result of interest rate movements in order to
seek long-term total return.
- Are prepared to receive taxable dividends.

MERCURY TOTAL RETURN BOND FUND 3

<PAGE> 157

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 and 5 years and for the life of the Class compare with those of a broad
measure of market performance. Class I shares now are sold subject to sales
charges, which are not reflected in the bar chart. If sales charges were
reflected, the returns would be less. The Fund's performance is for periods
prior to its investment in the Total Return Bond Master Portfolio. How the Fund
has performed in the past is not necessarily an indication of how the Fund will
perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
6.57% (quarter ended June 30, 1995) and the lowest return for a quarter was
-2.38% (quarter ended March 31, 1996). The year-to-date return as of September
30, 2000 was 4.87%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS INCEPTION
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I*+ -5.84% 7.51% 7.48%(1)
LEHMAN BROTHERS AGGREGATE BOND INDEX -0.82% 7.73% 7.63%(1)
---------------------------------------------------------------------------------------
</TABLE>

The Lehman Brothers Aggregate Bond Index is an unmanaged market-weighted Index
comprised of investment-grade corporate bonds (rated BBB or better), mortgages
and U.S. Treasury and government agency issues with at least one year to
maturity.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since December 6, 1994.

4 MERCURY TOTAL RETURN BOND FUND
<PAGE> 158
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Trust.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants and other financial
intermediaries, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
or other financial intermediaries for account maintenance activities.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)(a): CLASS I* CLASS A* CLASS B(b) CLASS C
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.25%(c) 4.25%(c) None None
----------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) None(d) 4.00%(c) 1.00%(c)
----------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
----------------------------------------------------------------------------------------
Redemption Fee None None None None
----------------------------------------------------------------------------------------
Exchange Fee None None None None
----------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM THE FUND'S TOTAL ASSETS)(e):
----------------------------------------------------------------------------------------
MANAGEMENT FEES(f) 0.30% 0.30% 0.30% 0.30%
----------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1) FEES(g) None 0.25% 1.00% 1.00%
----------------------------------------------------------------------------------------
Other Expenses (including transfer agency and
administrative fees)(h) 0.62% 0.62% 0.62% 0.62%
----------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.92% 1.17% 1.92% 1.92%
----------------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(i) 0.27% 0.27% 0.27% 0.27%
----------------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 0.65% 0.90% 1.65% 1.65%
----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* As of October 6, 2000, Investor Class shares were
redesignated Class I shares and Distributor Class shares
were redesignated Class A shares.
(a) Certain selected securities dealers or other financial
intermediaries may charge a fee to process a purchase or
sale of shares. See "How to Buy, Sell, Transfer and Exchange
Shares."
(b) Class B shares automatically convert to Class A shares about
ten years after you buy them and will no longer be subject
to distribution fees.
(c) Some investors may qualify for reductions in the sales
charge (load).
(d) You may pay a deferred sales charge if you purchase $1
million or more and you redeem within one year.
(e) For the Fund, the fees and expenses include both the Fund
and the Total Return Bond Master Portfolio.
(f) Paid by the Total Return Bond Master Portfolio.
(g) The Fund calls the "Service Fee" an "Account Maintenance
Fee." Account Maintenance Fee is the term used elsewhere in
this prospectus and in all other Fund materials. If you hold
Class B or C shares over time, it may cost you more in
distribution (12b-1) fees than the maximum sales charge that
you would have paid if you had bought one of the other
classes.
(h) Includes administrative fees, which are payable to the
Investment Adviser by the Fund at the annual rate of 0.25%.
(i) The Investment Adviser has contractually agreed to waive
management fees and/or reimburse expenses through June 30,
2001, as shown in the table.
</TABLE>

MERCURY TOTAL RETURN BOND FUND 5
<PAGE> 159

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

Expenses if you did redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 489 $ 513 $ 568 $ 268
------------------------------------------------------------------------------------------
THREE YEARS $ 680 $ 755 $ 877 $ 577
------------------------------------------------------------------------------------------
FIVE YEARS $ 887 $1,016 $1,212 $1,012
------------------------------------------------------------------------------------------
TEN YEARS $1,484 $1,762 $2,221 $2,221
------------------------------------------------------------------------------------------
</TABLE>

Expenses if you did not redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 489 $ 513 $ 168 $ 168
------------------------------------------------------------------------------------------
THREE YEARS $ 680 $ 755 $ 577 $ 577
------------------------------------------------------------------------------------------
FIVE YEARS $ 887 $1,016 $1,012 $1,012
------------------------------------------------------------------------------------------
TEN YEARS $1,484 $1,762 $2,221 $2,221
------------------------------------------------------------------------------------------
</TABLE>

6 MERCURY TOTAL RETURN BOND FUND
<PAGE> 160
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Michael Sanchez has been a co-Portfolio Manager
of the Fund since joining the Investment Adviser in 1996. Before joining the
Investment Adviser, Mr. Sanchez was with Provident Investment Counsel as senior
vice president and portfolio manager from 1991 to 1995 and with ARCO Investment
Management Company as Director of Fixed Income Investments from 1988 to 1991.
John Queen has been a co-Portfolio Manager of the Fund since joining the
Investment Adviser in 1997. Prior to joining the Investment Adviser, Mr. Queen
was associated with The Capital Group as a member of an analyst team responsible
for $8 billion in fixed-income assets.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to maximize long-term total return. The Fund
invests in bonds with a portfolio duration of two to eight years. Investments
are concentrated in areas of the bond market (based on quality, sector, coupon
or maturity) that the Investment Adviser believes are relatively undervalued.

TYPES OF INVESTMENTS

The Fund seeks to achieve its objective by investing mainly in investment grade,
interest-bearing securities of varying maturities. These include:

- U.S. government securities
- preferred stocks
- mortgage-backed and other asset-backed securities
- corporate bonds
- bonds that are convertible into stocks

The Investment Adviser sells securities to manage portfolio duration, yield
curve exposure, sector exposure, diversification and credit quality.

In addition to these principal investments, the Fund also may invest in:

- bank certificates of deposit, fixed time deposits and bankers'
acceptances
- repurchase agreements, reverse repurchase agreements and dollar
rolls
- obligations of foreign governments or their subdivisions, agencies
and instrumentalities
- obligations of international agencies or supra-national entities
- municipal bonds

RATINGS LIMITATIONS

- at least 85% of total assets rated at least investment grade or,
if short-term, the second highest quality grade, by a major rating
agency such as Moody's Investors Service ("Moody's") or Standard &
Poor's Ratings Group ("S&P")
- up to 15% of total assets rated below investment grade (below Baa
by Moody's or below BBB by S&P), but none below B

The Investment Adviser can invest in unrated securities and will assign them the
rating of a rated security of comparable quality. After the Fund buys a

MERCURY TOTAL RETURN BOND FUND 7
<PAGE> 161

[MAGNIFYING GLASS ICON] About the Details

security, it may be given a lower rating or stop being rated. This will not
require the Fund to sell it, but the Investment Adviser will consider the change
in rating in deciding whether to keep the security.

MATURITY AND DURATION REQUIREMENTS

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:

<TABLE>
<CAPTION>
DURATION CHANGE IN INTEREST RATES
---------------------------------------------------------------
<C> <S>
4.5 yrs. 1% decline -> 4.5% gain in Fund price
---------------------------------------------------------------
1% rise -> 4.5% decline in Fund price
---------------------------------------------------------------
</TABLE>

Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Fund and may correlate with
changes in interest rates. These factors can increase swings in the Fund's share
price during periods of volatile interest rate changes.

PORTFOLIO TURNOVER

8 MERCURY TOTAL RETURN BOND FUND
<PAGE> 162

[MAGNIFYING GLASS ICON] About the Details

performance. It also can result in a greater amount of dividends as ordinary
income rather than long-term capital gains.

FOREIGN BONDS

The Fund may invest in foreign bonds as follows:

- up to 25% of total assets in foreign bonds that are denominated in
U.S. dollars
- up to 15% of total assets in foreign bonds that are not
denominated in U.S. dollars
- up to 15% of total assets in emerging market foreign bonds

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

MORTGAGE-BACKED SECURITIES

MERCURY TOTAL RETURN BOND FUND 9
<PAGE> 163

[MAGNIFYING GLASS ICON] About the Details

mortgage-backed securities will be paid off more quickly than originally
anticipated. Prepayment reduces the yield to maturity and average life of the
mortgage-backed securities. In addition, when the Fund reinvests the proceeds of
a prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. This risk is known as "prepayment risk." When interest rates
rise, certain types of mortgage-backed securities will be paid off more slowly
than originally anticipated and the value of these securities will fall. This
risk is known as extension risk.

Mortgage-backed securities are issued by Federal government agencies like the
Government National Mortgage Association ("Ginnie Mae") the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Association ("Freddie Mac"). Principal and interest payments on mortgage-backed
securities issued by Federal government agencies are guaranteed by either the
Federal government or the government agency. This means that such securities
have very little credit risk. Other mortgage-backed securities are issued by
private corporations rather than Federal agencies. Private mortgage-backed
securities have credit risk as well as prepayment risk and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations ("CMOs"). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams ("tranches") with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only ("IOs"), principal only
("POs") or an amount that remains after other floating-rate tranches are paid
(an "inverse floater"). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If the
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by the Investment
Adviser, it is possible that the Fund could lose all or substantially all of its
investment.

10 MERCURY TOTAL RETURN BOND FUND
<PAGE> 164

[MAGNIFYING GLASS ICON] About the Details

ASSET-BACKED SECURITIES

Like traditional bonds, the value of asset-backed securities typically increases
when interest rates fall and decreases when interest rates rise. Certain asset-
backed securities may also be subject to the risk of prepayment. In a period of
declining interest rates, borrowers may pay what they owe on the underlying
assets more quickly than anticipated. Prepayment reduces the yield to maturity
and the average life of the asset-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. In a period of rising interest
rates, prepayments may occur at a slower rate than expected. As a result, the
average maturity of the Fund's portfolio will increase. The value of long-term
securities changes more widely in response to changes in interest rates than
shorter-term securities.

CREDIT RISK

INTEREST RATE RISK

CALL AND REDEMPTION RISK

JUNK BONDS

Junk bonds are bonds that are rated below investment grade by the major rating
agencies or are unrated securities that the Fund's Investment Adviser believes
are of comparable quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high risk investments that may
cause income and principal losses for the Fund. Junk bonds generally are less
liquid and experience more price volatility than higher rated bonds. The issuers
of junk bonds may have a larger amount of outstanding debt relative to their
assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk

MERCURY TOTAL RETURN BOND FUND 11
<PAGE> 165

[MAGNIFYING GLASS ICON] About the Details

bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

The Fund also may be subject to the following risks:

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

These types of investments involve the risk that the security the Fund buys will
lose value prior to its delivery to the Fund. There also is the risk that the
security will not be issued or that the other party will not meet its
obligation, in which case the Fund loses the investment opportunity of the
assets it has set aside to pay for the security and any gain in the security's
price.

VARIABLE RATE DEMAND OBLIGATIONS

INDEXED AND INVERSE FLOATING RATE SECURITIES

The Fund may invest in securities whose potential returns are directly related
to changes in an underlying index or interest rate, known as indexed securities.
The return on indexed securities will rise when the underlying index or interest
rate rises and fall when the index or interest rate falls. The Fund may also
invest in securities whose return is inversely related to changes in an interest
rate ("inverse floaters"). In general, inverse floaters change in value in a
manner that is opposite to most bonds -- that is, interest rates on inverse
floaters will decrease when short-term rates increase and increase when
short-term rates decrease. Investments in indexed securities and inverse
floaters may subject the Fund to the risk of reduced or eliminated interest
payments. Investments in indexed securities also may subject the Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages the Fund's investment. As a result, the market
value of such securities will generally be more volatile than that of fixed rate
securities. Both indexed securities and inverse floaters can be derivative
securities and can be considered speculative.

12 MERCURY TOTAL RETURN BOND FUND
<PAGE> 166

[MAGNIFYING GLASS ICON] About the Details

SOVEREIGN DEBT

The Fund may invest in sovereign debt securities. These securities are issued or
guaranteed by foreign government entities. Investments in sovereign debt subject
the Fund to the risk that a government entity may delay or refuse to pay
interest or repay principal on its sovereign debt. Some of these reasons may
include cash flow problems, insufficient foreign currency reserves, political
considerations, the relative size of its debt position to its economy or its
failure to put in place economic reforms required by the International Monetary
Fund or other multilateral agencies. If a government entity defaults, it may ask
for more time in which to pay or for further loans. There is no legal process
for collecting sovereign debts that a government does not pay.

CORPORATE LOANS

CONVERTIBLE SECURITIES

FOREIGN MARKET RISK

MERCURY TOTAL RETURN BOND FUND 13
<PAGE> 167

[MAGNIFYING GLASS ICON] About the Details

in foreign securities involve the following risks, which are generally greater
for investments in emerging markets:

- Prices of foreign securities may go up and down more than prices
of securities traded in the U.S.

14 MERCURY TOTAL RETURN BOND FUND
<PAGE> 168

[MAGNIFYING GLASS ICON] About the Details

- The value of the Fund's foreign holdings (and hedging transactions
in foreign currencies) will be affected by changes in currency
exchange rates.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

- If the Fund purchases a bond issued by a foreign government, the
government may be unwilling or unable to make payments when due.
There may be no formal bankruptcy proceeding to collect amounts
owed by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

A number of European countries have entered into EMU in an effort to reduce
trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro.
These securities trade and make dividend and other payments only in euros. Like
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected the transition
to the euro, or EMU as a whole, does not take effect as planned or if a
participating country withdraws from EMU.

DERIVATIVES

The Fund also may use "derivatives." Derivatives are financial instruments, like
futures, forwards, options and swaps, the values of which are derived from other
securities, commodities (such as gold or oil) or indexes (such as the S&P 500).
Derivatives may allow the Fund to increase or decrease its level of risk
exposure more quickly and efficiently than transactions in other types of
instruments. If the Fund invests in derivatives, the investments may not be
effective as a hedge against price movements and can limit potential for growth
in the value of an interest in the Fund. Derivatives are volatile and involve
significant risks, including:

MERCURY TOTAL RETURN BOND FUND 15
<PAGE> 169

[MAGNIFYING GLASS ICON] About the Details

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial
obligation to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

16 MERCURY TOTAL RETURN BOND FUND
<PAGE> 170

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying other types of sales charges. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.

Certain financial institutions may charge you additional fees in connection with
transactions in Fund shares. The Investment Adviser, the Distributor or their
affiliates may make payments out of their own resources to securities dealers
and other financial intermediaries for providing services intended to result in
the sale of Fund shares or for shareholder servicing activities.

MERCURY TOTAL RETURN BOND FUND 17
<PAGE> 171

[CHECKMARK ICON] Account Choices

To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:
<TABLE>
<CAPTION>
CLASS I* CLASS A* CLASS B
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Availability LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH SELECTED THROUGH SELECTED
- Investor Class and SECURITIES DEALERS AND SECURITIES DEALERS AND
current Class I OTHER FINANCIAL OTHER FINANCIAL
beneficial INTERMEDIARIES. INTERMEDIARIES.
shareholders. DISTRIBUTOR CLASS
- Certain retirement SHAREHOLDERS.
plans.
- Participants in
certain programs
sponsored by
affiliates.
- Certain investors
participating in
transaction fee
programs.
- Certain employees and
affiliates of selected
securities dealers and
other financial
intermediaries.
---------------------------------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PURCHASE. LOWER SALES PRICE IS INVESTED IN
CHARGES AVAILABLE FOR CHARGES AVAILABLE FOR SHARES OF THE FUND.
LARGER INVESTMENTS. LARGER INVESTMENTS.
---------------------------------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR YES. PAYABLE IF YOU
Charge? PURCHASES OVER $1 PURCHASES OVER $1 REDEEM WITHIN SIX YEARS
MILLION THAT ARE MILLION THAT ARE OF PURCHASE.
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
---------------------------------------------------------------------------------------------------------------
Account Maintenance NO. 0.25% ACCOUNT 0.25% ACCOUNT
and Distribution MAINTENANCE FEE NO MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE. DISTRIBUTION FEE.
---------------------------------------------------------------------------------------------------------------
Conversion to Class A NO. NO. YES, AUTOMATICALLY AFTER
shares? APPROXIMATELY TEN YEARS.
---------------------------------------------------------------------------------------------------------------

<CAPTION>
CLASS C
------------------------------------------------------------------------
<S> <C>
Availability GENERALLY AVAILABLE
THROUGH SELECTED
SECURITIES DEALERS AND
OTHER FINANCIAL
INTERMEDIARIES.
------------------------------------------------------------------------
Initial Sales Charge? NO. ENTIRE PURCHASE
PRICE IS INVESTED IN
SHARES OF THE FUND.
------------------------------------------------------------------------
Deferred Sales YES. PAYABLE IF YOU
Charge? REDEEM WITHIN ONE YEAR
OF PURCHASE.
------------------------------------------------------------------------
Account Maintenance 0.25% ACCOUNT
and Distribution MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE.
------------------------------------------------------------------------
Conversion to Class A NO.
shares?
------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares
and Distributor Class shares were redesignated Class A shares.

18 MERCURY TOTAL RETURN BOND FUND
<PAGE> 172
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I AND A SHARES* -- INITIAL SALES CHARGE OPTIONS

If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
AS A % OF YOUR AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT** OFFERING PRICE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $50,000 4.25% 4.44% 4.00%
-----------------------------------------------------------------------------------------
$50,000 BUT LESS THAN
$100,000 4.00% 4.17% 3.50%
-----------------------------------------------------------------------------------------
$100,000 BUT LESS THAN
$250,000 3.50% 3.63% 3.00%
-----------------------------------------------------------------------------------------
$250,000 BUT LESS THAN
$500,000 2.50% 2.56% 2.00%
-----------------------------------------------------------------------------------------
$500,000 BUT LESS THAN
$1,000,000 2.00% 2.04% 1.75%
-----------------------------------------------------------------------------------------
$1,000,000 BUT LESS THAN
$2,000,000*** 0.00% 0.00% 0.50%
-----------------------------------------------------------------------------------------
$2,000,000 AND OVER*** 0.00% 0.00% 0.25%
-----------------------------------------------------------------------------------------
</TABLE>

No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:

MERCURY TOTAL RETURN BOND FUND 19
<PAGE> 173

[CHECKMARK ICON] Account Choices

- Certain investors, including directors or trustees of mutual funds
sponsored by the Investment Adviser or its affiliates, employees
of the Investment Adviser and its affiliates and employees of
selected securities dealers
- Certain programs of the Investment Adviser or its affiliates
- Certain programs of selected securities dealers and other
financial intermediaries that have an agreement with the
Distributor or its affiliates
- Investor Class beneficial shareholders

CLASS B AND C SHARES -- DEFERRED SALES CHARGE OPTIONS

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that the Fund has adopted under Rule 12b-1 of the Investment Company Act of
1940. Because these fees are paid out of the Fund's assets on an ongoing basis,
over time these fees increase the cost of your investment and may cost you more
than paying other types of sales charges. The Distributor uses the money that it
receives from the deferred sales charges and the distribution fees

20 MERCURY TOTAL RETURN BOND FUND
<PAGE> 174

[CHECKMARK ICON] Account Choices

to cover the costs of marketing, advertising and compensating the financial
consultant, selected securities dealer or other financial intermediary who
assists you in purchasing Fund shares.

CLASS B SHARES

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old

- Redemption by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers

- Redemption in connection with participation in certain fee-based
programs managed by the Investment Adviser or its affiliates

- Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year after death or
disability or, if later, reasonably promptly following comple-

MERCURY TOTAL RETURN BOND FUND 21
<PAGE> 175

[CHECKMARK ICON] Account Choices

tion of probate, or in connection with involuntary termination of
an account in which Fund shares are held

- Withdrawal through the Systematic Withdrawal Plan of up to 10% per
year of your Class B account value at the time the plan is
established

Your Class B shares convert automatically into Class A shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class A
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B shares to Class A shares is not a taxable event for Federal income
tax purposes.

CLASS C SHARES

Class C shares do not offer a conversion privilege.

22 MERCURY TOTAL RETURN BOND FUND
<PAGE> 176

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

MERCURY TOTAL RETURN BOND FUND 23
<PAGE> 177

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 18. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

24 MERCURY TOTAL RETURN BOND FUND
<PAGE> 178

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SELECTED securities dealer or other securities dealer or other financial intermediary if
SECURITIES DEALER financial intermediary authorized dealer agreements are in place between the
OR OTHER FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these shares must be coordinated by the receiving
intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer or other - Transfer your shares to an account with the Transfer
financial intermediary Agent; or
- Sell your shares, paying any applicable deferred sales
charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular trading on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY TOTAL RETURN BOND FUND 25
<PAGE> 179

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested.
For Class B and C shares, your total annual withdrawals
cannot be more than 10% per year of the value of your shares
at the time your plan is established. The deferred sales
charge is waived for systematic redemptions. Ask your
financial intermediary for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit. Class B or
Class C shares can be exchanged for Class B shares of
Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or A shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B or Class C shares for shares of a fund with
a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. Your time in both funds will also count when
determining the holding period for a conversion from Class B
to Class A shares.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

26 MERCURY TOTAL RETURN BOND FUND
<PAGE> 180

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

MERCURY TOTAL RETURN BOND FUND 27
<PAGE> 181
[CHECKMARK ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the Fund's shares or into the Summit fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class A shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute any net investment income monthly and any net realized
long-term or short-term capital gains at least annually. The Fund may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. DIVIDENDS may be reinvested automatically in shares of the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a securities dealer or other financial intermediary that has an
agreement with the Fund, contact your dealer or intermediary about which option
you would like. If your account is with the Transfer Agent and you would like to
receive dividends in cash, contact the Transfer Agent. The Fund anticipates that
the majority of its dividends, if any, will consist of ordinary income. Capital
gains, if any, may be taxable to you at different rates, depending, in part, on
how long the Fund has held the assets sold.

28 MERCURY TOTAL RETURN BOND FUND
<PAGE> 182

[CHECKMARK ICON] Account Choices

MERCURY TOTAL RETURN BOND FUND 29
<PAGE> 183

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

Mercury Advisors, the Fund's Investment Adviser, manages the Fund's investments
under the overall supervision of the Board of Trustees of the Trust. The
Investment Adviser has the responsibility for making all investment decisions
for the Fund. The Trust pays the Investment Adviser a fee at the annual rate of
0.30% of the average daily net assets of the Total Return Bond Master Portfolio
of the Trust. The Fund pays the Investment Adviser an administrative fee at the
annual rate of 0.25% of the average daily net assets of the Fund.

For the fiscal year ended June 30, 2000, the Fund paid an affiliate of the
Investment Adviser fees for advisory and administrative services of 0.55% of the
Fund's average net assets. Although not required to do so, the Investment
Adviser has agreed to make reimbursements so that the regular annual operating
expenses of the Fund will be limited as shown in the table on page 5. The
Investment Adviser has agreed to these expense limits through June 2001, and
will thereafter give shareholders at least 30 days' notice if this reimbursement
policy will change. Prior to the date of this prospectus, the Investment Adviser
provided portfolio management directly to the Fund, which was then called the
Total Return Bond Fund, a series of the Hotchkis and Wiley Funds.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------

The Fund is a "feeder" fund that invests all of its assets in the Total Return
Bond Master Portfolio of the Trust. (Except where indicated, this prospectus
uses the term "Fund" to mean this feeder fund and the Total Return Bond Master
Portfolio taken together.) Investors in the Fund will acquire an indirect
interest in the Total Return Bond Master Portfolio.

The Total Return Bond Master Portfolio may accept investments from other feeder
funds, and all the feeders of the Total Return Bond Master Portfolio

30 MERCURY TOTAL RETURN BOND FUND
<PAGE> 184

[MANAGEMENT TEAM ICON] The Management Team

bear the Portfolio's expenses in proportion to their assets. This structure may
enable the Fund to reduce costs through economies of scale. A larger investment
portfolio may also reduce certain transaction costs to the extent that
contributions to and redemptions from the Portfolio from different feeders may
offset each other and produce a lower net cash flow.

However, each feeder fund can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder fund could offer
access to the Total Return Bond Master Portfolio on more attractive terms, or
could experience better performance, than another feeder fund. Information about
other feeder funds is available by calling 1-800-236-4479.

Whenever the Total Return Bond Master Portfolio holds a vote of its feeder
funds, the fund investing will pass the vote through to its own shareholders.
Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than the Fund over
the operations of the Total Return Bond Master Portfolio.

The Fund may withdraw from the Total Return Bond Master Portfolio at any time
and may invest all of its assets in another pooled investment vehicle or retain
an investment adviser to manage the Fund's assets directly.

MERCURY TOTAL RETURN BOND FUND 31
<PAGE> 185

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). These financial
highlights were audited by PricewaterhouseCoopers LLP. The accountants' report
and the Fund's financial statements are included in the Fund's annual report,
which is available upon request. Further performance information is contained in
the annual report.

<TABLE>
<CAPTION>
CLASS I (1) CLASS A(1)
-------------------------------------------------------- ------------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE PERIOD ENDED JUNE 30,
INCREASE (DECREASE) IN -------------------------------------------------------- ------------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996 2000 1999(2)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
year $ 12.85 $ 13.46 $13.04 $12.78 $12.94 $12.85 $12.88
----------------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.86 0.81 0.89 0.99 0.84(3) 0.80 0.06
----------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net (0.54) (0.49) 0.50 0.30 0.06 (0.51) (0.03)
----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.32 0.32 1.39 1.29 0.90 0.29 0.03
----------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions
Investment income -- net (0.84) (0.83) (0.97) (0.92) (0.93) (0.81) (0.06)
Realized gain on
investments -- net -- (0.10) -- (0.11) (0.13) -- --
----------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (0.84) (0.93) (0.97) (1.03) (1.06) (0.81) (0.06)
----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 12.33 $ 12.85 $13.46 $13.04 $12.78 $12.33 $12.85
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per
share 2.59% 2.30% 11.04% 10.48% 7.05% 2.37% 0.23%(++)
----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
----------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.65% 0.65% 0.65% 0.65% 0.68% 0.90% 0.90%(+)
----------------------------------------------------------------------------------------------------------------------------
Expenses 0.92% 0.79% 1.02% 0.95% 0.98% 1.17% 1.18%(+)
----------------------------------------------------------------------------------------------------------------------------
Investment income -- net 6.80% 5.78% 6.65% 7.08% 7.16% 6.55% 6.26%(+)
----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in
millions) $100.37 $124.32 $45.25 $14.31 $43.42 $43.94 $0.35
----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 247% 233% 195% 173% 51% 247% 233%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares and Distributor Class shares were redesignated Class A shares.

No sales loads were charged prior to this time.

(2) Class A commenced operations on June 2, 1999.

(3) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

* Total investment return excludes the effects of sales charges.

(+) Annualized.

(++) Not annualized.

32 MERCURY TOTAL RETURN BOND FUND
<PAGE> 186

FUND

Mercury Total Return Bond Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER

Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT

Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR

FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN

Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL

Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 187
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1090-1000
(C) Mercury Advisors

Mercury Total
Return Bond Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 188

Mercury Low Duration Fund

This prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.

PROSPECTUS - October 6, 2000
<PAGE> 189
Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury Low Duration Fund......................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 9
Statement of Additional Information......................... 16

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 17
How to Buy, Sell, Transfer and Exchange Shares.............. 23
How Shares are Priced....................................... 27
Fee-Based Programs.......................................... 27
Dividends and Taxes......................................... 28

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 30
Master/Feeder Structure..................................... 30
Financial Highlights........................................ 32

MERCURY LOW DURATION FUND
<PAGE> 190
[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.
CORPORATE BONDS -- debt securities issued by corporations, as distinct from
bonds issued by a government or its agencies or instrumentalities.
ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies, or other providers of
credit.
MORTGAGE-BACKED SECURITIES -- securities that give the holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed by
government agencies.

ABOUT THE MERCURY LOW DURATION FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to maximize total return, consistent with
capital preservation.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund is a "feeder" fund that invests all of its assets in a corresponding
"master" portfolio (the "Low Duration Master Portfolio") of the Fund Asset
Management Master Trust (the "Trust") which has the same objective as the Fund.
All investments will be made at the Trust level. This structure is sometimes
called a "master/feeder" structure. The Fund's investment results will
correspond directly to the investment results of the Low Duration Master
Portfolio in which it invests. For simplicity, this prospectus uses the term
"Fund" to include the Low Duration Master Portfolio of the Trust.

The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED SECURITIES
and MORTGAGE-BACKED SECURITIES. At least 70% of its investments are securities
rated A or better by a major rating agency. Up to 30% of its investments may be
in securities rated BBB/Baa and up to 10% of its investments may be in
securities rated below investment grade -- that is, rated below BBB/Baa (none
below B). The Fund's DURATION will be from one to three years. The Fund may
actively and frequently trade its portfolio securities.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

2 MERCURY LOW DURATION FUND
<PAGE> 191

[GLOBE ICON] Fund Facts

High portfolio turnover resulting from active and frequent trading results in
higher mark ups and other transaction costs and can result in a greater amount
of dividends from ordinary income rather than capital gains.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are looking for an investment that provides income.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline as the result of interest rate movements in order to
seek to maximize total return, consistent with the preservation of
capital.

- Are prepared to receive taxable dividends.

MERCURY LOW DURATION FUND 3
<PAGE> 192

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 and 5 years and for the life of the Class compare with those of a broad
measure of market performance. Class I shares now are sold subject to sales
charges, which are not reflected in the bar chart. If sales charges were
reflected, the returns would be less. The Fund's performance is for periods
prior to its investment in the Low Duration Master Portfolio. How the Fund has
performed in the past is not necessarily an indication of how the Fund will
perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
4.02% (quarter ended June 30, 1995) and the lowest return for a quarter was
-0.09% (quarter ended December 31, 1998). The year-to-date return as of
September 30, 2000 was 5.32%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS INCEPTION
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I*+ 0.09% 6.39% 6.70%(1)
MERRILL LYNCH 1-3 YEAR U.S. TREASURY NOTE INDEX 3.06% 6.51% 5.37%(1)
---------------------------------------------------------------------------------------
</TABLE>

The Merrill Lynch 1-3 year U.S. Treasury Note Index is an unmanaged Index
comprised of U.S. Treasury securities with maturities ranging from one to three
years, which are guaranteed as to the timely payment of principal and interest
by the U.S. government. The Fund invests in securities that are not reflected in
the Index or guaranteed.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since May 18, 1993.

4 MERCURY LOW DURATION FUND
<PAGE> 193
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Trust.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants, other financial
intermediaries, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate selected
securities dealers or other financial intermediaries for account maintenance
activities.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)(a): CLASS I* CLASS A* CLASS B(b) CLASS C
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) 3.00%(c) 3.00%(c) None None
---------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption
proceeds, whichever is lower) None(d) None(d) 4.00%(c) 1.00%(c)
---------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
---------------------------------------------------------------------------------------------
Redemption Fee None None None None
---------------------------------------------------------------------------------------------
Exchange Fee None None None None
---------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM THE FUND'S TOTAL ASSETS)(e):
---------------------------------------------------------------------------------------------
MANAGEMENT FEES(f) 0.21% 0.21% 0.21% 0.21%
---------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1) FEES(g) None 0.25% 0.90% 0.90%
---------------------------------------------------------------------------------------------
Other Expenses (including transfer agency and
administrative fees)(h) 0.51% 0.51% 0.51% 0.51%
---------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.72% 0.97% 1.62% 1.62%
---------------------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(i) 0.14% 0.14% 0.14% 0.14%
---------------------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 0.58% 0.83% 1.48% 1.48%
---------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* As of October 6, 2000, Investor Class shares were
redesignated Class I shares and Distributor Class shares
were redesignated Class A shares.
(a) Certain securities dealers or other financial intermediaries
may charge a fee to process a purchase or sale of shares.
See "How to Buy, Sell, Transfer and Exchange Shares."
(b) Class B shares automatically convert to Class A shares about
ten years after you buy them and will no longer be subject
to distribution fees.
(c) Some investors may qualify for reductions in the sales
charge (load).
(d) You may pay a deferred sales charge if you purchase $1
million or more and you redeem within one year.
(e) For the Fund, the fees and expenses include both the Fund
and the Low Duration Master Portfolio.
(f) Paid by the Low Duration Master Portfolio.
(g) The Fund calls the "Service Fee" an "Account Maintenance
Fee." Account Maintenance Fee is the term used elsewhere in
this prospectus and in all other Fund materials. If you hold
Class B or C shares over time, it may cost you more in
distribution (12b-1) fees than the maximum sales charge that
you would have paid if you had bought one of the other
classes.
(h) Includes administrative fees, which are payable to the
Investment Adviser by the Fund at the annual rate of 0.25%.
(i) The Investment Adviser has contractually agreed to waive
management fees and/or reimburse expenses through June 30,
2001, as shown in the table.
</TABLE>

MERCURY LOW DURATION FUND 5
<PAGE> 194

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

Expenses if you did redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 358 $ 382 $ 551 $ 251
------------------------------------------------------------------------------------------
THREE YEARS $ 510 $ 586 $ 797 $ 497
------------------------------------------------------------------------------------------
FIVE YEARS $ 675 $ 807 $ 1,068 $ 868
------------------------------------------------------------------------------------------
TEN YEARS $ 1,155 $ 1,442 $ 1,910 $ 1,910
------------------------------------------------------------------------------------------
</TABLE>

Expenses if you did not redeem your shares:

<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ 358 $ 382 $ 151 $ 151
------------------------------------------------------------------------------------------
THREE YEARS $ 510 $ 586 $ 497 $ 497
------------------------------------------------------------------------------------------
FIVE YEARS $ 675 $ 807 $ 868 $ 868
------------------------------------------------------------------------------------------
TEN YEARS $ 1,155 $ 1,442 $ 1,910 $ 1,910
------------------------------------------------------------------------------------------
</TABLE>

6 MERCURY LOW DURATION FUND
<PAGE> 195
[MAGNIFYING GLASS ICON] About the Details

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to maximize total return, consistent with
capital preservation. The Fund invests in bonds with a portfolio duration of one
to three years. The total rate of return for the Fund is expected to rise and
fall less than a longer duration bond fund.

TYPES OF INVESTMENTS

The Fund seeks to achieve its objective by investing mainly in investment grade,
interest-bearing securities of varying maturities. These include:

- U.S. government securities
- preferred stocks
- mortgage-backed and other asset-backed securities
- corporate bonds
- bonds that are convertible into stocks

The Investment Adviser sells securities to manage portfolio duration, yield
curve exposure, sector exposure, diversification and credit quality.

In addition to these principal investments, the Fund also may invest in:

RATINGS LIMITATIONS

- at least 70% of total assets rated at least A or, if short-term,
the second highest quality grade, by a major rating agency such as
Moody's Investors Service ("Moody's") or Standard & Poor's Ratings
Group ("S&P")
- up to 30% of total assets rated Baa by Moody's or BBB by S&P
- up to 10% of total assets rated below investment grade (below
Baa/BBB), but none below B

The Investment Adviser can invest in unrated securities and will assign them the
rating of a rated security of comparable quality. After the Fund buys a
security, it may be given a lower rating or stop being rated. This will not

MERCURY LOW DURATION FUND 7
<PAGE> 196

[MAGNIFYING GLASS ICON] About the Details

require the Fund to sell it, but the Investment Adviser will consider the change
in rating in deciding whether to keep the security.

MATURITY AND DURATION REQUIREMENTS

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:

<TABLE>
<CAPTION>
DURATION CHANGE IN INTEREST RATES
---------------------------------------------------------------
<C> <S>
2 yrs. 1% decline -> 2% gain in Fund price
---------------------------------------------------------------
1% rise -> 2% decline in Fund price
---------------------------------------------------------------
</TABLE>

PORTFOLIO TURNOVER

8 MERCURY LOW DURATION FUND
<PAGE> 197

[MAGNIFYING GLASS ICON] About the Details

performance. It also can result in a greater amount of dividends as ordinary
income rather than long-term capital gains.

FOREIGN BONDS

The Fund may invest in foreign bonds as follows:

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

MORTGAGE-BACKED SECURITIES

MERCURY LOW DURATION FUND 9
<PAGE> 198

[MAGNIFYING GLASS ICON] About the Details

anticipated. Prepayment reduces the yield to maturity and average life of
mortgage-backed securities. In addition, when the Fund reinvests the proceeds of
a prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. This risk is known as "prepayment risk." When interest rates
rise, certain types of mortgage-backed securities will be paid off more slowly
than originally anticipated and the value of these securities will fall. This
risk is known as extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations ("CMOs"). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams ("tranches") with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only ("IOs"), principal only
("POs") or an amount that remains after other floating-rate tranches are paid
(an "inverse floater"). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If the
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by the Investment
Adviser, it is possible that the Fund could lose all or substantially all of its
investment.

ASSET-BACKED SECURITIES

10 MERCURY LOW DURATION FUND
<PAGE> 199

[MAGNIFYING GLASS ICON] About the Details

declining interest rates, borrowers may pay what they owe on the underlying
assets more quickly than anticipated. Prepayment reduces the yield to maturity
and the average life of the asset-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. In a period of rising interest
rates, prepayments may occur at a slower rate than expected. As a result, the
average maturity of the Fund's portfolio will increase. The value of long-term
securities changes more widely in response to changes in interest rates than
shorter-term securities.

CREDIT RISK

INTEREST RATE RISK

CALL AND REDEMPTION RISK

JUNK BONDS

MERCURY LOW DURATION FUND 11
<PAGE> 200

[MAGNIFYING GLASS ICON] About the Details

The Fund also may be subject to the following risks:

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

VARIABLE RATE DEMAND OBLIGATIONS

INDEXED AND INVERSE FLOATING RATE SECURITIES

SOVEREIGN DEBT

12 MERCURY LOW DURATION FUND
<PAGE> 201

[MAGNIFYING GLASS ICON] About the Details

include cash flow problems, insufficient foreign currency reserves, political
considerations, the relative size of its debt position to its economy or its
failure to put in place economic reforms required by the International Monetary
Fund or other multilateral agencies. If a government entity defaults, it may ask
for more time in which to pay or for further loans. There is no legal process
for collecting sovereign debts that a government does not pay.

CORPORATE LOANS

CONVERTIBLE SECURITIES

FOREIGN MARKET RISK

The Fund may invest a portion of its assets in foreign securities. Such
investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, investments
in foreign securities involve the following risks, which are generally greater
for investments in emerging markets:

MERCURY LOW DURATION FUND 13
<PAGE> 202

[MAGNIFYING GLASS ICON] About the Details

economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.

- Prices of foreign securities may go up and down more than prices
of securities traded in the U.S.

- The value of the Fund's foreign holdings (and hedging transactions
in foreign currencies) will be affected by changes in currency
exchange rates.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

14 MERCURY LOW DURATION FUND
<PAGE> 203

[MAGNIFYING GLASS ICON] About the Details

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

DERIVATIVES

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial
obligation to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.

MERCURY LOW DURATION FUND 15
<PAGE> 204

[MAGNIFYING GLASS ICON] About the Details

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

16 MERCURY LOW DURATION FUND
<PAGE> 205

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.65% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying other types of sales charges. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.

MERCURY LOW DURATION FUND 17
<PAGE> 206

[CHECKMARK ICON] Account Choices

To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:
<TABLE>
<CAPTION>
CLASS I* CLASS A* CLASS B
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Availability LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH SELECTED THROUGH SELECTED
- Investor Class and SECURITIES DEALERS AND SECURITIES DEALERS AND
current Class I OTHER FINANCIAL OTHER FINANCIAL
beneficial INTERMEDIARIES. INTERMEDIARIES.
shareholders. DISTRIBUTOR CLASS
- Certain retirement SHAREHOLDERS.
plans.
- Participants in
certain programs
sponsored by
affiliates.
- Certain investors
participating in
transaction fee
programs.
- Certain employees and
affiliates of selected
securities dealers and
other financial
intermediaries.
---------------------------------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PURCHASE. LOWER SALES PRICE IS INVESTED IN
CHARGES AVAILABLE FOR CHARGES AVAILABLE FOR SHARES OF THE FUND.
LARGER INVESTMENTS. LARGER INVESTMENTS.
---------------------------------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR YES. PAYABLE IF YOU
Charge? PURCHASES OVER $1 PURCHASES OVER $1 REDEEM WITHIN SIX YEARS
MILLION THAT ARE MILLION THAT ARE OF PURCHASE.
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
---------------------------------------------------------------------------------------------------------------
Account Maintenance NO. 0.25% ACCOUNT 0.25% ACCOUNT
and Distribution MAINTENANCE FEE NO MAINTENANCE FEE 0.65%
Fees? DISTRIBUTION FEE. DISTRIBUTION FEE.
---------------------------------------------------------------------------------------------------------------
Conversion to Class A NO. NO. YES, AUTOMATICALLY AFTER
shares? APPROXIMATELY TEN YEARS.
---------------------------------------------------------------------------------------------------------------

<CAPTION>
CLASS C
------------------------------------------------------------------------
<S> <C>
Availability GENERALLY AVAILABLE
THROUGH SELECTED
SECURITIES DEALERS AND
OTHER FINANCIAL
INTERMEDIARIES.
------------------------------------------------------------------------
Initial Sales Charge? NO. ENTIRE PURCHASE
PRICE IS INVESTED IN
SHARES OF THE FUND.
------------------------------------------------------------------------
Deferred Sales YES. PAYABLE IF YOU
Charge? REDEEM WITHIN ONE YEAR
OF PURCHASE.
------------------------------------------------------------------------
Account Maintenance 0.25% ACCOUNT
and Distribution MAINTENANCE FEE 0.65%
Fees? DISTRIBUTION FEE.
------------------------------------------------------------------------
Conversion to Class A NO.
shares?
------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares
and Distributor Class shares were redesignated Class A shares.

18 MERCURY LOW DURATION FUND
<PAGE> 207
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I AND A SHARES* -- INITIAL SALES CHARGE OPTIONS

If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
AS A % OF YOUR AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT** OFFERING PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $50,000 3.00% 3.09% 2.50%
-------------------------------------------------------------------------------------------
$50,000 BUT LESS THAN
$100,000 2.50% 2.56% 2.00%
-------------------------------------------------------------------------------------------
$100,000 BUT LESS THAN
$250,000 2.00% 2.04% 1.75%
-------------------------------------------------------------------------------------------
$250,000 BUT LESS THAN
$500,000 1.50% 1.52% 1.25%
-------------------------------------------------------------------------------------------
$500,000 BUT LESS THAN
$1,000,000 1.25% 1.27% 1.00%
-------------------------------------------------------------------------------------------
$1,000,000 BUT LESS THAN
$2,000,000*** 0.00% 0.00% 0.50%
-------------------------------------------------------------------------------------------
$2,000,000 AND OVER*** 0.00% 0.00% 0.25%
-------------------------------------------------------------------------------------------
</TABLE>

No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:

MERCURY LOW DURATION FUND 19
<PAGE> 208

[CHECKMARK ICON] Account Choices

CLASS B AND C SHARES -- DEFERRED SALES CHARGE OPTIONS

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.65% and account maintenance fees of 0.25% each year under a distribution
plan that the Fund has adopted under Rule 12b-1 of the Investment Company Act of
1940. Because these fees are paid out of the Fund's assets on an ongoing basis,
over time these fees increase the cost of your investment and may cost you more
than paying other types of sales charges. The Distributor uses the money that it
receives from the deferred sales charges and the distribution fees

20 MERCURY LOW DURATION FUND
<PAGE> 209

[CHECKMARK ICON] Account Choices

to cover the costs of marketing, advertising and compensating the financial
consultant, selected securities dealer or other financial intermediary who
assists you in purchasing Fund shares.

CLASS B SHARES

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old

- Redemption by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers

- Redemption in connection with participation in certain fee-based
programs managed by the Investment Adviser or its affiliates

- Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year after death or
disability or, if later, reasonably promptly following comple-

MERCURY LOW DURATION FUND 21
<PAGE> 210

[CHECKMARK ICON] Account Choices

tion of probate, or in connection with involuntary termination of
an account in which Fund shares are held

- Withdrawal through the Systematic Withdrawal Plan of up to 10% per
year of your Class B account value at the time the plan is
established

CLASS C SHARES

Class C shares do not offer a conversion privilege.

22 MERCURY LOW DURATION FUND
<PAGE> 211

[CHECKMARK ICON] Account Choices

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

MERCURY LOW DURATION FUND 23
<PAGE> 212

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 18. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

24 MERCURY LOW DURATION FUND
<PAGE> 213

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SECURITIES securities dealer or other securities dealer or other financial intermediary if
DEALER OR OTHER financial intermediary authorized dealer agreements are in place between the
FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these shares must be coordinated by the receiving
financial intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer or other - Transfer your shares to an account with the Transfer Agent;
financial intermediary or
- Sell your shares, paying any applicable deferred
sales charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular trading on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERCURY LOW DURATION FUND 25
<PAGE> 214

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested.
For Class B and C shares, your total annual withdrawals
cannot be more than 10% per year of the value of your shares
at the time your plan is established. The deferred sales
charge is waived for systematic redemptions. Ask your
financial intermediary for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit. Class B or
Class C shares can be exchanged for Class B shares of
Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or A shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B or Class C shares for shares of a fund with
a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at redemp-
tion. Your time in both funds will also count when
determining the holding period for a conversion from Class B
to Class A shares.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

26 MERCURY LOW DURATION FUND
<PAGE> 215

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the

MERCURY LOW DURATION FUND 27
<PAGE> 216
[CHECKMARK ICON] Account Choices

program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the Fund's shares or into the Summit fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class A shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

28 MERCURY LOW DURATION FUND
<PAGE> 217

[CHECKMARK ICON] Account Choices

MERCURY LOW DURATION FUND 29
<PAGE> 218

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

Mercury Advisors, the Fund's Investment Adviser, manages the Fund's investments
under the overall supervision of the Board of Trustees of the Trust. The
Investment Adviser has the responsibility for making all investment decisions
for the Fund. The Trust pays the Investment Adviser a fee at the annual rate of
0.21% of the average daily net assets of the Low Duration Master Portfolio of
the Trust. The Fund pays the Investment Adviser an administrative fee at the
annual rate of 0.25% of the average daily net assets of the Fund.

For the fiscal year ended June 30, 2000, the Fund paid an affiliate of the
Investment Adviser fees for advisory and administrative services of 0.46% of the
Fund's average net assets. Although not required to do so, the Investment
Adviser has agreed to make reimbursements so that the regular annual operating
expenses of the Fund will be limited as shown in the table on page 5. The
Investment Adviser has agreed to these expense limits through June 2001, and
will thereafter give shareholders at least 30 days' notice if this reimbursement
policy will change. Prior to the date of this prospectus, the Investment Adviser
provided portfolio management directly to the Fund, which was then called the
Low Duration Fund, a series of the Hotchkis and Wiley Funds.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------

The Fund is a "feeder" fund that invests all of its assets in the Low Duration
Master Portfolio of the Trust. (Except where indicated, this prospectus uses the
term "Fund" to mean this feeder fund and the Low Duration Master Portfolio taken
together.) Investors in the Fund will acquire an indirect interest in the Low
Duration Master Portfolio.

The Low Duration Master Portfolio may accept investments from other feeder
funds, and all the feeders of the Low Duration Master Portfolio bear the

30 MERCURY LOW DURATION FUND
<PAGE> 219

[MANAGEMENT TEAM ICON] The Management Team

Portfolio's expenses in proportion to their assets. This structure may enable
the Fund to reduce costs through economies of scale. A larger investment
portfolio may also reduce certain transaction costs to the extent that
contributions to and redemptions from the Portfolio from different feeders may
offset each other and produce a lower net cash flow.

However, each feeder fund can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder fund could offer
access to the Low Duration Master Portfolio on more attractive terms, or could
experience better performance, than another feeder fund. Information about other
feeder funds is available by calling 1-800-236-4479.

Whenever the Low Duration Master Portfolio holds a vote of its feeder funds, the
fund investing will pass the vote through to its own shareholders. Smaller
feeder funds may be harmed by the actions of larger feeder funds. For example, a
larger feeder fund could have more voting power than the Fund over the
operations of the Low Duration Master Portfolio.

The Fund may withdraw from the Low Duration Master Portfolio at any time and may
invest all of its assets in another pooled investment vehicle or retain an
investment adviser to manage the Fund's assets directly.

MERCURY LOW DURATION FUND 31
<PAGE> 220

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). These financial
highlights were audited by PricewaterhouseCoopers LLP. The accountants' report
and the Fund's financial statements are included in the Fund's annual report,
which is available upon request. Further performance information is contained in
the annual report.

<TABLE>
<CAPTION>
CLASS A(1)
CLASS I (1) --------------
------------------------------------------------------------------- FOR THE PERIOD
FOR THE YEAR ENDED JUNE 30, ENDED JUNE 30,
INCREASE (DECREASE) IN ------------------------------------------------------------------- --------------
NET ASSET VALUE: 2000 1999 1998 1997 1996 2000(2)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 9.91 $ 10.20 $ 10.23 $ 10.12 $ 10.15 $ 9.95
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.65 0.60 0.66 0.66 0.68 0.51
---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (0.13) (0.28) 0.05 0.10 0.06 (0.14)
---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.52 0.32 0.71 0.76 0.74 0.37
---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.65) (0.59) (0.68) (0.64) (0.72) (0.53)
Realized gain on investments -- net -- (0.02) (0.06) (0.01) (0.05) --
---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.65) (0.61) (0.74) (0.65) (0.77) (0.53)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 9.78 $ 9.91 $ 10.20 $ 10.23 $ 10.12 $ 9.79
---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 5.40% 3.15% 7.19% 7.79% 7.47% 3.83%++
---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.58% 0.58% 0.58% 0.58% 0.58% 0.83%+
---------------------------------------------------------------------------------------------------------------------------------
Expenses 0.72% 0.64% 0.65% 0.66% 0.60% 0.98%+
---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 6.43% 5.71% 6.46% 6.34% 7.09% 6.48%+
---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $344.73 $409.99 $253.15 $171.21 $189.16 $16.01
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 182% 201% 119% 202% 50% 182%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares and Distributor Class shares were redesignated Class A shares.

No sales loads were charged prior to this time.

(2) Class A commenced operations on September 24, 1999.

* Total investment return excludes the effects of sales charges.

+ Annualized.

++ Not annualized.

32 MERCURY LOW DURATION FUND
<PAGE> 221

FUND
Mercury Low Duration Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 222
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1070-1000
(C) Mercury Advisors
Mercury Low
Duration Fund

PROSPECTUS - October 6, 2000
<PAGE> 223

Mercury Short-Term Investment Fund

This prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
PROSPECTUS - October 6, 2000
<PAGE> 224

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
-----------------------------------------------------------------
About the Mercury Short-Term Investment Fund................ 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 9
Statement of Additional Information......................... 16

[CHECKMARK ICON]
ACCOUNT CHOICES
-----------------------------------------------------------------
Pricing of Shares........................................... 17
How to Buy, Sell, Transfer and Exchange Shares.............. 19
How Shares are Priced....................................... 23
Fee-Based Programs.......................................... 23
Dividends and Taxes......................................... 24

[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 25
Financial Highlights........................................ 26

MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 225
[GLOBE ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.
CORPORATE BONDS -- debt securities issued by corporations, as distinct from
bonds issued by a government or its agencies or instrumentalities.
ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies, or other providers of
credit.
MORTGAGE-BACKED SECURITIES -- securities that give the holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed by
government agencies.

ABOUT THE MERCURY SHORT-TERM INVESTMENT FUND
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to maximize total return, consistent with
capital preservation.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED SECURITIES
and MORTGAGE-BACKED SECURITIES. At least 70% of its investments will be in
securities rated A or better. The Fund's DURATION will generally not exceed one
year. The Fund may actively and frequently trade its portfolio securities.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency. The
Fund is not a money market fund.

See "Investment Risks" for more information about the risks associated with the
Fund.

2 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 226
[GLOBE ICON] Fund Facts

DURATION -- a measure of how much the price of a bond would change compared to a
change in market interest rates. See page 8 for an example.

PREPAYMENT RISK -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the value of these securities will
fall.
EXTENSION RISK -- the risk that certain obligations will be paid off more slowly
by the obligor than anticipated and the value of these securities will fall.
VOLATILITY -- the amount and frequency of changes in a security's value.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are you looking for an investment that provides income.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline as the result of interest rate movements in order to
maximize total return, consistent with capital preservation.

- Are prepared to receive taxable dividends.

MERCURY SHORT-TERM INVESTMENT FUND 3
<PAGE> 227

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 and 5 years and for the life of the Class compare with those of a broad
measure of market performance. Class I shares now are sold subject to sales
charges, which are not reflected in the bar chart. If sales charges were
reflected, the returns would be less. How the Fund has performed in the past is
not necessarily an indication of how the Fund will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
2.23% (quarter ended March 31, 1995) and the lowest return for a quarter was
0.71% (quarter ended December 31, 1998). The year-to-date return as of September
30, 2000 was 4.61%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS INCEPTION
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I*+ 2.58% 5.69% 5.74%(1)
MERRILL LYNCH 6 MONTH U.S. TREASURY BILL INDEX 4.64% 5.53% 5.06%(1)
---------------------------------------------------------------------------------------
</TABLE>

The Merrill Lynch 6 month U.S. Treasury Bill Index is an unmanaged Index
comprised of U.S. Treasury bills with maturities of six months which are
guaranteed as to the timely payment of principal and interest by the U.S.
government. The Fund invests in securities that are not reflected in the Index
or guaranteed.

* Sales charges went into effect on October 6, 2000, but are reflected in the
table.

+ As of October 6, 2000, Investor Class shares were redesignated Class I
shares.

(1) Since May 18, 1993.

4 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 228
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

FEES AND EXPENSES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS I*
------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 2.00%(b)
------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None(c)
------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Exchange Fee None
------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
------------------------------------------------------------------------
MANAGEMENT FEES(d) 0.40%
------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees None
------------------------------------------------------------------------
Other Expenses (including transfer agency fees) 0.33%
------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.73%
------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(d) 0.25%
------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES 0.48%
------------------------------------------------------------------------
</TABLE>

MERCURY SHORT-TERM INVESTMENT FUND 5
<PAGE> 229

[GLOBE ICON] Fund Facts

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------------------
<S> <C>
ONE YEAR $ 248
-------------------------------------------------------------------------------
THREE YEARS $ 404
-------------------------------------------------------------------------------
FIVE YEARS $ 574
-------------------------------------------------------------------------------
TEN YEARS $1,065
-------------------------------------------------------------------------------
</TABLE>

6 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 230
[MAGNIFYING GLASS ICON] About the Details

ABOUT THE PORTFOLIO MANAGERS -- Michael Sanchez has been a co-Portfolio Manager
of the Fund since joining the Investment Adviser in 1996. Before joining the
Investment Adviser, Mr. Sanchez was with Provident Investment Counsel as senior
vice president and portfolio manager from 1991 to 1995 and with ARCO Investment
Management Company as Director of Fixed Income Investments from 1988 to 1991.
John Queen has been a co-Portfolio Manager of the Fund since 1997. Prior to
joining the Investment Adviser in 1997, Mr. Queen was associated with The
Capital Group as a member of an analyst team responsible for $8 billion in
fixed-income assets.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to maximize total return consistent with
capital preservation. The Fund invests in bonds and seeks to maintain a
portfolio duration that will generally not exceed one year. The Fund also seeks
to maintain a dollar-weighted average portfolio maturity that will generally not
exceed three years, based on the effective maturity of the Fund's securities.

TYPES OF INVESTMENTS

The Fund seeks to achieve its objective by investing mainly in investment grade,
interest-bearing securities of varying maturities. These include:

- U.S. government securities
- preferred stocks
- mortgage-backed and other asset-backed securities
- corporate bonds
- bonds that are convertible into stocks

The Investment Adviser sells securities to manage portfolio duration, yield
curve exposure, sector exposure, diversification and credit quality.

In addition to these principal investments, the Fund also may invest in:

RATINGS LIMITATIONS

The Investment Adviser can invest in unrated securities and will assign them the
rating of a rated security of comparable quality. After the Fund buys a

MERCURY SHORT-TERM INVESTMENT FUND 7
<PAGE> 231

[MAGNIFYING GLASS ICON] About the Details

MATURITY AND DURATION REQUIREMENTS

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:

<TABLE>
<CAPTION>
DURATION CHANGE IN INTEREST RATES

---------------------------------------------------------------------
<C> <S>
.75 yrs. 1% decline -> .75% gain in Fund price
----------------------------------------------------------------------
1% rise -> .75% decline in Fund price
----------------------------------------------------------------------
</TABLE>

PORTFOLIO TURNOVER

8 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 232

[MAGNIFYING GLASS ICON] About the Details

results in higher mark ups and other transaction costs and can affect the Fund's
performance. It also can result in a greater amount of dividends as ordinary
income rather than long-term capital gains.

FOREIGN BONDS

The Fund may invest in foreign bonds as follows:

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are listed below:

MARKET AND SELECTION RISK

MORTGAGE-BACKED SECURITIES

MERCURY SHORT-TERM INVESTMENT FUND 9
<PAGE> 233

[MAGNIFYING GLASS ICON] About the Details

Mortgage-backed securities are issued by Federal government agencies like the
Government National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Association ("Freddie Mac"), or the Federal National Mortgage
Association ("Fannie Mae"). Principal and interest payments on mortgage-backed
securities issued by Federal government agencies are guaranteed by either the
Federal government or the government agency. This means that such securities
have very little credit risk. Other mortgage-backed securities are issued by
private corporations rather than Federal agencies. Private mortgage-backed
securities have credit risk as well as prepayment risk and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations ("CMOs"). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams ("tranches") with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only ("IOs"), principal only
("POs") or an amount that remains after other floating-rate tranches are paid
(an "inverse floater"). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If the
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by the Investment
Adviser, it is possible that the Fund could lose all or substantially all of its
investment.

ASSET-BACKED SECURITIES

10 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 234

[MAGNIFYING GLASS ICON] About the Details

CREDIT RISK

INTEREST RATE RISK

CALL AND REDEMPTION RISK

The Fund also may be subject to the following risks:

JUNK BONDS

Junk bonds are bonds that are rated below investment grade by the major rating
agencies or are unrated securities that the Fund's Investment Adviser believes
are of comparable quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high risk investments that may
cause income and principal losses for the Fund. Junk bonds generally are less
liquid and experience more price volatility than higher rated debt securities.
The issuers of junk bonds may have a larger amount of outstanding debt relative
to their assets than issuers of investment grade bonds. In the event of an
issuer's bankruptcy, claims of other creditors may have priority over the claims
of junk bond holders, leaving few or no assets available to repay junk bond
holders. Junk bonds may be subject to greater call and redemption risk than
higher rated debt securities.

MERCURY SHORT-TERM INVESTMENT FUND 11
<PAGE> 235

[MAGNIFYING GLASS ICON] About the Details

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

VARIABLE RATE DEMAND OBLIGATIONS

INDEXED AND INVERSE FLOATING RATE SECURITIES

The Fund may invest in securities whose potential returns are directly related
to changes in an underlying index or interest rate, known as indexed securities.
The return on indexed securities will rise when the underlying index or interest
rate rises and fall when the index or interest rate falls. The Fund may also
invest in securities whose return is inversely related to changes in an interest
rate (inverse floaters). In general, inverse floaters change in value in a
manner that is opposite to most bonds -- that is, interest rates on inverse
floaters will decrease when short-term rates increase and increase when
short-term rates decrease. Investments in indexed securities and inverse
floaters may subject the Fund to the risk of reduced or eliminated interest
payments. Investments in indexed securities also may subject the Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages the Fund's investment. As a result, the market
value of such securities will generally be more volatile than that of fixed rate
securities. Both indexed securities and inverse floaters can be derivative
securities and can be considered speculative.

SOVEREIGN DEBT

12 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 236

[MAGNIFYING GLASS ICON] About the Details

to put in place economic reforms required by the International Monetary Fund or
other multilateral agencies. If a government entity defaults, it may ask for
more time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.

CORPORATE LOANS

CONVERTIBLE SECURITIES

FOREIGN MARKET RISK

MERCURY SHORT-TERM INVESTMENT FUND 13
<PAGE> 237

[MAGNIFYING GLASS ICON] About the Details

changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.

- Prices of foreign securities may go up and down more than prices
of securities traded in the U.S.

- The value of the Fund's foreign holdings (and hedging transactions
in foreign currencies) will be affected by changes in currency
exchange rates.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

- If the Fund purchases a bond issued by a foreign government, the
government may be unwilling or unable to make payments

14 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 238

[MAGNIFYING GLASS ICON] About the Details

when due. There may be no formal bankruptcy proceeding to collect
amounts owed by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

DERIVATIVES

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial
obligation to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.

MERCURY SHORT-TERM INVESTMENT FUND 15
<PAGE> 239

[MAGNIFYING GLASS ICON] About the Details

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

16 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 240

[CHECKMARK ICON] Account Choices

PRICING OF SHARES
--------------------------------------------------------------------------------

The Fund offers a single class of shares.

The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").
To better understand the pricing of the Fund's shares, we have summarized the
information below:

<TABLE>
<CAPTION>
CLASS I*
---------------------------------------------------------------------------------------
<S> <C>
Availability LIMITED TO CERTAIN INVESTORS INCLUDING:

- Investor Class and current Class I beneficial
shareholders.
- Participants in certain programs sponsored by affiliates.
- Certain investors participating in transaction fee
programs.
- Certain employees and affiliates of selected securities
dealers and other financial intermediaries.
</TABLE>

<TABLE>
<S> <C>
---------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME OF PURCHASE. LOWER SALES CHARGES
AVAILABLE FOR LARGER INVESTMENTS.
---------------------------------------------------------------------------------------
Deferred Sales NO. (MAY BE CHARGED FOR PURCHASES OVER $1 MILLION THAT ARE
Charge? REDEEMED WITHIN ONE YEAR.)
---------------------------------------------------------------------------------------
Account Maintenance NO.
and Distribution
Fees?
---------------------------------------------------------------------------------------
</TABLE>

* As of October 6, 2000, Investor Class shares were redesignated Class I shares.

MERCURY SHORT-TERM INVESTMENT FUND 17
<PAGE> 241
[CHECKMARK ICON] Account Choices

RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.

CLASS I SHARES*

If you buy shares of the Fund, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.

<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
AS A % OF YOUR AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT** OFFERING PRICE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $25,000 2.00% 2.04% 1.90%
---------------------------------------------------------------------------------------
$25,000 BUT LESS THAN
$50,000 1.90% 1.94% 1.80%
---------------------------------------------------------------------------------------
$50,000 BUT LESS THAN
$100,000 1.80% 1.83% 1.70%
---------------------------------------------------------------------------------------
$100,000 BUT LESS THAN
$250,000 1.40% 1.42% 1.30%
---------------------------------------------------------------------------------------
$250,000 BUT LESS THAN
$500,000 0.90% 0.91% 0.80%
---------------------------------------------------------------------------------------
$500,000 BUT LESS THAN
$1,000,000 0.70% 0.70% 0.60%
---------------------------------------------------------------------------------------
$1,000,000 AND OVER*** 0.00% 0.00% 0.00%
---------------------------------------------------------------------------------------
</TABLE>

No initial sales charge applies to Class I shares that you buy through
reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I shares may apply for:

18 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 242

[CHECKMARK ICON] Account Choices

If you redeem Class I shares and within 30 days buy new shares of the same
class, you will not pay a sales charge on the new purchase amount. The amount
eligible for this "Reinstatement Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege, contact your financial
consultant, selected securities dealer, or other financial intermediary or the
Fund's Transfer Agent at 1-800-236-4479.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

MERCURY SHORT-TERM INVESTMENT FUND 19
<PAGE> 243

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES Determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans

(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.

(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

20 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 244

[CHECKMARK ICON] Account Choices

The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.

MERCURY SHORT-TERM INVESTMENT FUND 21
<PAGE> 245

[CHECKMARK ICON] Account Choices

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested. Ask your financial intermediary
for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.

To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.

22 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 246

[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

MERCURY SHORT-TERM INVESTMENT FUND 23
<PAGE> 247
[CHECKMARK ICON] Account Choices

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute any net investment income monthly and any net realized
long-term or short-term capital gains at least annually. The Fund may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. DIVIDENDS may be reinvested automatically in shares of the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a selected securities dealer or other financial intermediary that has an
agreement with the Fund, contact your dealer or intermediary about which option
you would like. If your account is with the Transfer Agent and you would like to
receive dividends in cash, contact the Transfer Agent. The Fund anticipates that
the majority of its dividends, if any, will consist of ordinary income. Capital
gains, if any, may be taxable to you at different rates, depending, in part, on
how long the Fund has held the assets sold.

24 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 248

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

Mercury Advisors, the Fund's Investment Adviser, manages the Fund's investments
under the overall supervision of the Board of Trustees. The Investment Adviser
has the responsibility for making all investment decisions for the Fund. For
this fiscal year ended June 30, 2000, the Fund paid an affiliate of the
Investment Adviser a management fee at the annual rate of 0.40% of the average
daily net assets of the Fund.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Short-Term Investment Fund.

MERCURY SHORT-TERM INVESTMENT FUND 25
<PAGE> 249

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). These financial
highlights were audited by PricewaterhouseCoopers LLP. The accountants' report
and the Fund's financial statements are included in the Fund's annual report,
which is available upon request. Further performance information is contained in
the annual report.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -------------------------------------------------------
NET ASSET VALUE: 2000(1) 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.05 $10.13 $10.15 $10.17 $10.12
---------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.61 0.57 0.63 0.58 0.66
---------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (0.14) (0.11) (0.00) (0.01) 0.05
---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.47 0.46 0.63 0.57 0.71
---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.59) (0.54) (0.65) (0.59) (0.66)
Return of capital -- -- -- -- (0.00)
---------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.59) (0.54) (0.65) (0.59) (0.66)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 9.93 $10.05 $10.13 $10.15 $10.17
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 4.75% 4.70% 6.37% 5.77% 7.23%
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.48% 0.48% 0.48% 0.48% 0.48%
---------------------------------------------------------------------------------------------------------------------
Expenses 0.73% 0.68% 0.92% 0.96% 0.88%
---------------------------------------------------------------------------------------------------------------------
Investment income -- net 6.06% 5.52% 6.36% 5.82% 6.55%
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $55.02 $50.86 $28.04 $21.72 $18.73
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 79% 144% 121% 154% 60%
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares. No sales loads were charged prior to this time.

* Total investment return excludes the effects of sales charges.

26 MERCURY SHORT-TERM INVESTMENT FUND
<PAGE> 250

FUND

Mercury Short-Term Investment Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER

Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT

Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

DISTRIBUTOR

FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN

Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL

Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 251
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.
Investment Company Act File #811-4182.
CODE #MHW-P-1080-1000
(C) Mercury Advisors

Mercury Short-Term
Investment Fund

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 252
\
Mercury HW Equity Fund for
Insurance Companies

ARTWORK

This prospectus contains information you should know
before investing, including information about risks. Please
read it before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy
of this prospectus. Any representation to the contrary is a
criminal offense.
PROSPECTUS - October 6, 2000
<PAGE> 253

[GLOBE ICON]
[MAGNIFYING GLASS ICON]
[CHECKMARK ICON]
[MANAGEMENT TEAM ICON]
[TELEPHONE ICON]

Table of Contents

FUND FACTS
-----------------------------------------------------------------
About the Mercury HW Equity Fund for Insurance Companies.... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5

ABOUT THE DETAILS
-----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 7
Statement of Additional Information......................... 9

ACCOUNT CHOICES
-----------------------------------------------------------------
How to Buy Shares........................................... 10
How to Redeem Shares........................................ 11
How Shares are Priced....................................... 12
Dividends and Taxes......................................... 12

THE MANAGEMENT TEAM
-----------------------------------------------------------------
Management of the Fund...................................... 13
Financial Highlights........................................ 14

TO LEARN MORE
-----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 254

[GLOBE ICON] Fund Facts
ABOUT THE MERCURY HW EQUITY FUND FOR INSURANCE
COMPANIES
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.

2 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 255

[GLOBE ICON] Fund Facts

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.

- Are seeking a diversified portfolio of equity securities.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 3
<PAGE> 256

[GLOBE ICON] Fund Facts

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Fund and
by showing how the Fund's average annual total returns for 1 and 5 years and for
its life compare with those of a broad measure of market performance. How the
Fund has performed in the past is not necessarily an indication of how the Fund
will perform in the future.

During the period shown in the bar chart, the highest return for a quarter was
13.80% (quarter ended June 30, 1997) and the lowest return for a quarter was
-11.51% (quarter ended September 30, 1999). The year-to-date return as of
September 30, 2000 was 1.73%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, PAST PAST SINCE
1999) ONE YEAR FIVE YEARS INCEPTION
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTOR CLASS -4.29% 16.62% 13.04%(1)
S&P 500 INDEX 21.14% 28.66% 16.32%(1)
-----------------------------------------------------------------------------------------
</TABLE>

The S&P 500 Index is a capital weighted, unmanaged index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.

(1) Since January 29, 1993.

4 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 257
[GLOBE ICON] Fund Facts

UNDERSTANDING EXPENSES

Fund investors pay various expenses, either directly or indirectly. Listed below
is the only expense which the Fund may charge:

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.

FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers a single class of shares.

THIS TABLE SHOWS THE EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD SHARES OF THE
FUND. FUTURE EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED BELOW.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT): INVESTOR CLASS
----------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) None
----------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower) None
----------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None
----------------------------------------------------------------------------
Redemption Fee None
----------------------------------------------------------------------------
Exchange Fee None
----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S TOTAL ASSETS):
----------------------------------------------------------------------------
MANAGEMENT FEES(a) 0.53%
----------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees None
----------------------------------------------------------------------------
Other Expenses None
----------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.53%
----------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
(a) The Investment Adviser pays all of the Fund's operating
expenses other than the management fees.
</TABLE>

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 5
<PAGE> 258

[GLOBE ICON] Fund Facts

EXAMPLES:

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
INVESTOR
CLASS
-----------------------------------------------------------------------------
<S> <C>
ONE YEAR $ 54
-----------------------------------------------------------------------------
THREE YEARS $170
-----------------------------------------------------------------------------
FIVE YEARS $296
-----------------------------------------------------------------------------
TEN YEARS $665
-----------------------------------------------------------------------------
</TABLE>

6 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 259

[MAGNIFYING GLASS ICON] About the Details

MONEY MARKET INVESTMENTS

INVESTMENT RISKS
--------------------------------------------------------------------------------

The Fund's principal risks are market and selection risks.

MARKET AND SELECTION RISKS

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 7
<PAGE> 260

[MAGNIFYING GLASS ICON] About the Details

The Fund also may be subject to the following risks:

FOREIGN MARKET RISK

The Fund may invest up to 10% of its total assets in securities of companies
located in foreign countries, including American Depositary Receipts. American
Depositary Receipts are receipts typically issued by an American bank or trust
company that show evidence of underlying securities issued by a foreign
corporation. Foreign investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money.

- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.

- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.

- The costs of foreign securities transactions tend to be higher
than those of U.S. transactions.

CONVERTIBLE SECURITIES

DEBT SECURITIES

8 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 261

[MAGNIFYING GLASS ICON] About the Details

DERIVATIVES

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 9
<PAGE> 262

[CHECKMARK ICON] Account Choices

HOW TO BUY SHARES
--------------------------------------------------------------------------------

Shares of the Fund are offered only to insurance companies. The minimum initial
investment in the Fund is $1,000,000. There is no minimum subsequent investment.
The Fund reserves the right to reject any order.

Investors may invest in the Fund by sending a request and payment to the
Transfer Agent:

Financial Data Services, Inc.
P.O. Box 41621
Jacksonville, FL 32232-1621

Investors opening a new account must send a completed Purchase Application to
the address above.

Before wiring money, investors should call 800-236-4479 to notify the Transfer
Agent of the wire to ensure proper credit when the wire is received. To purchase
shares by wiring Federal Funds, payment should be wired to First Union National
Bank of Florida. Investors should give their financial institutions the
following wire instructions:

First Union National Bank of Florida
ABA #063000021
For credit to Financial Data Services
Acct #2112600019018
For further credit to Mercury HW Fund Account # [Your account number]
[Shareholder name]

The wire should indicate that the investment is being made in the Mercury HW
Equity Fund for Insurance Companies. Shares of the Fund will be purchased for
the account of the investor at the net asset value next determined after receipt
of the investor's wire. Shareholder inquiries should be directed to the Fund.

10 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 263

[MAGNIFYING GLASS ICON] Account Choices

HOW TO REDEEM SHARES
--------------------------------------------------------------------------------

A shareholder wishing to redeem shares (sell them back to the Fund) may do so at
any time by writing or delivering instructions to the Transfer Agent:

Financial Data Services, Inc.
P.O. Box 41621
Jacksonville, FL 32232-1621

The redemption request should identify the Fund, specify the number of shares to
be redeemed and be signed by a duly authorized officer of the insurance company.
If the request is in proper form, the shares specified will be redeemed at the
net asset value next determined after receipt of the request. In addition to
written instructions, if any shares being redeemed are represented by share
certificates, the certificates must be surrendered. The certificates must either
be endorsed or accompanied by a stock power signed by a duly authorized officer
of the insurance company, and signatures must be guaranteed. Any questions
concerning documents needed should be directed to (800) 236-4479.

DELAYS IN REDEEMING SHARES

At certain times when allowed by the Securities and Exchange Commission, we may
delay sending your check or wiring your redemption proceeds.

PAYMENTS

Payment also may be delayed up to 12 days if you bought shares with a check.

CHANGES TO REDEMPTION PROCEDURES

The redemption procedures may be modified at any time on 30 days' notice to
shareholders.

REDEMPTION IN KIND

The Fund reserves the right to pay shareholders securities instead of cash in
certain circumstances.

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 11
<PAGE> 264
[CHECKMARK ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.

HOW SHARES ARE PRICED
--------------------------------------------------------------------------------

When you buy shares, you pay the NET ASSET VALUE. Shares are also redeemed at
their net asset value. The Fund calculates its net asset value (generally by
using market quotations) each day the New York Stock Exchange is open as of the
close of regular trading on the Exchange based on prices at the time of closing,
except that the net asset value need not be calculated on a day on which no
order to purchase or redeem shares of the Fund is received. Regular trading on
the Exchange generally closes at 4:00 p.m. Eastern time. The net asset value
used in determining your price is the next one calculated after your purchase or
redemption order is placed. If market quotations are not available, the Fund may
use fair value.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

12 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 265

[MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Investment Adviser pays all of the Fund's operating expenses other than the
management fees.

The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.

The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Equity Fund for Insurance Companies.

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES 13
<PAGE> 266

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights tables are intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the tables
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). These
financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Fund's financial statements are included in the
Fund's annual report, which is available upon request. Further performance
information is contained in the annual report.

<TABLE>
<CAPTION>
INVESTOR CLASS
-----------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -----------------------------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $17.46 $18.55 $16.32 $13.51 $11.53
--------------------------------------------------------------------------------------------------------------------
Investment income -- net 0.39 0.41 0.41 0.39 0.34
--------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (3.75) 0.70 3.31 3.30 2.26
--------------------------------------------------------------------------------------------------------------------
Total from investment operations (3.36) 1.11 3.72 3.69 2.60
--------------------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.39) (0.41) (0.41) (0.40) (0.40)
Realized gain on investments -- net (1.21) (1.79) (1.08) (0.48) (0.22)
--------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.60) (2.20) (1.49) (0.88) (0.62)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.50 $17.46 $18.55 $16.32 $13.51
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
--------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (19.74)% 7.29% 23.69% 28.20% 22.93%
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
--------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.53% 0.52% 0.52% 0.53% 0.54%
--------------------------------------------------------------------------------------------------------------------
Expenses 0.68% 0.65% 0.73% 0.75% 0.76%
--------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.69% 2.41% 2.27% 2.72% 3.00%
--------------------------------------------------------------------------------------------------------------------
Supplemental Data:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $35.03 $43.68 $40.73 $32.96 $24.65
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover 21% 14% 21% 22% 21%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

14 MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES
<PAGE> 267

FUND
Mercury HW Equity Fund for Insurance Companies
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)

INVESTMENT ADVISER

Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400

TRANSFER AGENT

Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661

COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 268
[TELEPHONE ICON] To Learn More

SHAREHOLDER REPORTS

The Fund will send you one copy of each shareholder report and certain other
mailings regardless of the number of Fund accounts you have. To receive separate
shareholder reports for each account, write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call the Transfer
Agent at 1-800-236-4479.

STATEMENT OF ADDITIONAL INFORMATION

Contact the Fund at the telephone number or address indicated on the inside back
cover of this prospectus if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by electronic request at the following e-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.

Investment Company Act File #811-4182.
CODE #MHW-P-1010-1000
(C) Mercury Advisors

Mercury HW Equity Fund
for Insurance Companies

[ARTWORK]
PROSPECTUS - October 6, 2000
<PAGE> 269

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW LARGE CAP VALUE FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Large Cap Value Fund (the "Fund") is a fund of Mercury HW Funds
(the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to provide current income and long-term growth
of income, accompanied by growth of capital. The Fund seeks to achieve its
investment objective by investing primarily in U.S. stocks. No assurance can be
given that the investment objective of the Fund will be realized. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies."

The Fund offers a single class (Class I) of shares. Only certain investors
are eligible to purchase Class I shares. See "Purchase of Shares."

------------------------

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Fund, dated October 6, 2000 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling the Fund at
1-800-236-4479 or your financial consultant or other financial intermediary, or
by writing to the Fund at Financial Data Services, Inc., P.O. Box 41621,
Jacksonville, Florida 32232-1621. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement of Additional
Information is incorporated by reference into the Prospectus. The Fund's audited
financial statements are incorporated in this Statement of Additional
Information by reference to its annual report for the fiscal year ended June 30,
2000. You may request copies of the annual report at no charge by calling
1-800-236-4479 between 8:30 a.m. and 5:30 p.m. (Eastern time) on any business
day.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 270

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 5
Foreign Securities........................................ 7
Foreign Investment Risks.................................. 7
Swap Agreements........................................... 8
Illiquid Securities....................................... 8
Borrowing................................................. 9
When-Issued Securities.................................... 9
Real Estate Investment Trusts............................. 10
Shares of Other Investment Companies...................... 10
Limited Partnerships...................................... 10
Short Sales Against-the-Box............................... 10
Corporate Loans........................................... 10
Initial Public Offerings.................................. 10
Temporary Defensive Position.............................. 11
Management of the Fund...................................... 11
Advisory Arrangements..................................... 13
Accounting and Administrative Services.................... 14
Code of Ethics............................................ 14
Purchase of Shares.......................................... 15
Class I Shares............................................ 15
Reduced Initial Sales Charges............................. 16
Redemption of Shares........................................ 18
Redemption................................................ 18
Repurchase................................................ 19
Reinstatement Privilege -- Class I Shares................. 19
Pricing of Shares........................................... 20
Determination of Net Asset Value.......................... 20
Computation of Offering Price Per Share................... 21
Portfolio Transactions and Brokerage........................ 21
Transactions in Portfolio Securities...................... 21
Shareholder Services........................................ 23
Investment Account........................................ 23
Exchange Privilege........................................ 23
Fee-Based Programs........................................ 24
Retirement Plans.......................................... 24
Automatic Investment Plans................................ 25
Automatic Dividend Reinvestment Plan...................... 25
Systematic Withdrawal Plans............................... 25
Dividends and Tax Status.................................... 26
Performance Data............................................ 27
General Information......................................... 28
Description of Shares..................................... 28
Issuance of Fund Shares for Securities.................... 29
Redemption in Kind........................................ 29
Independent Auditors...................................... 29
Custodian................................................. 29
Transfer Agent............................................ 30
Legal Counsel............................................. 30
Reports to Shareholders................................... 30
Shareholder Inquiries..................................... 30
Additional Information.................................... 30
Principal Holders......................................... 30
</TABLE>

2
<PAGE> 271

TRUST HISTORY

The Trust was organized on August 22, 1984 as a Massachusetts business
trust. Before October 7, 1994, the Trust was called "Olympic Trust," and before
October 6, 2000, the Trust was called "Hotchkis and Wiley Funds." The Trust is a
diversified, open-end, management investment company currently consisting of ten
separate funds. Prior to October 6, 2000, the Fund was called the Equity Income
Fund.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide current income and
long-term growth of income, accompanied by growth of capital. Reference is made
to the discussion under "How the Fund Invests" and "Investment Risks" in the
Prospectus for information with respect to the Fund's investment objective and
policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of
the Fund's outstanding voting securities means the vote of the holders of the
lesser of (1) 67% of the shares of the Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (2)
more than 50% of the outstanding shares.

Except as noted, the Fund may not:

2. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions),
provided that the deposit or payment by the Fund of initial or
maintenance margin in connection with futures or options is not
considered the purchase of a security on margin.

3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short (short sale
against-the-box), and unless not more than 25% of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
one time.

4. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; the Fund will not purchase any
additional portfolio securities while such borrowings are outstanding.

3
<PAGE> 272

6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities
which are secured by real estate and securities of companies which
invest or deal in real estate. (For the purposes of this restriction,
forward foreign currency exchange contracts are not deemed to be
commodities or commodity contracts.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

11. Purchase or sell foreign currencies.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the 1940 Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the 1940 Act. See "Portfolio Transactions and Brokerage."
Without such an exemptive order the Fund would be prohibited from engaging in
portfolio transactions with Merrill Lynch or any of its affiliates acting as
principal.

REPURCHASE AGREEMENTS

A repurchase agreement is an agreement where the seller agrees to
repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is more than
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the repurchase agreement. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of those instruments declines, the Fund will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
In such circumstances, the Fund could experience a delay or be prevented from
disposing of the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

BONDS

The term "bond" or "bonds" as used in the Prospectus and this Statement of
Additional Information is intended to include all manner of fixed-income
securities, debt securities and other debt obligations unless specifically
defined or the context requires otherwise.

U.S. GOVERNMENT SECURITIES

U.S. government agencies or instrumentalities which issue or guarantee
securities include the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Tennessee Valley Authority, Inter-American Development Bank, Asian Development
Bank, Student Loan Marketing Association and the International Bank for
Reconstruction and Development.

4
<PAGE> 273

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. The Fund will invest in securities of such instrumentality
only when the Investment Adviser is satisfied that the credit risk with respect
to any instrumentality is acceptable.

The Fund may invest in component parts of U.S. Treasury notes or bonds,
namely, either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.

CORPORATE DEBT SECURITIES

The Fund's investments in U.S. dollar corporate debt securities of domestic
or foreign issuers are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are in the
Investment Adviser's opinion comparable in quality to corporate debt securities
in which the Fund may invest. The rate of return or return of principal on some
debt obligations may be linked or indexed to the level of exchange rates between
the U.S. dollar and a foreign currency or currencies.

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers rated investment grade (any of the four highest grades) by a major
rating agency or, if unrated, of comparable quality in the Investment Adviser's
opinion. A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of common stock or other equity securities of the
same or a different issuer. Convertible securities rank senior to common stock
in a corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.

In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

DERIVATIVE INSTRUMENTS

5
<PAGE> 274

and securities indexes and enter into forward contracts. The Fund also may enter
into swap agreements with respect to interest rates and securities indexes. The
Fund may use these techniques to hedge against changes in interest rates or
securities prices or as part of its overall investment strategies. The Fund will
mark as segregated cash, U.S. government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under forward contracts, swap agreements and options to avoid
leveraging of the Fund.

Options on Securities and on Securities Indexes. The Fund may purchase put
options on securities to protect holdings in an underlying or related security
against a substantial decline in market value. The Fund may purchase call
options on securities to protect against substantial increases in prices of
securities the Fund intends to purchase pending its ability to invest in such
securities in an orderly manner. The Fund may sell put or call options it has
previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold. The Fund
may write a call or put option only if the option is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series.

The purchase and writing of options involve certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Fund may be
unable to close out a position.

There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

6
<PAGE> 275

FOREIGN SECURITIES

The Fund may invest in American Depositary Receipts ("ADRs"), other
securities convertible into securities of issuers based in foreign countries or
other foreign securities that can be purchased and sold in U.S. dollars. ADRs
are receipts, usually issued by a U.S. bank or trust company, evidencing
ownership of the underlying securities. Generally, ADRs are issued in registered
form, denominated in U.S. dollars, and are designed for use in the U.S.
securities markets.

FOREIGN INVESTMENT RISKS

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or otherwise adversely affect the Fund's
operations. Other foreign market risks include difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are now
listed, traded, declaring dividends and making other payments only in euros.

No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power.

7
<PAGE> 276

Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU.

Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. government does. Some countries may not have laws
to protect investors the way that the United States securities laws do.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much disclosure or detail as U.S. accounting standards, it may be harder for the
Fund's portfolio managers to completely and accurately determine a company's
financial condition.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

The Fund may enter into interest rate and index swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded
the desired return. Swap agreements are two party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the dollar amount invested at a particular interest
rate or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. The Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Fund's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Fund) and any
accrued but unpaid net amounts owed to a swap counter-party will be covered by
marking as segregated cash, U.S. government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, to avoid any
potential leveraging of the Fund's portfolio. The Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.

Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Investment Adviser's ability to
correctly predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counter-party. Restrictions imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), may limit the Fund's
ability to use swap agreements. The swaps market is a relatively new market and
is largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect the Fund's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.

ILLIQUID SECURITIES

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purchased directly from the issuer or in the secondary market. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemption within seven days. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment of
the Investment Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Investment Adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.

BORROWING

The Fund may borrow for temporary or emergency purposes in amounts not
exceeding 10% of the Fund's total assets. This borrowing may be unsecured. The
1940 Act requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. Borrowing subjects the Fund to interest costs which may
or may not be recovered by appreciation of the securities purchased, and can
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. This is the speculative factor known as
leverage.

WHEN-ISSUED SECURITIES

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are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to 45
days after the transaction. The price that the Fund is obligated to pay on the
settlement date may be different from the market value on that date. While
securities may be sold prior to the settlement date, the Fund intends to
purchase such securities with the purpose of actually acquiring them, unless a
sale would be desirable for investment reasons. At the time the Fund makes a
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security each day in determining the
Fund's net asset value. The Fund will also mark as segregated with its custodian
cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, equal in value to its obligations
for when-issued securities.

REAL ESTATE INVESTMENT TRUSTS

The Fund may invest in securities of real estate investment trusts or
REITs. Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. REITs offer investors greater
liquidity and diversification than direct ownership of properties, as well as
greater income potential than an investment in common stocks. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.

SHARES OF OTHER INVESTMENT COMPANIES

The Fund can invest in securities of other investment companies except to
the extent prohibited by law. Like all equity investments, these investments may
go up or down in value. They also may not perform in correlation with the Fund's
principal strategies. The Fund will pay additional fees through its investments
in other investment companies.

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

The Fund can borrow and sell "short" securities when it also owns an equal
amount of those securities (or their equivalent). No more than 25% of the Fund's
total assets can be held as collateral for short sales at any one time.

CORPORATE LOANS

The Fund can invest in corporate loans. Commercial banks and other
financial institutions make corporate loans to companies that need capital to
grow or restructure. Borrowers generally pay interest on corporate loans at
rates that change in response to changes in market interest rates such as the
London Interbank Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a
result, the value of corporate loan investments is generally less responsive to
shifts in market interest rates. Because the trading market for corporate loans
is less developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's agent
arranges the corporate loans, holds collateral and accepts payments of principal
and interest. If the agent developed financial problems, the Fund may not
recover its investment, or there might be a delay in the Fund's recovery. By
investing in a corporate loan, the Fund becomes a member of the syndicate.

INITIAL PUBLIC OFFERINGS

The Fund may purchase securities in initial public offerings. Securities
purchased in initial public offerings may produce gains that positively affect
Fund performance during any given period, but such securities may not be
available during other periods or, even if they are available, may not be
available in
10
<PAGE> 279

sufficient quantity to have a meaningful impact on Fund performance. They may
also, of course, produce losses.

TEMPORARY DEFENSIVE POSITION

When adverse market or economic conditions indicate to the Investment
Adviser that a temporary defensive strategy is appropriate, the Fund may invest
all or part of its assets in short-term investment grade debt obligations of the
U.S. government, its agencies and instrumentalities, money market mutual funds,
bank certificates of deposit, bankers' acceptances, high quality commercial
paper, demand notes and repurchase agreements.

MANAGEMENT OF THE FUND

The Trustees oversee the actions of the Fund's Investment Adviser and other
service providers and decide upon matters of general policy. The Trustees also
review the actions of the Trust's officers, who conduct and supervise the daily
business operations of the Trust. The Trustees (* denotes "interested" Trustee
as defined in the 1940 Act, due to the relationship with the Investment Adviser)
and officers of the Trust are:

MICHAEL BAXTER* (37) -- Trustee -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Managing Director of the Investment Adviser (since
1996); Co-Head of the Investment Adviser (1999 - 2000); Partner of the
Investment Adviser (1994 - 1996); Portfolio Manager of the Investment Adviser
(since 1990).

ROBERT L. BURCH III (66) -- Trustee -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments) (since 1984); Chairman,
Jonathan Mfg. Corp. (slide manufacturing) (since 1977).

JOHN A. G. GAVIN (69) -- Trustee -- 2100 Century Park West, Los Angeles, CA
90067. Partner and Managing Director, Hicks, Muse, Tate & Furst (Latin America)
(private equity investment firm) (since 1994); Chairman, Gamma Holdings
(investment holding company) (since 1968); Principal, Gavin, Dailey & Partners
(consulting) (since 1993); U.S. Ambassador to Mexico (1981 - 1986); Director,
Apex Mortgage Capital, Inc., Atlantic Richfield Co., International Wire Corp.
and Krause's Furniture, Inc.

JOE GRILLS (65) -- Trustee -- P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute (affiliation changed in June 2000 to the Association of Financial
Professionals) ("CIEBA") (since 1986); Member of CIEBA's Executive Committee
(since 1988) and its Chairman (1991 - 1992); Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds (1986 - 1993); Member of the Investment Advisory
Committees of the State of New York Common Retirement Fund and the Howard Hughes
Medical Institute (since 1997); Director, Duke Management Company (since 1992)
and Vice Chairman (since 1998); Director, Kimco Realty Corporation (since 1997);
Director, LaSalle Street Fund (since 1995); Member of the Investment Advisory
Committee of the Virginia Retirement System (since 1998); Director, Montpelier
Foundation (since 1998); Member of the Investment Committee of the Woodberry
Forest School (since 2000); Member of the Investment Committee of the National
Trust for Historic Preservation (since 2000); Trustee or Director of 24
registered investment companies (consisting of 56 portfolios) for which the
Investment Adviser or an advisory affiliate is the adviser.

NIGEL HURST-BROWN* (49) -- Trustee -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Managing Director of the Investment Adviser
(since 1998); Co-Head of the Investment Adviser (1999 - 2000); Director of
Mercury Asset Management Group Plc. (since 1990).

MADELEINE A. KLEINER (49) -- Trustee -- 1900 Avenue of the Stars, Suite
1700, Los Angeles, CA 90067. Former Senior Executive Vice President, Chief
Administrative Officer and General Counsel, H.F. Ahmanson & Company and Home
Savings of America, FSB (banking company) (1995 - 1998); Partner, Gibson, Dunn &
Crutcher (law firm) (1983 - 1995).

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<PAGE> 280

RICHARD R. WEST (62) -- Trustee -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University Leonard N. Stern School of Business Administration; Director, Vornado
Realty Trust, Inc. and Vornado Operating (real estate holding company);
Director, Bowne & Co., Inc. (financial printers); Director, Alexander's, Inc.
(real estate company); Trustee or Director of 67 registered investment companies
(consisting of 72 portfolios) for which the Investment Adviser or an advisory
affiliate is the adviser.

NANCY D. CELICK (48) -- President -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. First Vice President of the Investment Adviser
(since 2000); Chief Administrative Officer of the Investment Adviser
(1998 - 2000); Chief Financial Officer of the Investment Adviser (1993 - 1998);
Chief Financial Officer of Kennedy-Wilson, Inc. (auction marketing services)
(1992 - 1993); Chief Financial Officer of First National Corporation (bank
holding company) (1984 - 1992).

DONALD C. BURKE (40) -- Vice President and Treasurer -- P.O. Box 9011,
Princeton, NJ 08543-9011. Senior Vice President and Treasurer of the Investment
Adviser (since 1999); Senior Vice President and Treasurer of Princeton Services,
Inc. (since 1999); Vice President of FAM Distributors, Inc. (since 1999); First
Vice President of the Investment Adviser (1990 - 1997).

ANNA MARIE S. LOPEZ (32) -- Assistant Treasurer and Assistant
Secretary -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400.
Compliance Officer of the Investment Adviser (since 1997); Manager, Price
Waterhouse (1991 - 1997).

TURNER SWAN (38) -- Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Attorney with the Investment Adviser (since 1997);
Attorney, Sheppard, Mullin, Richter & Hampton LLP (1995 - 1997); Attorney, Trout
Trading Management Company Ltd. (1993 - 1995).

GRACIE FERMELIA (38) -- Vice President and Assistant Secretary -- 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Director of the
Investment Adviser (since 2000); Vice President of the Investment Adviser
(1994 - 2000); Senior Manager, Price Waterhouse (1985 - 1994).

The Trust does not pay salaries to any of its officers or fees to any of
its Trustees affiliated with the Investment Adviser. The following table sets
forth the aggregate compensation paid to the Trustees during the Trust's fiscal
year ended June 30, 2000 and the aggregate compensation paid to the Trustees for
service on the Trust's Board and that of any other fund for which the Investment
Adviser serves as investment adviser or which has an investment adviser that is
an affiliated person of the Investment Adviser ("Fund Complex") for the year
ended December 31, 1999.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter..................................... $ -0- $ -0-
Robert L. Burch III................................ $27,859 $ 34,000
John A.G. Gavin.................................... $27,859 $ 25,000
Joe Grills......................................... $27,859 $232,333
Nigel Hurst-Brown.................................. $ -0- $ -0-
Robert B. Hutchinson**............................. $12,000 $ 34,000
Madeleine A. Kleiner............................... $27,859 $ 18,000
Merle T. Welshans**................................ $12,000 $ 34,000
Richard R. West.................................... $27,859 $422,225
</TABLE>

---------------
* Each Trustee also serves as a Trustee of Mercury HW Variable Trust, Fund
Asset Management Master Trust and Merrill Lynch Investment Managers Funds,
Inc. Messrs. Grills and West also serve on the boards of other investment
companies advised by the Investment Adviser or its advisory affiliates.

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

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<PAGE> 281

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Trust on behalf of the Fund has
entered into an investment advisory agreement (the "Advisory Agreement") with
the Investment Adviser as investment adviser. Subject to the supervision of the
Trustees, the Investment Adviser is responsible for the actual management of the
Fund and continuously reviews the Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser. The Investment Adviser performs certain of the other administrative
services and provides all office space, facilities, equipment and necessary
personnel for management of the Fund. The Investment Adviser receives for its
services to the Fund a monthly fee at an annual rate of 0.75% of the Fund's
average daily net assets. For purposes of this calculation, average daily net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each day during the month.

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid Merrill Lynch Investment Managers, L.P.
$750,406, $1,176,425 and $1,424,185, respectively. For the fiscal years ended
June 30, 2000 and 1999, as a result of its agreement to limit Fund expenses,
Merrill Lynch Investment Managers, L.P. waived a portion of its fee in the
amounts of $77,397 and $2,088, respectively.

Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients of the Investment Adviser or an affiliate when one or more clients of
the Investment Adviser or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the
Investment Adviser or an affiliate acts as manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or an affiliate during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.

Payment of Fund Expenses. The Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay, or cause an
affiliate to pay, for maintaining its staff and personnel and to provide office
space, facilities and necessary personnel for the Fund. The Investment Adviser
is also obligated to pay, or cause an affiliate to pay, the fees of all officers
and Trustees who are affiliated persons of the Investment Adviser. The Fund
pays, or causes to be paid, all other expenses incurred in the operation of the
Fund (except to the extent paid by FAM Distributors, Inc. (the "Distributor")),
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, shareholder reports, copies of the Registration
Statement, charges of the custodian, any sub-custodian and the transfer agent,
expenses of portfolio transactions, expenses of redemption of shares, Commission
fees, expenses of registering the shares under Federal, state or non-U.S. laws,
fees and actual out-of-pocket expenses of non-interested Trustees, accounting
and pricing costs (including the daily calculation of net asset value),
insurance, interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses, and other expenses properly payable by the Fund.

Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are Merrill Lynch & Co., Inc. ("ML & Co."), a
financial services holding company and the parent of Merrill Lynch and Princeton
Services, Inc. ML & Co. and Princeton Services, Inc. are "controlling persons"
of the Investment Adviser as defined under the 1940 Act because of their
ownership of its voting securities and their power to exercise a controlling
influence over its management or policies.
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<PAGE> 282

Duration and Termination. Unless earlier terminated as described below, the
Advisory Agreement will remain in effect from year to year if approved annually
(a) by the Board of Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees of the Trust who are
not parties to the Advisory Agreement or interested persons (as defined in the
1940 Act) of any such party. The Advisory Agreement is not assignable and will
automatically terminate in the event of its assignment. In addition, such
contract may be terminated by the vote of a majority of the outstanding voting
securities of the Fund or by the Investment Adviser without penalty on 60 days'
written notice to the other party.

ACCOUNTING AND ADMINISTRATIVE SERVICES

The Trust has entered into a Fund Accounting and Administration Servicing
Agreement (the "Fund Accounting Agreement") with the Investment Adviser acting
as service provider. The Fund Accounting Agreement obligates the Investment
Adviser to provide certain accounting and administrative services to the Trust.
The Trust reimburses the Investment Adviser for its costs in connection with
such services.

Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee
ranging from $16.00 to $20.00 per account (depending on the level of services
required) and certain other fees relating to special processing of sub-transfer
agency relationships. The Transfer Agent is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system.

Distribution Expenses. The Fund has entered into a distribution agreement
with the Distributor in connection with the continuous offering of shares of the
Fund (the "Distribution Agreement"). The Distribution Agreement obligates the
Distributor to pay certain expenses in connection with the offering of the
shares of the Fund. After the prospectuses, statements of additional information
and periodic reports have been prepared, set in type and mailed to shareholders,
the Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination provisions
as the Advisory Agreement described above.

CODE OF ETHICS

The Board of Trustees of the Trust has approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Trust, the Investment Adviser and the
Distributor (the "Code of Ethics"). The Code of Ethics significantly restricts
the personal investing activities of all employees of the Investment Adviser and
the Distributor and, as described below, imposes additional, more onerous,
restrictions on fund investment personnel.

The Code of Ethics requires that all employees of the Investment Adviser
and the Distributor pre-clear any personal securities investments (with limited
exceptions, such as mutual funds, high-quality short-term securities and direct
obligations of the U.S. government). The pre-clearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser and the Distributor
include a ban on acquiring any securities in a "hot" initial public offering. In
addition, investment personnel are prohibited from profiting on short-term
trading in securities. No employee may purchase or sell any security that at the
time is being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Code of Ethics provides for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within seven calendar days before or after trading by the Fund in the same or an
equivalent security.
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<PAGE> 283

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues a single class (Class I) of shares. Each share of the Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights.

FAM Distributors, Inc., an affiliate of the Investment Adviser and of
Merrill Lynch, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 (mailing address: P.O. Box 9081, Princeton, New Jersey 08543-9081), acts
as Distributor for the Fund.

The Fund offers its shares at a public offering price equal to the next
determined net asset value per share plus any sales charge applicable to the
shares. The applicable offering price for purchase orders is based upon the net
asset value of the Fund next determined after receipt of the purchase order by
the Distributor. As to purchase orders received by selected securities dealers
or other financial intermediaries prior to the close of regular trading on the
New York Stock Exchange (the "NYSE") (generally 4:00 p.m., Eastern time) which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset value
on the day the order is placed with the Distributor, provided that the orders
are received by the Distributor prior to 30 minutes after the close of regular
trading on the NYSE on that day. If the purchase orders are not received prior
to 30 minutes after the close of regular trading on the NYSE on that day, such
orders shall be deemed received on the next business day. Selected securities
dealers or other financial intermediaries have the responsibility of submitting
purchase orders to the Fund not later than 30 minutes after the close of regular
trading on the NYSE in order to purchase shares at that day's offering price.

The Fund or the Distributor may suspend the continuous offering of the
Fund's shares at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Fund or the Distributor for any reason, including to
prevent the "market-timing" of the Fund. Neither the Distributor nor the
selected securities dealers or other financial intermediaries are permitted to
withhold placing orders to benefit themselves by a price change. Certain
selected securities dealers or other financial intermediaries may charge a
processing fee to confirm a sale of shares. For example, the fee currently
charged by Merrill Lynch is $5.35. Purchases made directly through the Transfer
Agent are not subject to the processing fee.

CLASS I SHARES

Class I shares will be subject to an initial sales charge, unless you
qualify for a reduction or waiver of the sales charge. See "Reduced Initial
Sales Charges."

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I shares of the
Fund, refers to a single purchase by an individual or to concurrent purchases,
which in the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21 years
purchasing shares for his, her or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company," as that term is defined in
the 1940 Act, but does not include purchases by any such company that has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.

retirement or savings plans, including eligible 401(k) plans, may purchase Class
I shares at net asset value provided such plans meet the required minimum number
of eligible employees or required amount of assets advised by the Investment
Adviser or any of its affiliates. Also eligible to purchase Class I shares at
net asset value are participants in certain investment programs including
certain managed accounts for which a trust institution, thrift or bank trust
department provides discretionary trustee services, certain collective
investment trusts for which a trust institution, thrift, or bank trust
department serves as trustee, certain purchases made in connection with certain
programs sponsored by the Investment Adviser or its affiliates, and investors
with accounts with financial intermediaries who participate in transaction fee
programs and invest at least $250,000 for their customers in the Fund. Class I
shares are offered at net asset value to certain beneficial owners who are
institutional investors. Class I shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the participant has $3 million or more
initially invested in affiliate-advised investment companies. In addition, Class
I shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees, to members of the Boards of investment companies
advised by the Investment Adviser or its affiliates, including the Fund, and to
employees of certain selected securities dealers or other financial
intermediaries. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises investment
discretion. Although some investors who previously purchased Class I shares may
no longer be eligible to purchase Class I shares of other affiliate-advised
funds, those previously purchased Class I shares, together with Class A, Class B
and Class C share holdings of other Mercury mutual funds, will count toward a
right of accumulation which may qualify the investor for a reduced initial sales
charge on new initial sales charge purchases.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I shares of the Fund
will receive a concession equal to most of the sales charge, they may be deemed
to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon shares
issued as a result of the automatic reinvestment of dividends.

Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other Mercury mutual funds. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by the
purchaser or the purchaser's selected securities dealer or other financial
intermediary, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such confirmation.
The right of accumulation may be amended or terminated at any time. Shares held
in the name of a nominee or custodian under pension, profit-sharing, or other
employee benefit plans may not be combined with other shares to qualify for the
right of accumulation.

16
<PAGE> 285

purchase not originally made pursuant to a Letter of Intent may be included
under a subsequent Letter of Intent executed within 90 days of such purchase if
the Distributor is informed in writing of this intent within such 90-day period.
The value of Class I shares of the Fund and of other Mercury mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intent, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the execution of such Letter, the difference between the
sales charge on the Class I shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class I
shares equal to 5.0% of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intent must be at least
5.0% of the dollar amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales charge based on the
right of accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge but there
will be no retroactive reduction of the sales charges on any previous purchase.

The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund, a series of Financial Institutions Series Trust ("Summit"), into
the Fund that creates a sales charge will count toward completing a new or
existing Letter of Intent from the Fund.

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I shares at net asset value, based on the
number of employees or number of employees eligible to participate in the plan
and/or the aggregate amount invested by the plan in specified investments.
Minimum purchase requirements may be waived or varied for such plans. For
additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements, call your plan administrator or
your selected securities dealer or other financial intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

Purchase Privileges of Certain Persons. Trustees of the Trust and of other
investment companies advised by the Investment Adviser or its affiliates,
directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes the
Investment Adviser, Merrill Lynch Investment Managers, L.P., Merrill Lynch
Investment Managers International Limited and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.), employees of certain
selected securities dealers, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class I shares of the Fund at net
asset value. The Fund realizes economies of scale and reduction of sales-
related expenses by virtue of the familiarity of these persons with the Fund.
Employees and Trustees wishing to purchase shares of the Fund must satisfy the
Fund's suitability standards.

Class I shares are also offered at net asset value to participants in
certain investment programs including certain purchases in connection with
certain programs sponsored by the Investment Adviser or its affiliates and
certain transaction fee programs. Class I shares are offered at net asset value
to certain beneficial owners who are institutional investors.

A waived sales charge on a purchase of Class I shares will apply to current
beneficial shareholders who were also beneficial shareholders of the Fund as of
the opening of business of the Fund on October 6, 2000.

17
<PAGE> 286

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any deferred sales charge that may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or
during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

The Trust has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates and a
syndicate of banks that is intended to provide the Fund with a temporary source
of cash to be used to meet redemption requests from Fund shareholders in
extraordinary or emergency circumstances.

REDEMPTION

A shareholder wishing to redeem shares held with the Transfer Agent may do
so by tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., P.O. Box 41621, Jacksonville, Florida 32232-1621. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Redemption
requests should not be sent to the Fund. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the Transfer Agent's
register. The signature(s) on the redemption request may require a guarantee by
an "eligible guarantor institution" as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures are not
sufficient. In general, signature guarantees are waived on redemptions of less
than $50,000 as long as the following requirements are met: (i) all requests
require the signature(s) of all persons in whose name(s) shares are recorded on
the Transfer Agent's register; (ii) all checks must be mailed to the address of
record on the Transfer Agent's register and (iii) the address must not have
changed within 30 days. Certain rules may apply regarding certain account types
such as but not limited to UGMA/UTMA accounts, Joint Tenancies with Rights of
Survivorship, contra broker transactions and institutional accounts. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority.

A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the Transfer
Agent at 1-800-236-4479. The request must be made by the shareholder of record
and be for an amount less than $50,000. Before telephone requests will be
honored, signature approval from all shareholders of record on the account must
be obtained. The shares being redeemed must have been held for at least 15 days.
Telephone redemption requests will not be honored in the following situations:
the accountholder is deceased, the proceeds are to be sent to someone other than
the shareholder of record, funds are to be wired to the client's bank account, a
systematic withdrawal plan is in effect, the request is by an individual other
than the accountholder of record, the account is held by joint

18
<PAGE> 287

tenants who are divorced, the address has changed within the last 30 days or
share certificates have been issued on the account.

Since this account feature involves a risk of loss from unauthorized or
fraudulent transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be refused if the
caller is unable to provide: the account number, the name and address registered
on the account and the social security number registered on the account. The
Fund or the Transfer Agent may temporarily suspend telephone transactions at any
time.

For shareholders redeeming directly with the Transfer Agent, payments will
be mailed within seven days of receipt of a proper notice of redemption. At
various times the Fund may be requested to redeem shares for which it has not
yet received good payment (e.g., cash, Federal funds or certified check drawn on
a U.S. bank). The Fund may delay or cause to be delayed the mailing of a
redemption check until such time as good payment (e.g., cash, Federal funds or
certified check drawn on a U.S. bank) has been collected for the purchase of
such Fund shares, which usually will not exceed 10 days. In the event that a
shareholder account held directly with the Transfer Agent contains a fractional
share balance, such fractional share balance will be automatically redeemed by
the Fund.

REPURCHASE

The Fund also will repurchase its shares through a shareholder's listed
selected securities dealer or other financial intermediary. The Fund normally
will accept orders to repurchase shares by wire or telephone from dealers for
their customers at the net asset value next computed after the order is placed.
Shares will be priced at the net asset value calculated on the day the request
is received, provided that the request for repurchase is submitted to the
selected securities dealer or other financial intermediary prior to the close of
regular trading on the NYSE (generally, regular trading on the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
selected securities dealer or other financial intermediary not later than 30
minutes after the close of regular trading on the NYSE on the same day.

Selected securities dealers and other financial intermediaries have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of regular trading on the NYSE in order to obtain
that day's closing price.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
deferred sales charge). Securities firms that do not have agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Certain selected securities
dealers and other financial intermediaries may charge a processing fee to
confirm a repurchase of shares. For example, the fee currently charged by
Merrill Lynch is $5.35. Fees charged by other selected securities dealers may be
higher or lower. Repurchases made through the Transfer Agent, on accounts held
at the Transfer Agent, are not subject to the processing fee. The Fund reserves
the right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. A shareholder whose order for repurchase is rejected by the Fund,
however, may redeem Fund shares as set forth above.

REINSTATEMENT PRIVILEGE -- CLASS I SHARES

Shareholders of the Fund who have redeemed their Class I shares have a
privilege to reinstate their accounts by purchasing Class I shares of the Fund
at the net asset value without a sales charge up to the dollar amount redeemed.
The reinstatement privilege may be exercised by sending a notice of exercise
along with a check for the amount to be reinstated to the Transfer Agent within
30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. Alternatively, the reinstatement privilege may be
exercised through the investor's financial consultant within 30 days after the
date the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds.

19
<PAGE> 288

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of the close of regular trading on the NYSE on each day
the NYSE is open for trading based on prices at the time of closing. Regular
trading on the NYSE generally closes at 4:00 p.m., Eastern time. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The NYSE is not open for trading
on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Net asset value of the Fund is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.

Portfolio securities, including ADRs, that are traded on stock exchanges
are valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of regular trading on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Long positions in securities traded
in the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC market prior to the
time of valuation. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last ask price. Options purchased by the Fund are valued at their
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.

Each investor in the Fund may add to or reduce its investment in the Fund
on each day the NYSE is open for trading. The value of each investor's interest
in the Fund will be determined as of the close of regular trading on the NYSE by
multiplying the net asset value of the Fund by the percentage, effective for
that day, that represents that investor's share of the aggregate interests in
the Fund. The close of regular trading on the NYSE is generally 4:00 p.m.,
Eastern time. Any additions or withdrawals to be effected on that day will then
be effected. The investor's percentage of the aggregate beneficial interests in
the Fund will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Fund as of
the time of determination on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Fund effected on such day, and (ii) the denominator of which is the aggregate
net asset value of the Fund as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Fund by all investors in the Fund. The percentage
so determined will then be applied to determine the value of

20
<PAGE> 289

the investor's interest in the Fund after the close of regular trading on the
NYSE on the next determination of net asset value of the Fund.

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for shares of the
Fund based on the net asset value of the Fund's shares on June 30, 2000 is as
follows:

<TABLE>
<S> <C>
Net Assets.................................................. $79,312,642
===========
Number of Shares Outstanding................................ 6,092,101
===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 13.02
Sales Charge (for Class I Shares: 5.25% of Offering Price;
(5.54% of net amount invested))*.......................... .72
-----------
Offering Price.............................................. $ 13.74
===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable. No sales charges were imposed as of June 30, 2000.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, the Investment Adviser seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Trustees, the Investment Adviser may consider sales of Fund shares as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund; however, whether or not a particular broker or dealer sells shares
of the Fund neither qualifies nor disqualifies such broker or dealer to execute
transactions for the Fund.

Subject to obtaining the best net results, brokers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement and the expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the Fund will benefit
from supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting the same
transactions. Certain supplemental research services may primarily benefit one
or more other investment companies or other accounts for which the Investment
Adviser exercises investment discretion. Conversely, the Fund may be the primary
beneficiary of the supplemental research services received as a result of
portfolio transactions effected for such other accounts or investment companies.

21
<PAGE> 290

may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage the portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have significant effect on the Fund's
portfolio strategies.

The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the 1940 Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities unless
a permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with the
dealers acting as principal for their own accounts, the Fund will not deal with
affiliated persons, including Merrill Lynch and its affiliates, in connection
with such transactions. However, an affiliated person of the Fund may serve as
its broker in OTC transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch or an affiliate is a member or in a
private placement in which Merrill Lynch or an affiliate serves as placement
agent except pursuant to procedures approved by the Board of Trustees that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."

Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch or its affiliates acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund. Securities may be held by, or be appropriate
investments for, the Fund as well as other funds or investment advisory clients
of the Investment Adviser or its affiliates.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
AGGREGATE BROKERAGE COMMISSIONS PAID
FISCAL YEAR ENDED JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
-------------------------- ------------------- ----------------
<S> <C> <C>
2000..................................... $136,657 $-0-
1999..................................... $ 88,009 $-0-
1998..................................... $110,157 $-0-
</TABLE>

The Board of Trustees has considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund to the
Investment Adviser. After considering all factors deemed relevant, the Board of
Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.

22
<PAGE> 291

respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each such
service and copies of the various plans or how to change options with respect
thereto, can be obtained from the Fund by calling the telephone number on the
cover page hereof, or from the Distributor or your selected securities dealer or
other financial intermediary. Certain of these services are available only to
U.S. investors.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The statements
also will show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
dividends. A shareholder with an account held at the Transfer Agent may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. The Fund does not issue share certificates.

Shareholders considering transferring their Class I shares from a selected
securities dealer or other financial intermediary to another brokerage firm or
financial institution should be aware that, if the firm to which the Class I
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those shares.

Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer, and all future trading of these assets must be
coordinated by the new firm.

Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from a selected securities dealer or
other financial intermediary to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at a selected securities dealer or other financial
intermediary for those shares.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class I shares. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege and any shares used in
an exchange must have been held by the shareholder for at least 15 days. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.

Exchanges of Class I Shares. Under the Fund's pricing system, Class I
shareholders may exchange Class I shares of the Fund for Class I shares of a
second Mercury mutual fund. If the Class I shareholder wants to exchange Class I
shares for shares of a second Mercury mutual fund, but does not hold Class I
shares of the second fund in his or her account at the time of exchange and is
not otherwise eligible to acquire Class I

23
<PAGE> 292

shares of the second fund, the shareholder will receive Class A shares of the
second fund as a result of the exchange.

Exchanges of Class I shares outstanding ("outstanding Class I shares") for
Class I or Class A shares of another Mercury mutual fund, or for Class A shares
of Summit ("new Class I or Class A shares") are transacted on the basis of
relative net asset value per Class I or Class A share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class I shares and the sales charge payable at the time of
the exchange on the new Class I or Class A shares. With respect to outstanding
Class I shares as to which previous exchanges have taken place, the "sales
charge previously paid" shall include the aggregate of the sales charges paid
with respect to such Class I shares in the initial purchase and any subsequent
exchange. Class I shares issued pursuant to dividend reinvestment are sold on a
no-load basis. For purposes of the exchange privilege, Class I shares acquired
through dividend reinvestment shall be deemed to have been sold with a sales
charge equal to the sales charge previously paid on the Class I shares on which
the dividend was paid. Based on this formula, Class I shares of the Fund
generally may be exchanged into the Class I and Class A shares, respectively, of
the other funds with a reduced or without a sales charge.

Exchanges for Shares of a Money Market Fund. Class I shares are
exchangeable for Class A shares of Summit. Class A shares of Summit have an
exchange privilege back into Class I or Class A shares of affiliate-advised
Funds. This exchange privilege does not apply with respect to certain fee-based
programs for which alternative exchange arrangements may exist. Please see your
financial consultant for further information.

Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her financial consultant, who will advise the
relevant Fund of the exchange. Shareholders of the Fund and shareholders of the
other funds described above with shares for which certificates have not been
issued may exercise the exchange privilege by wire through their selected
securities dealers or other financial intermediaries. The Fund reserves the
right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and may thereafter
resume such offering from time to time. The exchange privilege is available only
to U.S. shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor. The Fund may refuse to
permit exchanges to prevent shareholders from market-timing the Fund.

FEE-BASED PROGRAMS

Certain fee-based programs sponsored by affiliates of the Investment
Adviser, including pricing alternatives for securities transactions (each
referred to in this paragraph as a "Program"), may permit the purchase of Class
I shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class I shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in certain Programs may result in the redemption of shares held
therein. In addition, upon termination of participation in a Program, shares
that have been held for less than specified periods within such Program may be
subject to a fee based on the current value of such shares. These Programs also
generally prohibit such shares from being transferred to another account, to
another broker-dealer or to the Transfer Agent. Additional information regarding
certain specific Programs (including charges and limitations on transferability
applicable to shares that may be held in such Programs) is available in each
such Program's client agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

24
<PAGE> 293

plan should review specific tax laws relating thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any such plan.

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares at the applicable public offering price. These
purchases may be made either through the shareholder's securities dealer or by
mail directly to the Transfer Agent, acting as agent for such securities dealer.
You may also add to your account by automatically investing a specific amount in
the Fund on a periodic basis through your selected securities dealer or other
financial intermediary. The current minimum for such automatic additional
investments is $100. This minimum may be waived or revised under certain
circumstances.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

Shareholders may, at any time, by written notification to their selected
securities dealer or other financial intermediary if their account is maintained
with a selected securities dealer or other financial intermediary, or by written
notification or by telephone (1-800-236-4479) to the Transfer Agent, if their
account is maintained with the Transfer Agent, elect to have subsequent
dividends of ordinary income and/or capital gains paid with respect to shares of
the Fund in cash, rather than reinvested in shares of the Fund (provided that,
in the event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares).
Commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. The Fund is not responsible for any failure
of delivery to the shareholder's address of record and no interest will accrue
on amounts represented by uncashed dividend checks. Cash payments can also be
directly deposited to the shareholder's bank account.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount to
be redeemed. Redemptions will be made at net asset value as of the close of
regular trading on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for business on such
date, the shares will be redeemed at the net asset value determined after the
close of regular trading on the NYSE on the following business day. The check
for the withdrawal payment will be mailed, or the direct deposit for withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends on all shares in the
Investment Account are reinvested automatically in Fund shares. A shareholder's
systematic withdrawal plan may be terminated at any time, without a charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

Withdrawal payments should not be considered dividends. Each withdrawal is
a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors who maintain a systematic withdrawal plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may

25
<PAGE> 294

not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.

DIVIDENDS AND TAX STATUS

The Fund has qualified as, and intends to remain qualified as, a regulated
investment company under Subchapter M of the Code. Qualification as a regulated
investment company exempts the Fund (but not its shareholders) from paying
Federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains (i.e., the excess of net long-term
capital gains over net long-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long the shareholders have
held their shares in the Fund. Thus, failure by the Fund to qualify as a
regulated investment company would result in all of its income being subject to
Federal income tax at corporate rates.

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock or securities, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities, or currencies; and (2) the Fund diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. government securities or
the securities of other regulated investment companies). In addition, in order
not to be subject to Federal taxation, the Fund must distribute to its
shareholders at least 90% of its investment company taxable income earned in
each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, annually. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement date
of a redemption order.

The Fund is required to pay a non-deductible 4% excise tax to the extent it
does not distribute to its shareholders during any calendar year at least 98% of
its ordinary income for that calendar year, 98% of the excess of its capital
gains over its capital losses for the one-year period ending October 31 in such
calendar year, and all undistributed ordinary income and capital gains for the
preceding respective one-year period. The Fund intends to meet these
distribution requirements to avoid excise tax liability. The Fund also intends
to continue distributing to shareholders all of the excess of net long-term
capital gain over net short-term capital loss on sales of securities. If the net
asset value of shares of the Fund should, by reason of a distribution of
realized capital gains, be reduced below a shareholder's cost, such distribution
would to that extent be a return of capital to that shareholder even though
taxable to the shareholder, and a sale of shares by a shareholder at net asset
value at that time would result in a capital loss for Federal income tax
purposes.

In determining the extent to which the Fund's dividends may be eligible for
the 70% dividends-received deduction by corporate shareholders, interest income,
capital gain net income, gain or loss from Section 1256 contracts, dividend
income from foreign corporations and income from certain other sources will not
constitute qualified dividends. Corporate shareholders should consult their tax
advisers regarding other requirements applicable to the dividends-received
deduction. Individual shareholders are not eligible for the dividends-received
deduction.

Upon sale or exchange of shares of the Fund, a shareholder will realize
short-term or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund's shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares.

26
<PAGE> 295

Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
received in connection with the reinvestment of a dividend paid by the Fund
constitute a replacement of shares.

The foregoing is a general and abbreviated summary of the Federal income
tax consequences of an investment in the Fund, and is based on the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action, and
any such change may be prospective or retroactive. Ordinary income and capital
gains dividends may also be subject to state and local taxes. Investors are
urged to consult their attorneys or tax advisers regarding specific questions as
to Federal, foreign, state or local taxes.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined in accordance with a formula specified
by the Commission.

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
----- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class I*.......................... 19.83% 9.82% 11.00% 9.72% (Since 6/24/87)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In order to reflect the reduced sales charges applicable to certain
investors, as described under "Purchase of Shares" and "Redemption of Shares,"
respectively, the total return data quoted by the Fund in advertisements
directed to such investors may take into account the reduced, and not the
maximum, sales charge and therefore may reflect greater total return since, due
to the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.

27
<PAGE> 296

published indexes. When comparing its performance to a market index, the Fund
may refer to various statistical measures derived from the historic performance
of the Fund and the index, such as standard deviation and beta. In addition, the
Fund may refer in advertising or sales literature to (i) mutual fund performance
ratings, rankings and comparisons (including risk-adjusted ratings, rankings and
comparisons), (ii) other comparisons of mutual fund data including assets,
expenses, fees and other data, and (iii) other discussions reported in or
assigned by Barron's, Business Week, CDA Investment Technology, Inc., Financial
World, Forbes Magazine, Fortune Magazine, Lipper Inc., Money Magazine, U.S. News
& World Report, The Wall Street Journal and other industry publications. The
Fund may also make reference to awards that may be given to the Investment
Adviser. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.

The Fund may provide information designed to help investors understand how
the Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political, or
other conditions, descriptive information on general principles of investing
such as asset allocation, diversification and risk tolerance, discussion of the
Fund's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Fund's performance or portfolio composition to
that of other funds or types of investments, indices relevant to the comparison
being made, or to a hypothetical or model portfolio. The Fund may also quote
various measures of volatility and benchmark correlation in advertising and
other materials, and may compare these measures to those of other funds or types
of investments.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share.
Upon a fund's liquidation, all shareholders would share pro rata in the net
assets of the fund available for distribution to shareholders. If they deem it
advisable and in the best interest of shareholders, the Board of Trustees may
create additional classes of shares. The Board of Trustees has created ten funds
and ten series of shares, and may create additional funds and series in the
future, which have separate assets and liabilities.

The Declaration of Trust 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 or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.

Ten shareholders holding the lesser of $25,000 worth or one percent of the
Trust's shares may advise the Trustees in writing that they wish to communicate
with other shareholders for the purpose of requesting a meeting to remove a
Trustee. The Trustees will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all other shareholders.

The Trust or the Fund may be terminated if approved by the vote of a
majority of the Trustees or by the approval of the holders of a majority of the
Trust's (or the Fund's) outstanding shares, as defined in the 1940 Act. If not
so terminated, the Trust will continue indefinitely.

28
<PAGE> 297

the voting securities of each series affected by the matter. Such separate
voting requirements do not apply to the election of Trustees or the ratification
of the selection of accountants. The Rule contains special provisions for cases
in which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.

The Declaration of Trust contains an express disclaimer of shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.

Common expenses incurred by the Trust are allocated among the funds based
upon: (1) relative net assets; (2) as incurred on a specific identification
basis; or (3) evenly among the funds, depending on the nature of the
expenditure.

Except for (1) changes which do not adversely affect the rights of Trust
shareholders; (2) a change in the name of the Trust, or a fund or series or
class thereof; (3) authorization of a new fund or series or class; (4) changes
to supply any omission or correct any ambiguous or defective provision; or (5)
changes required by any Federal, state or similar regulatory authority or
required by the Code to eliminate or reduce any Federal, state or local taxes
which may be payable by the Fund or its shareholders, no amendment may be made
to the Declaration of Trust without the affirmative vote of the holders of at
least 67% of the Trust's outstanding shares at a meeting at which more than 50%
of its outstanding shares are present in person or represented by proxy. The
holders of shares have no preemptive or conversion rights. Shares when issued
pursuant to the Prospectus are fully paid and non-assessable, except as set
forth above.

ISSUANCE OF FUND SHARES FOR SECURITIES

Investors may purchase Fund shares for consideration consisting of
securities rather than cash when, in the judgment of the Investment Adviser, the
securities: (a) meet the investment objective and policies of the Fund, (b) are
liquid and not subject to restrictions on resale, and (c) have a value that is
readily ascertainable via listing on or trading in a recognized United States or
international exchange or market.

REDEMPTION IN KIND

If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
in cash, the Fund may pay the redemption price in part by a distribution in kind
of readily marketable securities from the portfolio of the Fund, in lieu of
cash. The Trust has elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which the Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or one percent of the net asset value of the Fund during
any 90 day period for any one shareholder. Should redemptions by any shareholder
exceed such limitation the Fund will have the option of redeeming the excess in
cash or in kind. If shares are redeemed in kind, the redeeming shareholder would
incur brokerage costs in converting the assets into cash.

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP, 100 E. Wisconsin Avenue, Milwaukee, Wisconsin
53202, has been selected as the independent auditors of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.

CUSTODIAN

Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement (the "Transfer Agency Agreement").
The Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An annual report containing financial statements audited by
independent auditors is sent to shareholders each year. After the end of each
year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

Northern States Power Company, P.O. Box 64482, St. Paul, MN
55164-0482 - 28.81% of Class I shares.

Sun Health, P.O. Box 9800, Calabasas, CA 91372-0800 - 11.81% of Class I
shares.

Audit Bureau of CIR Pension, P.O. Box 160, Westerville, OH
43066-0160 - 5.93% of Class I shares.

Bi-State, 648 Grassmere Park, Nashville, TN 37211-3658 - 5.31% of Class
I shares.

As of September 19, 2000, the following shareholder owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 - 9.77% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.14% of the Fund's outstanding shares.

30
<PAGE> 299

Code #: MHW-SAI-1040-1000
<PAGE> 300

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW MID-CAP VALUE FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Mid-Cap Value Fund (the "Fund") is a fund of the Mercury HW
Funds (the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to provide current income and long-term growth
of income, accompanied by growth of capital. The Fund seeks to achieve its
investment objective by investing primarily in stocks of U.S. companies with
market capitalizations of between $1 billion and $15 billion. No assurance can
be given that the investment objective of the Fund will be realized. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies."

The Fund offers a single class (Class I) of shares. Only certain investors
are eligible to purchase Class I shares. See "Purchase of Shares."

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 301

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 6
Foreign Securities........................................ 7
Foreign Investment Risks.................................. 7
Swap Agreements........................................... 8
Illiquid Securities....................................... 8
Borrowing................................................. 9
When-Issued Securities.................................... 10
Real Estate Investment Trusts............................. 10
Shares of Other Investment Companies...................... 10
Limited Partnerships...................................... 10
Short Sales Against-the-Box............................... 10
Corporate Loans........................................... 10
Temporary Defensive Position.............................. 11
Management of the Fund...................................... 11
Advisory Arrangements..................................... 13
Accounting and Administrative Services.................... 14
Code of Ethics............................................ 14
Purchase of Shares.......................................... 15
Class I Shares............................................ 15
Reduced Initial Sales Charges............................. 16
Redemption of Shares........................................ 17
Redemption................................................ 18
Repurchase................................................ 19
Reinstatement Privilege -- Class I Shares................. 19
Pricing of Shares........................................... 19
Determination of Net Asset Value.......................... 19
Computation of Offering Price Per Share................... 21
Portfolio Transactions and Brokerage........................ 21
Transactions in Portfolio Securities...................... 21
Shareholder Services........................................ 23
Investment Account........................................ 23
Exchange Privilege........................................ 23
Fee-Based Programs........................................ 24
Retirement Plans.......................................... 24
Automatic Investment Plans................................ 25
Automatic Dividend Reinvestment Plan...................... 25
Systematic Withdrawal Plans............................... 25
Dividends and Tax Status.................................... 26
Performance Data............................................ 27
General Information......................................... 28
Description of Shares..................................... 28
Issuance of Fund Shares for Securities.................... 29
Redemption in Kind........................................ 29
Independent Auditors...................................... 29
Custodian................................................. 29
Transfer Agent............................................ 30
Legal Counsel............................................. 30
Reports to Shareholders................................... 30
Shareholder Inquiries..................................... 30
Additional Information.................................... 30
Principal Holders......................................... 30
</TABLE>

2
<PAGE> 302

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

3
<PAGE> 303

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

11. Purchase or sell foreign currencies.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

4
<PAGE> 304

by the credit of the instrumentality. In the case of securities 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. The Fund will invest in securities of such instrumentality
only when the Investment Adviser is satisfied that the credit risk with respect
to any instrumentality is acceptable.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers rated investment grade (any of the four highest grades) by a major
rating agency or, if unrated, of comparable quality in the Investment Adviser's
opinion. The Fund also may invest up to 5% of its total assets in convertible
securities rated below investment grade, but not below B, or, if unrated, of
comparable quality in the Investment Adviser's opinion. A convertible security
is a fixed-income security (a bond or preferred stock) which may be converted at
a stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.

5
<PAGE> 305

DERIVATIVE INSTRUMENTS

To the extent consistent with its investment objective and policies and the
investment restrictions listed in this Statement of Additional Information, the
Fund may purchase and write call and put options on securities and securities
indexes and enter into forward contracts. The Fund also may enter into swap
agreements with respect to interest rates and securities indexes. The Fund may
use these techniques to hedge against changes in interest rates, or securities
prices or as part of its overall investment strategies. The Fund will mark as
segregated cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions), to cover its obligations
under forward contracts, futures contracts, swap agreements and options to avoid
leveraging of the Fund.

the same index purchased by the Fund, movements in the index may result in a
loss to the Fund; however, such losses may be mitigated by changes in the value
of the Fund's securities during the period the option was outstanding.

FOREIGN SECURITIES

The Fund may invest in American Depositary Receipts ("ADRs") or other
securities convertible into securities of issuers based in foreign countries or
other foreign securities that can be purchased and sold in U.S. dollars. ADRs
are receipts, usually issued by a U.S. bank or trust company, evidencing
ownership of the underlying securities. Generally, ADRs are issued in registered
form, denominated in U.S. dollars, and are designed for use in the U.S.
securities markets.

FOREIGN INVESTMENT RISKS

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU establishes a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are now
listed, traded, declaring dividends and making other payments only in euros.

7
<PAGE> 307

rates that were introduced in anticipation of EMU. Also, withdrawal from EMU at
any time by an initial participant could cause disruption of the financial
markets as securities redenominated in euros are transferred back into that
country's national currency, particularly if the withdrawing country is a major
economic power. Such developments could have an adverse impact on the Fund's
investments in Europe generally or in specific countries participating in EMU.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

ILLIQUID SECURITIES

8
<PAGE> 308

Securities Act of 1933, as amended ("Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements that have a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption within seven days. The absence of a
trading market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment of
the Investment Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

BORROWING

9
<PAGE> 309

WHEN-ISSUED SECURITIES

The Fund may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. The price that the Fund is obligated to pay on the settlement
date may be different from the market value on that date. While securities may
be sold prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in determining the Fund's net asset
value. The Fund will also mark as segregated with its custodian cash, U.S.
government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its obligations for when-issued
securities.

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

10
<PAGE> 310

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

MADELEINE A. KLEINER (48) -- Trustee -- 1900 Avenue of the Stars, Suite
1700, Los Angeles, CA 90067. Former Senior Executive Vice President, Chief
Administrative Officer and General Counsel, H.F. Ahmanson & Company and Home
Savings of America, FSB (banking company) (1995 - 1998); Partner, Gibson, Dunn &
Crutcher (law firm) (1983 - 1995).

company); Trustee or Director of 67 registered investment companies (consisting
of 72 portfolios) for which the Investment Adviser or an advisory affiliate is
the adviser.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

12
<PAGE> 312

ADVISORY ARRANGEMENTS

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, as a result of its agreement to limit Fund expenses,
Merrill Lynch Investment Managers, L.P. waived its fee in the amounts of
$54,806, $46,081 and $40,200, respectively. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid no advisory fees and Merrill Lynch Investment
Managers, L.P. reimbursed the Fund in the amounts of $1,326, $13,497 and
$52,325, respectively.

Advisory Agreement is not assignable and will automatically terminate in the
event of its assignment. In addition, such contract may be terminated by the
vote of a majority of the outstanding voting securities of the Fund or by the
Investment Adviser without penalty on 60 days' written notice to the other
party.

ACCOUNTING AND ADMINISTRATIVE SERVICES

CODE OF ETHICS

14
<PAGE> 314

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues a single class (Class I) of shares. Each share of the Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights.

CLASS I SHARES

Class I shares will be subject to an initial sales charge, unless you
qualify for a reduction or waiver of the sales charge. See "Reduced Initial
Sales Charges."

Class I shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class I shares. Investors
who owned beneficially Investor Class shares or who currently beneficially own
Class I shares of the Fund in a shareholder account are entitled to purchase
additional Class I shares of the Fund in that account at net asset value.
Certain employer-sponsored
15
<PAGE> 315

retirement or savings plans, including eligible 401(k) plans, may purchase Class
I shares at net asset value provided such plans meet the required minimum number
of eligible employees or required amount of assets advised by the Investment
Adviser or any of its affiliates. Also eligible to purchase Class I shares at
net asset value are participants in certain investment programs including
certain managed accounts for which a trust institution, thrift or bank trust
department provides discretionary trustee services, certain collective
investment trusts for which a trust institution, thrift, or bank trust
department serves as trustee, certain purchases made in connection with certain
programs sponsored by the Investment Adviser or its affiliates, and investors
with accounts with financial intermediaries who participate in transaction fee
programs and invest at least $250,000 for their customers in the Fund. Class I
shares are available at net asset value to corporate warranty insurance reserve
fund programs and U.S. branches of foreign banking institutions, provided that
the participant has $3 million or more initially invested in affiliate-advised
investment companies. In addition, Class I shares are offered at net asset value
to ML & Co. and its subsidiaries and their directors and employees, to members
of the Boards of investment companies advised by the Investment Adviser or its
affiliates, including the Fund, and to employees of certain selected securities
dealers or other financial intermediaries. Class I shares may also be offered at
net asset value to certain accounts over which the Investment Adviser or an
affiliate exercises investment discretion. Although some investors who
previously purchased Class I shares may no longer be eligible to purchase Class
I shares of other affiliate-advised funds, those previously purchased Class I
shares, together with Class A, Class B and Class C share holdings of other
Mercury mutual funds, will count toward a right of accumulation which may
qualify the investor for a reduced initial sales charge on new initial sales
charge purchases.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon shares
issued as a result of the automatic reinvestment of dividends.

16
<PAGE> 316

such 90-day period. The value of Class I shares of the Fund and of other Mercury
mutual funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intent, may be
included as a credit toward the completion of such Letter, but the reduced sales
charge applicable to the amount covered by such Letter will be applied only to
new purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intent (minimum of $25,000), the investor will be notified and
must pay, within 20 days of the execution of such Letter, the difference between
the sales charge on the Class I shares purchased at the reduced rate and the
sales charge applicable to the shares actually purchased through the Letter.
Class I shares equal to 5.0% of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intent must
be at least 5.0% of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales charge
based on the right of accumulation, the purchaser will be entitled on that
purchase and subsequent purchases to that further reduced percentage sales
charge but there will be no retroactive reduction of the sales charges on any
previous purchase.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

17
<PAGE> 317

notice of redemption. Except for any deferred sales charge that may be
applicable, there will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

18
<PAGE> 318

account and the social security number registered on the account. The Fund or
the Transfer Agent may temporarily suspend telephone transactions at any time.

REPURCHASE

REINSTATEMENT PRIVILEGE -- CLASS I SHARES

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

19
<PAGE> 319

20
<PAGE> 320

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for shares of the
Fund based on the net asset value of the Fund's shares on June 30, 2000 is as
follows:

<TABLE>
<S> <C>
Net Assets.................................................. $10,255,751
===========
Number of Shares Outstanding................................ 804,134
===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 12.75
Sales Charge (for Class I Shares; 5.25% of Offering Price;
(5.54% of net amount invested))*.......................... 0.71
-----------
Offering Price.............................................. $ 13.46
===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

Foreign equity securities may be held by the Fund in the form of ADRs or
other securities convertible into foreign equity securities. ADRs may be listed
on stock exchanges, or traded in over-the-counter markets in the United States.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates. The Fund's ability and decisions to purchase or
sell portfolio securities of foreign issuers may be affected by laws or
regulations relating to the convertibility and repatriation of assets. Because
the shares of the Fund are redeemable on a daily basis in U.S. dollars, the Fund
intends to manage the portfolio so as to give reasonable assurance that it will
be able to obtain U.S. dollars to the extent necessary to meet

21
<PAGE> 321

anticipated redemptions. Under present conditions, it is not believed that these
considerations will have significant effect on the Fund's portfolio strategies.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $39,899 $-0-
1999 $27,997 $-0-
1998 $11,847 $-0-
</TABLE>

Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or its affiliates
when one or more clients of the Investment Adviser or its affiliates are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate acts as investment adviser,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the

22
<PAGE> 322

demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

EXCHANGE PRIVILEGE

23
<PAGE> 323

FEE-BASED PROGRAMS

RETIREMENT PLANS

The minimum initial purchase to establish a retirement plan is $100.
Dividends received in retirement plans are exempt from Federal taxation until
distributed from the plans. Different tax rules apply to Roth IRA plans and
educational savings plans. Investors considering participation in any retirement
or education savings plan should review specific tax laws relating thereto and
should consult their attorneys or tax advisers with respect to the establishment
and maintenance of any such plan.

24
<PAGE> 324

AUTOMATIC INVESTMENT PLANS

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

25
<PAGE> 325

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock or securities or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies; and (2) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies). In addition, in order not to be subject to
Federal taxation, the Fund must distribute to its shareholders at least 90% of
its investment company taxable income earned in each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, annually. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement date
of a redemption order.

26
<PAGE> 326

PERFORMANCE DATA

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE SINCE
YEAR INCEPTION
----- ---------
<S> <C> <C> <C>
Class I*....................................... 10.41% 14.40% (Since 1/2/97)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Russell Midcap Index, Standard & Poor's 500 Composite Stock Price Index and
other published indexes. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index, such as standard deviation and beta. In
addition, the Fund may refer in advertising or sales literature to (i) mutual
fund performance ratings, rankings and comparisons (including risk-adjusted
ratings, rankings and comparisons), (ii) other comparisons of mutual fund data
including assets, expenses, fees and other data, and

27
<PAGE> 327

(iii) other discussions reported in or assigned by Barron's, Business Week, CDA
Investment Technology, Inc., Financial World, Forbes Magazine, Fortune Magazine,
Lipper Inc., Money Magazine, U.S. News & World Report, The Wall Street Journal
and other industry publications. The Fund may also make reference to awards that
may be given to the Investment Adviser. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the Trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share.
Upon a fund's liquidation, all shareholders would share pro rata in the net
assets of the fund available for distribution to shareholders. If they deem it
advisable and in the best interest of shareholders, the Board of Trustees may
create additional classes of shares. The Board of Trustees has created ten funds
and ten series of shares, and may create additional funds and series in the
future, which have separate assets and liabilities.

Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.

28
<PAGE> 328

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109-3661, acts as custodian of the Fund's assets (the "Custodian"). The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.

29
<PAGE> 329

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

MLSIP, PO Box 30532, New Brunswick, NJ 08989 -- 8.96% of Class I shares.

MLRAP, PO Box 30532, New Brunswick, NJ 08989 -- 5.60% of Class I shares.

Elizabeth B. Janeway Foundation, PO Box 60078, Los Angeles, CA
90060-0078 -- 5.46% of Class I shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 23.70% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 5.60% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.78% of the Fund's outstanding shares.

30
<PAGE> 330

Code #: MHW-SAI-1050-1000
<PAGE> 331

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW SMALL CAP VALUE FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Small Cap Value Fund (the "Fund") is a fund of the Mercury HW
Funds (the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek capital appreciation. The Fund seeks to achieve
its investment objective by investing primarily in stocks of U.S. companies with
market capitalizations of less than $2 billion. No assurance can be given that
the investment objective of the Fund will be realized. For more information on
the Fund's investment objective and policies, see "Investment Objective and
Policies."

The Fund offers two classes of shares, each with a different combination of
sales charges, ongoing fees and other features. Only certain investors are
eligible to buy Class I shares. See "Purchase of Shares."

------------------------

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund, dated October 6, 2000 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling the Fund at
1-800-236-4479 or your financial consultant or other financial intermediary, or
by writing to the Fund at Financial Data Services, Inc., P.O. Box 41621,
Jacksonville, Florida 32232-1621. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement of Additional
Information is incorporated by reference into the Prospectus. The Fund's audited
financial statements are incorporated in this Statement of Additional
Information by reference to its annual report for the fiscal year ended June 30,
2000. You may request copies of the annual report at no extra charge by calling
1-800-236-4479 between 8:30 a.m. and 5:30 p.m. (Eastern time) on any business
day.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 332

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 6
Foreign Securities........................................ 7
Foreign Investment Risks.................................. 7
Swap Agreements........................................... 8
Illiquid Securities....................................... 8
Borrowing................................................. 9
When-Issued Securities.................................... 10
Real Estate Investment Trusts............................. 10
Shares of Other Investment Companies...................... 10
Limited Partnerships...................................... 10
Short Sales Against-the-Box............................... 10
Corporate Loans........................................... 10
Temporary Defensive Position.............................. 11
Management of the Fund...................................... 11
Advisory Arrangements..................................... 13
Accounting and Administrative Services.................... 14
Code of Ethics............................................ 14
Purchase of Shares.......................................... 15
Class I and Class A Shares................................ 15
Reduced Initial Sales Charges............................. 16
Distribution Plan......................................... 18
Redemption of Shares........................................ 18
Redemption................................................ 19
Repurchase................................................ 20
Reinstatement Privilege -- Class I and Class A Shares..... 20
Pricing of Shares........................................... 20
Determination of Net Asset Value.......................... 20
Computation of Offering Price Per Share................... 22
Portfolio Transactions and Brokerage........................ 22
Transactions in Portfolio Securities...................... 22
Shareholder Services........................................ 24
Investment Account........................................ 24
Exchange Privilege........................................ 24
Fee-Based Programs........................................ 25
Retirement Plans.......................................... 26
Automatic Investment Plans................................ 26
Automatic Dividend Reinvestment Plan...................... 26
Systematic Withdrawal Plans............................... 26
Dividends and Tax Status.................................... 27
Performance Data............................................ 28
General Information......................................... 29
Description of Shares..................................... 29
Issuance of Fund Shares for Securities.................... 30
Redemption in Kind........................................ 31
Independent Auditors...................................... 31
Custodian................................................. 31
Transfer Agent............................................ 31
Legal Counsel............................................. 31
Reports to Shareholders................................... 31
Shareholder Inquiries..................................... 31
Additional Information.................................... 32
Principal Holders......................................... 32
</TABLE>

2
<PAGE> 333

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek capital appreciation.
Reference is made to the discussion under "How the Fund Invests" and "Investment
Risks" in the Prospectus for information with respect to the Fund's investment
objective and policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

invest or deal in real estate. (For the purposes of this restriction,
forward foreign currency exchange contracts are not deemed to be
commodities or commodity contracts.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

11. Purchase or sell foreign currencies.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

The Fund may purchase debt securities maturing more than one year from the
date of purchase only if they are purchased subject to repurchase agreements. A
repurchase agreement is an agreement where the seller agrees to repurchase a
security from the Fund at a mutually agreed-upon time and price. The period of
maturity is usually quite short, possibly overnight or a few days, although it
may extend over a number of months. The resale price is more than the purchase
price, reflecting an agreed-upon rate of return effective for the period of time
the Fund's money is invested in the repurchase agreement. The Fund's repurchase
agreements will at all times be fully collateralized in an amount at least equal
to the resale price. The instruments held as collateral are valued daily, and if
the value of those instruments declines, the Fund will require additional
collateral. In the event of a default, insolvency or bankruptcy by a seller, the
Fund will promptly seek to liquidate the collateral. In such circumstances, the
Fund could experience a delay or be prevented from disposing of the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.

BONDS

The term "bond" or "bonds" are used in the Prospectus and this Statement of
Additional Information is intended to include all manner of fixed-income
securities, debt securities and other debt obligations unless specifically
defined or the context requires otherwise.

U.S. GOVERNMENT SECURITIES

4
<PAGE> 335

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. The Fund will
invest in securities of such instrumentality only when the Investment Adviser is
satisfied that the credit risk with respect to any instrumentality is
acceptable.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers rated investment grade (any of the four highest grades) by a major
rating agency or, if unrated, be of comparable quality in the Investment
Adviser's opinion. The Fund also may invest up to 5% of its total assets in
convertible securities rated below investment grade, but not below B, or, if
unrated, of comparable quality in the Investment Adviser's opinion. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.

5
<PAGE> 336

DERIVATIVE INSTRUMENTS

To the extent consistent with its investment objective and policies and the
investment restrictions listed in this Statement of Additional Information, the
Fund may purchase and write call and put options on securities and securities
indexes and enter into forward contracts. The Fund also may enter into swap
agreements with respect to interest rates and securities indexes. The Fund may
use these techniques to hedge against changes in interest rates or securities
prices or as part of its overall investment strategies. The Fund will mark as
segregated cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions), to cover its obligations
under forward contracts, swap agreements and options to avoid leveraging of the
Fund.

such losses may be mitigated by changes in the value of the Fund's securities
during the period the option was outstanding.

FOREIGN SECURITIES

FOREIGN INVESTMENT RISKS

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

7
<PAGE> 338

participant could cause disruption of the financial markets as securities
redenominated in euros are transferred back into that country's national
currency, particularly if the withdrawing country is a major economic power.
Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

ILLIQUID SECURITIES

8
<PAGE> 339

and repurchase agreements that have a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Also market
quotations are less readily available. The judgment of the Investment Adviser
may at times play a greater role in valuing these securities than in the case of
unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

BORROWING

9
<PAGE> 340

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

10
<PAGE> 341

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

company); Trustee or Director of 67 registered investment companies (consisting
of 72 portfolios) for which the Investment Adviser or an advisory affiliate is
the adviser.

NANCY D. CELICK (49) -- President -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. First Vice President of the Investment Adviser
(since 2000); Chief Administrative Officer of the Investment Adviser
(1998 - 2000); Chief Financial Officer of the Investment Adviser (1993 - 1998);
Chief Financial Officer of Kennedy-Wilson, Inc. (auction marketing services)
(1992 - 1993); Chief Financial Officer of First National Corporation (bank
holding company) (1984 - 1992).

DONALD C. BURKE (40) -- Vice President and Treasurer -- P.O. Box 9011,
Princeton, NJ 08543-9011. Senior Vice President and Treasurer of the Investment
Adviser (since 1999); Senior Vice President and Treasurer of Princeton Services
(since 1999); Vice President of FAM Distributors, Inc. (since 1999); First Vice
President of the Investment Adviser (1990 - 1997).

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

12
<PAGE> 343

ADVISORY ARRANGEMENTS

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid Merrill Lynch Investment Managers, L.P.
$288,558, $357,779 and $491,489, respectively. For the fiscal year ended June
30, 1999, as a result of its agreement to limit Fund expenses, Merrill Lynch
Investment Managers, L.P. waived a portion of its fee in the amount of $84,856.

addition, such contract may be terminated by the vote of a majority of the
outstanding voting securities of the Fund or by the Investment Adviser without
penalty on 60 days' written notice to the other party.

ACCOUNTING AND ADMINISTRATIVE SERVICES

Transfer Agency Services. Financial Data Services Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee
ranging from $16.00 to $20.00 per account (depending on the level of services
required) and certain other fees relating to special processing of sub-transfer
agency relationships. The Transfer Agent is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system.

CODE OF ETHICS

14
<PAGE> 345

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues two classes of shares: Class I and Class A. Each Class I
and Class A share of the Fund represents an identical interest in the investment
portfolio of the Fund, and has the same rights, except that Class A shares bear
the expenses of the ongoing account maintenance fees (also known as service
fees). The account maintenance fees that are imposed on Class A shares are
imposed directly against the class and not against all assets of the Fund, and,
accordingly, such charges do not affect the net asset value of the other class.
Dividends paid by the Fund for each class of shares are calculated in the same
manner at the same time and differ only to the extent that account maintenance
fees are borne exclusively by that class. Class A shares have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which the account maintenance fees are paid. Each class
has different exchange privileges. See "Shareholder Services -- Exchange
Privilege."

The Fund offers its shares at a public offering price equal to the next
determined net asset value per share plus any sales charge applicable to the
class of shares selected by the investor. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by selected securities dealers or other financial intermediaries prior
to the close of regular trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m., Eastern time) which includes orders received after the
determination of net asset value on the previous day, the applicable offering
price will be based on the net asset value on the day the order is placed with
the Distributor, provided that the orders are received by the Distributor prior
to 30 minutes after the close of regular trading on the NYSE on that day. If the
purchase orders are not received prior to 30 minutes after the close of regular
trading on the NYSE on that day, such orders shall be deemed received on the
next business day. Selected securities dealers or other financial intermediaries
have the responsibility of submitting purchase orders to the Fund not later than
30 minutes after the close of regular trading on the NYSE in order to purchase
shares at that day's offering price.

The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Fund or the Distributor for any
reason, including to prevent the "market-timing" of the Fund. Neither the
Distributor nor the selected securities dealers or other financial
intermediaries are permitted to withhold placing orders to benefit themselves by
a price change. Certain selected securities dealers or other financial
intermediaries may charge a processing fee to confirm a sale of shares. For
example, the fee currently charged by Merrill Lynch is $5.35. Purchases made
directly through the Transfer Agent are not subject to the processing fee.

CLASS I AND CLASS A SHARES

Investors may elect to purchase Class A shares or, if an eligible investor,
Class I shares.

Investors who are eligible to purchase Class I shares should purchase Class
I shares rather than Class A shares, because there is an account maintenance fee
imposed on Class A shares.

by any such company that has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.

Class I shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class I shares. Investors
who beneficially owned Investor Class shares or who currently beneficially own
Class I shares of the Fund in a shareholder account are entitled to purchase
additional Class I shares of the Fund in that account at net asset value.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by the Investment Adviser or any of its affiliates. Also eligible
to purchase Class I shares at net asset value are participants in certain
investment programs including certain managed accounts for which a trust
institution, thrift or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain programs sponsored by the Investment Adviser or its
affiliates, and investors with accounts with financial intermediaries who
participate in transaction fee programs and invest at least $250,000 for their
customers in the Fund. Class I shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the participant has $3 million or more
initially invested in affiliate-advised investment companies. In addition, Class
I shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees, to members of the Boards of investment companies
advised by the Investment Adviser or its affiliates, including the Fund, and to
employees of certain selected securities dealers or other financial
intermediaries. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises investment
discretion. Although some investors who previously purchased Class I shares may
no longer be eligible to purchase Class I shares of other affiliate-advised
funds, those previously purchased Class I shares, together with Class A share
holdings, will count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge on new initial sales charge
purchases. The ongoing Class A account maintenance fees will cause Class A
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class I shares.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.

16
<PAGE> 347

of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.

Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class I or Class A shares of the Fund or any
other Mercury mutual funds made within a 13-month period starting with the first
purchase pursuant to the Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which affiliates of the Investment Adviser provide plan participant
record-keeping services. The Letter of Intent is not a binding obligation to
purchase any amount of Class I or Class A shares; however, its execution will
result in the purchaser paying a lower sales charge at the appropriate quantity
purchase level. A purchase not originally made pursuant to a Letter of Intent
may be included under a subsequent Letter of Intent executed within 90 days of
such purchase if the Distributor is informed in writing of this intent within
such 90-day period. The value of Class I and Class A shares of the Fund and of
other Mercury mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total amount of shares does not equal the
amount stated in the Letter of Intent (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the execution of such Letter, the
difference between the sales charge on the Class I or Class A shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class I or Class A shares equal to 5.0% of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intent must be at least 5.0% of the dollar amount
of such Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to that
further reduced percentage sales charge but there will be no retroactive
reduction of the sales charges on any previous purchase.

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I or Class A shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan and/or the aggregate amount invested by the plan in specified
investments. Minimum purchase requirements may be waived or varied for such
plans. For additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements, call your plan
administrator or your selected securities dealer or other financial
intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

Purchase Privileges of Certain Persons. Trustees of the Trust and of other
investment companies advised by the Investment Adviser or its affiliates,
directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes the
Investment Adviser, Merrill Lynch Investment Managers, L.P., Merrill Lynch
Investment Managers International Limited and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), employees of certain
selected securities dealers, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class I shares of the Fund at net
asset value. The Fund realizes economies of scale and reduction of sales-
related expenses by virtue of the familiarity of these persons with the Fund.
Employees and Trustees wishing to purchase shares of the Fund must satisfy the
Fund's suitability standards.

17
<PAGE> 348

Class I and Class A shares are also offered at net asset value to
participants in certain investment programs including certain purchases in
connection with certain programs sponsored by the Investment Adviser or its
affiliates and certain transaction fee programs.

Acquisition of Certain Investment Companies. Class A shares may be offered
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.

DISTRIBUTION PLAN

Reference is made to "Account Choices -- Pricing of Shares" in the
Prospectus for certain information with respect to the distribution plan for
Class A shares pursuant to Rule 12b-1 under the 1940 Act (the "Distribution
Plan") with respect to the account maintenance fees paid by the Fund to the
Distributor with respect to such class.

The Distribution Plan of the Class A shares provides that the Fund pays the
Distributor an account maintenance fee relating to the Class A shares, accrued
daily and paid monthly, at the annual rate of 0.25% of the average daily net
assets of the Fund in order to compensate the Distributor and selected
securities dealers or other financial intermediaries (pursuant to
sub-agreements) in connection with account maintenance activities with respect
to Class A shares. Holders of Class A shares have exclusive voting rights with
respect to the Distribution Plan adopted with respect to such class pursuant to
which account maintenance fees are paid.

The Fund's Distribution Plan is subject to the provisions of Rule 12b-1
under the 1940 Act. In their consideration of the Distribution Plan, the
Trustees must consider all factors they deem relevant, including information as
to the benefits of the Distribution Plan to the Fund and the related class of
shareholders. The Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving the Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
a reasonable likelihood that such Distribution Plan will benefit the Fund and
its related class of shareholders. The Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the non-interested
Trustees or by the vote of the holders of a majority of the outstanding Class A
shares of the Fund. The Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the Class
A shareholders, and all material amendments are required to be approved by the
vote of Trustees, including a majority of the non-interested Trustees who have
no direct or indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further requires that
the Fund preserve copies of the Distribution Plan and any report made pursuant
to such plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.

Among other things, the Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance fees paid to the Distributor. Payments
under the Distribution Plan are based on a percentage of average daily net
assets attributable to the shares regardless of the amount of expenses incurred.

For the fiscal year ended June 30, 2000, the Fund made no payments to the
Distributor under the Rule 12b-1 Plan for the Distributor Class shares (which
were redesignated as Class A shares).

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

notice of redemption. Except for any CDSC that may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

19
<PAGE> 350

account and the social security number registered on the account. The Fund or
the Transfer Agent may temporarily suspend telephone transactions at any time.

REPURCHASE

REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES

Shareholders of the Fund who have redeemed their Class I and Class A shares
have a privilege to reinstate their accounts by purchasing Class I or Class A
shares of the Fund, as the case may be, at the net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's financial consultant within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

20
<PAGE> 351

The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of the close of regular trading on the NYSE
on each day the NYSE is open for trading based on prices at the time of closing.
Regular trading on the NYSE generally closes at 4:00 p.m., Eastern time. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The NYSE is not open for
trading on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

The per share net asset value of Class A shares generally will be lower
than the per share net asset value of Class I shares, reflecting the daily
expense accruals of the account maintenance fees applicable with respect to
Class A shares. It is expected, however, that the per share net asset value of
the two classes of the Fund will tend to converge (although not necessarily
meet) immediately after the payment of dividends which will differ by
approximately the amount of the expense accrual differentials between the
classes.

Generally, trading in non-U.S. securities, as well as U.S. government
securities and money market instruments, is substantially completed each day at
various times prior to the close of regular trading on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of regular trading on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of regular trading
on the NYSE that may not be reflected in the computation of the Fund's net asset
value.

21
<PAGE> 352

denominator of which is the aggregate net asset value of the Fund as of such
time on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in the Fund by all
investors in the Fund. The percentage so determined will then be applied to
determine the value of the investor's interest in the Fund after the close of
regular trading on the NYSE on the next determination of net asset value of the
Fund.

COMPUTATION OF OFFERING PRICE PER SHARE

No Class A shares were outstanding on June 30, 2000. An illustration of the
computation of the offering price for Class I shares of the Fund based on the
net asset value of the Fund's shares on June 30, 2000 is as follows:

<TABLE>
<S> <C>
Net Assets.................................................. $32,233,064
-----------
Number of Shares Outstanding................................ 1,884,037
-----------
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 17.11
Sales Charge (for Class I Shares; 5.25% of Offering Price;
(5.54% of net amount invested))*.......................... 0.95
-----------
Offering Price.............................................. $ 18.06
===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

22
<PAGE> 353

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $150,958 $-0-
1999 $247,112 $-0-
1998 $195,891 $-0-
</TABLE>

The Board of Trustees of the Trust has considered the possibility of
seeking to recapture for the benefit of the Fund brokerage commissions and other
expenses of portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund to the
Investment Adviser. After considering all factors deemed relevant, the Board of
Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.

23
<PAGE> 354

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

Shareholders considering transferring their Class I or Class A shares from
a selected securities dealer or other financial intermediary to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class I or Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class I or Class A shares.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class I and Class A shares. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege and any
shares used in an exchange must have been held by the shareholder for at least
15 days. Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. Exercise
of the exchange privilege is

24
<PAGE> 355

treated as a sale of the exchanged shares and a purchase of the acquired shares
for Federal income tax purposes.

Exchanges of Class I and Class A Shares. Under the Fund's pricing system,
Class I shareholders may exchange Class I shares of the Fund for Class I shares
of a second Mercury mutual fund. If the Class I shareholder wants to exchange
Class I shares for shares of a second Mercury mutual fund, but does not hold
Class I shares of the second fund in his or her account at the time of exchange
and is not otherwise eligible to acquire Class I shares of the second fund, the
shareholder will receive Class A shares of the second fund as a result of the
exchange. Class A shares also may be exchanged for Class I shares of a second
Mercury mutual fund at any time as long as, at the time of the exchange, the
shareholder is eligible to acquire Class I shares of any Mercury mutual fund.

Exchanges of Class I or Class A shares outstanding ("outstanding Class I or
Class A shares") for Class I or Class A shares of another Mercury mutual fund,
or for Class A shares of Summit ("new Class I or Class A shares") are transacted
on the basis of relative net asset value per Class I or Class A share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class I or Class A shares and the
sales charge payable at the time of the exchange on the new Class I or Class A
shares. With respect to outstanding Class I or Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class I or
Class A shares in the initial purchase and any subsequent exchange. Class I or
Class A shares issued pursuant to dividend reinvestment are sold on a no-load
basis. For purposes of the exchange privilege, Class I and Class A shares
acquired through dividend reinvestment shall be deemed to have been sold with a
sales charge equal to the sales charge previously paid on the Class I or Class A
shares on which the dividend was paid. Based on this formula, Class I and Class
A shares of the Fund generally may be exchanged into the Class I and Class A
shares, respectively, of the other funds with a reduced or without a sales
charge.

Exchanges for Shares of a Money Market Fund. Class I and Class A shares are
exchangeable for Class A shares of Summit. Class A shares of Summit have an
exchange privilege back into Class I or Class A shares of affiliate-advised
Funds. This exchange privilege does not apply with respect to certain fee-based
programs for which alternative exchange arrangements may exist. Please see your
financial consultant for further information.

FEE-BASED PROGRAMS

25
<PAGE> 356

fee based on the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial sales charges and account maintenance fees) in order for the investment
not to be subject to Program fees. Additional information regarding certain
specific Programs (including charges and limitations on transferability
applicable to shares that may be held in such Programs) is available in each
such Program's client agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if he or she is an eligible Class I investor) or
Class A shares at the applicable public offering price. These purchases may be
made either through the shareholder's securities dealer or by mail directly to
the Transfer Agent, acting as agent for such securities dealer. You may also add
to your account by automatically investing a specific amount in the Fund on a
periodic basis through your selected securities dealer or other financial
intermediary. The current minimum for such automatic additional investments is
$100. This minimum may be waived or revised under certain circumstances.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

26
<PAGE> 357

after the close of regular trading on the NYSE on the following business day.
The check for the withdrawal payment will be mailed, or the direct deposit for
withdrawal payment will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends on all shares in
the Investment Account are reinvested automatically in Fund shares. A
shareholder's systematic withdrawal plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock or securities or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies; and (2) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies). In addition, in order not to be subject to
Federal taxation, the Fund must distribute to its shareholders at least 90% of
its investment company taxable income earned in each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, annually. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. The per share
dividends on Class A shares will be lower than the per share dividends on Class
I shares as a result of the account maintenance fees applicable with respect to
the Class A shares. See "Pricing of Shares -- Determination of Net Asset Value."
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order.

27
<PAGE> 358

continue distributing to shareholders all of the excess of net long-term capital
gain over net short-term capital loss on sales of securities. If the net asset
value of shares of the Fund should, by reason of a distribution of realized
capital gains, be reduced below a shareholder's cost, such distribution would to
that extent be a return of capital to that shareholder even though taxable to
the shareholder, and a sale of shares by a shareholder at net asset value at
that time would result in a capital loss for Federal income tax purposes.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I and Class A
shares in accordance with a formula specified by the Commission.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class I and Class A
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
charges will be borne exclusively by Class A.

calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average rates of return reflect
compounding of return; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
------ ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class I*.................... -18.60% 4.81% 8.54% 9.73% (Since 9/20/85)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In order to reflect the reduced sales charges in the case of Class I or
Class A shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares," respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge and therefore may reflect greater
total return since, due to the reduced sales charges or the waiver of sales
charges, a lower amount of expenses is deducted.

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Russell 2000 Index, Standard & Poor's 500 Composite Stock Price Index and other
published indexes. When comparing its performance to a market index, the Fund
may refer to various statistical measures derived from the historic performance
of the Fund and the index, such as standard deviation and beta. In addition, the
Fund may refer in advertising or sales literature to (i) mutual fund performance
ratings, rankings and comparisons (including risk-adjusted ratings, rankings and
comparisons), (ii) other comparisons of mutual fund data including assets,
expenses, fees and other data, and (iii) other discussions reported in or
assigned by Barron's, Business Week, CDA Investment Technology, Inc., Financial
World, Forbes Magazine, Fortune Magazine, Lipper Inc., Money Magazine, U.S. News
& World Report, The Wall Street Journal and other industry publications. The
Fund may also make reference to awards that may be given to the Investment
Adviser. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

29
<PAGE> 360

would share pro rata in the net assets of the fund available for distribution to
shareholders. If they deem it advisable and in the best interest of
shareholders, the Board of Trustees may create additional classes of shares. The
Board of Trustees has created ten funds and ten series of shares, and may create
additional funds and series in the future, which have separate assets and
liabilities.

ISSUANCE OF FUND SHARES FOR SECURITIES

30
<PAGE> 361

Fund, (b) are liquid and not subject to restrictions on resale, and (c) have a
value that is readily ascertainable via listing on or trading in a recognized
United States or international exchange or market.

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109-3661, acts as custodian of the Fund's assets (the "Custodian"). Under its
contract with the Trust, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Trust to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

31
<PAGE> 362

ADDITIONAL INFORMATION

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

MLSIP, PO Box 30532, New Brunswick, NJ 08989 - 14.26% of Class I shares.

New Providence Investment Trust, 1525 W. Wt. Harris Blvd. NC-1151,
Charlotte, NC 28288 -- 9.64% of Class I shares.

Merrill Lynch Investment Managers L.P., 725 S. Figueroa St., Ste. 4000,
Los Angeles, CA 90017-5400 -- 100.00% of Class A shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 10.31% of Class I shares.

National Investor Services, 55 Water Street, FL 32, New York, NY
10041-3299 -- 8.64% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 8.61% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.18% of the Fund's outstanding shares.

32
<PAGE> 363

Code #: MHW-SAI-1060-1000
<PAGE> 364

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW INTERNATIONAL VALUE FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW International Value Fund (the "Fund") is a fund of Mercury HW
Funds (the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to provide current income and long term growth
of income, accompanied by growth of capital. The Fund seeks to achieve its
investment objective by investing primarily in international stocks. No
assurance can be given that the investment objective of the Fund will be
realized. For more information on the Fund's investment objective and policies,
see "Investment Objective and Policies."

The Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. These alternatives permit an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 365

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 5
Foreign Securities........................................ 7
Foreign Currency Options and Related Risks................ 7
Forward Foreign Currency Exchange Contracts............... 8
Foreign Investment Risks.................................. 9
Swap Agreements........................................... 11
Illiquid Securities....................................... 11
Borrowing................................................. 12
When-Issued Securities.................................... 12
Real Estate Investment Trusts............................. 13
Shares of Other Investment Companies...................... 13
Limited Partnerships...................................... 13
Short Sales Against-the-Box............................... 13
Corporate Loans........................................... 13
Initial Public Offerings.................................. 13
Temporary Defensive Position.............................. 13
Management of the Fund...................................... 14
Advisory Arrangements..................................... 15
Accounting and Administrative Services.................... 17
Code of Ethics............................................ 17
Purchase of Shares.......................................... 18
Initial Sales Charge Alternatives -- Class I and Class A
Shares.................................................. 19
Reduced Initial Sales Charges............................. 20
Deferred Sales Charge Alternatives -- Class B and Class C
Shares.................................................. 21
Distribution Plans........................................ 24
Limitations on the Payment of Deferred Sales Charges...... 25
Redemption of Shares........................................ 25
Redemption................................................ 26
Repurchase................................................ 26
Reinstatement Privilege -- Class I and Class A Shares..... 27
Pricing of Shares........................................... 27
Determination of Net Asset Value.......................... 27
Computation of Offering Price Per Share................... 29
Portfolio Transactions and Brokerage........................ 29
Transactions in Portfolio Securities...................... 29
Shareholder Services........................................ 31
Investment Account........................................ 31
Exchange Privilege........................................ 32
Fee-Based Programs........................................ 33
Retirement Plans.......................................... 34
Automatic Investment Plans................................ 34
Automatic Dividend Reinvestment Plan...................... 34
Systematic Withdrawal Plans............................... 34
Dividends and Tax Status.................................... 35
Performance Data............................................ 37
General Information......................................... 38
Description of Shares..................................... 38
Issuance of Fund Shares for Securities.................... 39
Redemption in Kind........................................ 39
Independent Auditors...................................... 40
Custodian................................................. 40
Transfer Agent............................................ 40
Legal Counsel............................................. 40
Reports to Shareholders................................... 40
Shareholder Inquiries..................................... 40
Additional Information.................................... 40
Principal Holders......................................... 40
</TABLE>

2
<PAGE> 366

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return.
Reference is made to the discussion under "How the Fund Invests" and "Investment
Risks" in the Prospectus for information with respect to the Fund's investment
objective and policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

invest or deal in real estate. (For the purposes of this restriction,
forward foreign currency exchange contracts are not deemed to be
commodities or commodity contracts.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

Except for U.S. Treasury securities, obligations of U.S. government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities 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. The Fund will
invest in securities of such instrumentality only when the Investment Adviser is
satisfied that the credit risk with respect to any instrumentality is
acceptable.

4
<PAGE> 368

CORPORATE DEBT SECURITIES

The Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Investment Adviser's opinion comparable
in quality to corporate debt securities in which the Fund may invest. The rate
of return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.

CONVERTIBLE SECURITIES

DERIVATIVE INSTRUMENTS

fluctuations from one country to another. The Fund will mark as segregated cash,
U.S. government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily (or, as permitted by applicable regulation, enter
into certain offsetting positions), to cover its obligations under forward
contracts, swap agreements and options to avoid leveraging of the Fund.

6
<PAGE> 370

FOREIGN SECURITIES

The Fund may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
issuers based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European receipts
evidencing a similar arrangement. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and are designed for use in the U.S. securities
markets; EDRs are issued in bearer form, denominated in other currencies, and
are designed for use in European securities markets.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

The Fund may take positions in options on foreign currencies to hedge
against the risk that foreign exchange rate fluctuations will affect the value
of foreign securities the Fund holds in its portfolio or intends to purchase.
For example, if the Fund were to enter into a contract to purchase securities
denominated in a foreign currency, it could effectively fix the maximum U.S.
dollar cost of the securities by purchasing call options on that foreign
currency. Similarly, if the Fund held securities denominated in a foreign
currency and anticipated a decline in the value of that currency against the
U.S. dollar, it could hedge against such a decline by purchasing a put option on
the currency involved. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specific time. In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and investments
generally.

The quantities of currencies underlying option contracts represent odd lots
in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on a
timely basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.

Risks of Options Trading. The Fund may effectively terminate its rights or
obligations under options by entering into closing transactions. Closing
transactions permit the Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. The value of a
foreign currency option depends on the value of the underlying currency relative
to the U.S. dollar. Other factors affecting the value of an option are the time
remaining until expiration, the relationship of the exercise price to market
price, the historical price volatility of the underlying currency and general
market conditions. As a result, changes in the value of an option position may
have no relationship to the investment merit of a foreign security. Whether a
profit or loss is realized on a closing transaction depends on the price
movement of the underlying currency and the market value of the option.

Options normally have expiration dates of up to nine months. The exercise
price may be below, equal to or above the current market value of the underlying
currency. Options that expire unexercised have no value, and the Fund will
realize a loss of any premium paid and any transaction costs. Closing
transactions may be effected only by negotiating directly with the other party
to the option contract, unless a secondary market for the options develops.
Although the Fund intends to enter into foreign currency options only with
dealers which agree to enter into, and which are expected to be capable of
entering into, closing transactions with the Fund, there can be no assurance
that the Fund will be able to liquidate an option at a favorable price at any
time prior to expiration. In the event of insolvency of the counter-party, the
Fund may be unable to liquidate a foreign currency option. Accordingly, it may
not be possible to effect closing transactions with respect to certain options,
with the result that the Fund would have to exercise those options that it had
purchased in order to realize any profit.

7
<PAGE> 371

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

The Fund may enter into forward contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. The Fund will thereby be able to protect itself against
a possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.

The Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Investment Adviser believes may
rise in value relative to the U.S. dollar or to shift the Fund's exposure to
foreign currency fluctuations from one country to another. For example, when the
Investment Adviser believes that the currency of a particular foreign country
may suffer a substantial decline relative to the U.S. dollar or another
currency, it may enter into a forward contract to sell the amount of the former
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. This investment practice
generally is referred to as "cross-hedging" when another foreign currency is
used.

The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency, or (2) the Fund marks as segregated
cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, in an amount not less than the
value of the Fund's total assets committed to the consummation of the contracts.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Investment Adviser believes
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of the Fund will be served.

At or before the maturity date of a forward contract that requires the Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.

8
<PAGE> 372

The cost to the Fund of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.

Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

FOREIGN INVESTMENT RISKS

Foreign Market Risk. Because the Fund invests in foreign securities, the
Fund offers you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments that
can increase the chances that the Fund will lose money. In particular, the Fund
is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

Currency Risk and Exchange Risk. Securities in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S. dollar
decreases in value against a foreign currency, your investment in a security
denominated in that currency gains value because the currency is worth more U.S.
dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.

9
<PAGE> 373

government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these European countries. The Treaty of European Union (the
"Maastricht Treaty") seeks to set out a framework for the European Economic and
Monetary Union ("EMU") among the countries that comprise the European Union
("EU"). Among other things, EMU established a single common European currency
(the "euro") that was introduced on January 1, 1999 and is expected to replace
the existing national currencies of all EMU participants by July 1, 2002. Upon
implementation of EMU, certain securities issued in participating EU countries
(beginning with government and corporate bonds) were redenominated in euros, and
are now listed, traded, declaring dividends and making other payments only in
euros.

Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on the Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount the Fund can earn on its investments.

Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions. These problems may make it difficult for a Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

10
<PAGE> 374

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

The Fund may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded the desired return. Swap agreements are two party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. The Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the "net amount"). The
Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counter-party will be covered by marking as segregated cash, U.S.
government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio. The Fund will not enter into a swap agreement with any single party
if the net amount owed or to be received under existing contracts with that
party would exceed 5% of the Fund's assets.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
that have a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption within
seven days. The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Also market quotations are less readily
available. The judgment of the Investment Adviser may at times play a greater
role in valuing these securities than in the case of unrestricted securities. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.

11
<PAGE> 375

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. In addition, Rule 144A
securities are generally not deemed illiquid if they are freely tradable in
their primary market offshore. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

BORROWING

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

INITIAL PUBLIC OFFERINGS

TEMPORARY DEFENSIVE POSITION

13
<PAGE> 377

MANAGEMENT OF THE FUND

14
<PAGE> 378

GRACIE FERMELIA (38) -- Vice President and Assistant Secretary -- 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Director of the
Investment Adviser (since 2000); Vice President of the Investment Adviser
(1994-2000); Senior Manager, Price Waterhouse (1985 - 1994).

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter..................................... $ -0- $ -0-
Robert L. Burch III................................ $27,859 $ 34,000
John A. G. Gavin................................... $27,859 $ 25,000
Joe Grills......................................... $27,859 $232,333
Nigel Hurst-Brown.................................. $ -0- $ -0-
Robert B. Hutchinson**............................. $12,000 $ 34,000
Madeleine A. Kleiner............................... $27,859 $ 18,000
Merle T. Welshans**................................ $12,000 $ 34,000
Richard R. West.................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

ADVISORY ARRANGEMENTS

15
<PAGE> 379

Investment Adviser. The Investment Adviser performs certain of the other
administrative services and provides all office space, facilities, equipment and
necessary personnel for management of the Fund. The Investment Adviser receives
for its services to the Fund a monthly fee at an annual rate of 0.75% of the
Fund's average daily net assets. For purposes of this calculation, average daily
net assets is determined at the end of each month on the basis of the average
net assets of the Fund for each day during the month.

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid Merrill Lynch Investment Managers, L.P.
$10,327,484, $10,084,942 and $8,732,479, respectively.

Subadvisers. The Investment Adviser has entered into subadvisory agreements
with Merrill Lynch Investment Managers International Limited and Merrill Lynch
Asset Management U.K. Limited, affiliated investment advisers that are indirect
subsidiaries of Merrill Lynch & Co., Inc. The subadvisory arrangements are for
investment research, recommendations and other investment-related services to be
provided to the Fund at rates of compensation as may be agreed by the parties.
There is no increase in the aggregate fees paid by the Fund for such services.

16
<PAGE> 380

ACCOUNTING AND ADMINISTRATIVE SERVICES

CODE OF ETHICS

17
<PAGE> 381

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues four classes of shares: shares of Class I and Class A are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class I, Class A, Class B and Class C share of the Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights, except that Class A, Class B and Class C shares bear the
expenses of the ongoing account maintenance fees (also known as service fees)
and Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from the
deferred sales charge arrangements. The contingent deferred sales charges
("CDSCs"), distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class A shares, are imposed directly against those classes and not
against all assets of the Fund, and, accordingly, such charges do not affect the
net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
are calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs in relation to a particular class are borne exclusively by that
class. Class A, Class B and Class C shares each have exclusive voting rights
with respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which the account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Distribution Plan for Class A shares). Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege."

Investors should understand that the purpose and function of the initial
sales charges with respect to the Class I and Class A shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.

18
<PAGE> 382

sale of shares. For example, the fee currently charged by Merrill Lynch is
$5.35. Purchases made directly through the Transfer Agent are not subject to the
processing fee.

INITIAL SALES CHARGE ALTERNATIVES -- CLASS I AND CLASS A SHARES

Investors who prefer an initial sales charge alternative may elect to
purchase Class A shares or, if an eligible investor, Class I shares.

Investors choosing the initial sales charge alternative who are eligible to
purchase Class I shares should purchase Class I shares rather than Class A
shares, because there is an account maintenance fee imposed on Class A shares.

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.

Class I shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class I shares. Investors
who beneficially owned Investor Class shares or who currently beneficially own
Class I shares of the Fund in a shareholder account are entitled to purchase
additional Class I shares of the Fund in that account at net asset value.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by the Investment Adviser or any of its affiliates. Also eligible
to purchase Class I shares at net asset value are participants in certain
investment programs including certain managed accounts for which a trust
institution, thrift or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain programs sponsored by the Investment Adviser or its
affiliates, and investors with accounts with financial intermediaries who
participate in transaction fee programs and invest at least $250,000 for their
customers in the Fund. Class I shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the participant has $3 million or more
initially invested in affiliate-advised investment companies. In addition, Class
I shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees, to members of the Boards of investment companies
advised by the Investment Adviser or its affiliates, including the Fund, and to
employees of certain selected securities dealers or other financial
intermediaries. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises investment
discretion. Investors qualifying for significantly reduced initial sales charges
may find the initial sales charge alternative particularly attractive, because
similar sales charge reductions are not available with respect to the deferred
sales charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class A shares, the
account maintenance fee. Although some investors who previously purchased Class
I shares may no longer be eligible to purchase Class I shares of other
affiliate-advised funds, those previously purchased Class I shares, together
with Class A, Class B and Class C share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account
19
<PAGE> 383

maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class A account maintenance fees will
cause Class A shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class I shares.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.

20
<PAGE> 384

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I or Class A shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan and/or the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares with a waiver of
the CDSC upon redemption, based on similar criteria. Such Class B shares will
convert into Class A shares approximately eight years after the plan purchases
the first share of any Mercury mutual fund. Minimum purchase requirements may be
waived or varied for such plans. For additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other
arrangements, call your plan administrator or your selected securities dealer or
other financial intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Mercury mutual funds.

Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class A shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.

21
<PAGE> 385

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.

Class B shares that are redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over six years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
six-year period. A transfer of shares from a shareholder's account to another
account will be assumed to be made in the same order as a redemption.

The following table sets forth the Class B CDSC:

<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0-1....................................... 4.0%
1-2....................................... 4.0%
2-3....................................... 3.0%
3-4....................................... 3.0%
4-5....................................... 2.0%
5-6....................................... 1.0%
6 and thereafter.......................... None
</TABLE>

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.0% (the
applicable rate in the third year after purchase).

As discussed in the Prospectus under "Account Choices -- Pricing of
Shares -- Class B and C Shares -- Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an individual retirement
account ("IRA") or other retirement plan or redemption of Class B shares in
certain circumstances following the death of a Class B shareholder. In the case
of such withdrawal, the reduction or waiver applies to: (a) any partial or
complete redemption in connection with a distribution following retirement under
a tax-deferred retirement plan on attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA (certain
legal documentation may be required at the time of liquidation establishing
eligibility for qualified distribution); or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability, or if later, reasonably promptly
following completion of probate or in connection with involuntary termination of
an account in which Fund shares are held (certain legal documentation may be
required at the time of liquidation establishing eligibility for qualified
distribution).

22
<PAGE> 386

participation in certain fee-based programs of the Investment Adviser or its
affiliates; (c) redemptions in connection with participation in certain
fee-based programs of selected securities dealers and other financial
intermediaries that have agreements with the Investment Adviser or Distributor;
or (d) withdrawals through the Systematic Withdrawal Plan of up to 10% per year
of your account value at the time the plan is established. See "Shareholder
Services -- Fee-Based Programs" and "-- Systematic Withdrawal Plans."

Conversion of Class B Shares to Class A Shares. After approximately eight
years (the "Conversion Period"), Class B shares of the Fund will be converted
automatically into Class A shares of the Fund. Class A shares are subject to an
ongoing account maintenance fee of 0.25% of the average daily net assets of the
Fund but are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class A shares will occur at
least once each month (on the "Conversion Date") on the basis of the relative
net asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class A shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes.

In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class A shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to Class
A shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class A shares
of the Fund.

The Conversion Period may be modified for investors that participate in
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."

Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.

Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no Class C CDSC will be assessed
on shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends and then of shares held longest during the one-year
period. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption. The Class C CDSC
may be waived in connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Systematic Withdrawal Plans.
See "Shareholder Services -- Systematic Withdrawal Plans."

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers and other financial intermediaries (including Merrill Lynch) related to
providing distribution-related services to the Fund in connection with the sale
of the Class B and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares from the dealer's
own funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. See "Distribution
Plans" below. Imposition of the CDSC and the distribution fee on Class B and
Class C shares is limited by the National Association of Securities Dealers,
Inc. (the "NASD") asset-based sales charge rule. See "Limitations on the Payment
of Deferred Sales Charges" below.

23
<PAGE> 387

DISTRIBUTION PLANS

Reference is made to "Account Choices -- Pricing of Shares" in the
Prospectus for certain information with respect to separate distribution plans
for Class A, Class B and Class C shares pursuant to Rule 12b-1 under the 1940
Act (each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.

The Distribution Plans for each of the Class A, Class B and Class C shares
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and selected
securities dealers or other financial intermediaries (pursuant to
sub-agreements) in connection with account maintenance activities with respect
to Class A, Class B and Class C shares. Each of those classes has exclusive
voting rights with respect to the Distribution Plan adopted with respect to such
class pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote on any material changes to expenses
charged under the Class A Distribution Plan).

The Distribution Plans for each of the Class B and Class C shares provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.75% of the average daily net assets of the Fund attributable to the shares
of the relevant class in order to compensate the Distributor and selected
securities dealers or other financial intermediaries (pursuant to
sub-agreements) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
securities dealers and other financial intermediaries for selling Class B and
Class C shares of the Fund. The Distribution Plans relating to Class B and Class
C shares are designed to permit an investor to purchase Class B and Class C
shares through securities dealers and other financial intermediaries without the
assessment of an initial sales charge and at the same time permit the
Distributor to compensate securities dealers and other financial intermediaries
in connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class I and Class
A shares of the Fund in that the ongoing distribution fees and deferred sales
charges provide for the financing of the distribution of the Fund's Class B and
Class C shares.

The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the 1940 Act. In their consideration of each Distribution Plan, the
Trustees must consider all factors they deem relevant, including information as
to the benefits of each Distribution Plan to the Fund and the related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
a reasonable likelihood that such Distribution Plan will benefit the Fund and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the non-interested
Trustees or by the vote of the holders of a majority of the outstanding related
class of voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of its Distribution Plans and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.

24
<PAGE> 388

consideration in connection with their deliberations as to the continuance of
the Class B and Class C Distribution Plans. This information will be presented
annually as of December 31 of each year on a "fully allocated accrual" basis and
quarterly on a "direct expense and revenue/cash" basis. On the fully allocated
basis, revenues consist of the account maintenance fees, the distribution fees,
the CDSCs and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees, the
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.

For the fiscal year ended June 30, 2000, the Fund made payments of $7,390
to the Distributor under the Rule 12b-1 Plan for the Distributor Class shares
(which were redesignated as Class A shares). These payments were compensation
for providing distribution-related services such as advertising, printing and
mailing prospectuses to other than current shareholders, and training sales
personnel regarding the Fund.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC).

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

25
<PAGE> 389

REDEMPTION

REPURCHASE

26
<PAGE> 390

on the NYSE (generally, regular trading on the NYSE closes at 4:00 p.m., Eastern
time) and such request is received by the Fund from such selected securities
dealer or other financial intermediary not later than 30 minutes after the close
of regular trading on the NYSE on the same day.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Certain selected securities dealers and other
financial intermediaries may charge a processing fee to confirm a repurchase of
shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees
charged by other selected securities dealers may be higher or lower. Repurchases
made through the Transfer Agent, on accounts held at the Transfer Agent, are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem Fund shares as set
forth above.

REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

fees and higher transfer agency fees applicable with respect to Class B and
Class C shares of the Fund. It is expected, however, that the per share net
asset value of the four classes of the Fund will tend to converge (although not
necessarily meet) immediately after the payment of dividends which will differ
by approximately the amount of the expense accrual differentials between the
classes.

Portfolio securities, including ADRs, EDRs or Global Depositary Receipts
("GDRs"), that are traded on stock exchanges are valued at the last sale price
(regular way) on the exchange on which such securities are traded, as of the
close of regular trading on the day the securities are being valued or, lacking
any sales, at the last available bid price for long positions, and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Board of Trustees as the primary market. Long
positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last ask price. Options purchased
by the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last bid price.
Other investments, including financial futures contracts and related options,
are stated at market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Trustees. Such valuations and
procedures will be reviewed periodically by the Board of Trustees.

28
<PAGE> 392

COMPUTATION OF OFFERING PRICE PER SHARE

No Class B and Class C shares were outstanding on June 30, 2000. An
illustration of the computation of the offering price for Class I and Class A
shares of the Fund based on the net asset value of the Fund's shares on June 30,
2000 is as follows:

<TABLE>
<CAPTION>
CLASS I CLASS A
-------------- ----------
<S> <C> <C>
Net Assets.................................................. $1,393,912,805 $4,922,317
============== ==========
Number of Shares Outstanding................................ 51,010,921 180,523
============== ==========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 27.33 $ 27.27
-------------- ----------
Sales Charge (for Class I and Class A Shares; 5.25% of
Offering Price; (5.54% of net amount invested))*.......... 1.51 1.51
-------------- ----------
Offering Price.............................................. $ 28.84 $ 28.78
============== ==========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares" herein.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such
29
<PAGE> 393

countries. Brokerage commissions and other transaction costs on foreign stock
exchange transactions generally are higher than in the United States, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions. There generally is less governmental supervision and
regulation of foreign stock exchanges and brokers than in the United States.

Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, GDRs or other securities convertible into foreign equity securities. ADRs,
EDRs and GDRs may be listed on stock exchanges, or traded in over-the-counter
markets in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to negotiated commission
rates. The Fund's ability and decisions to purchase or sell portfolio securities
of foreign issuers may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Because the shares of the Fund are
redeemable on a daily basis in U.S. dollars, the Fund intends to manage the
portfolio so as to give reasonable assurance that it will be able to obtain U.S.
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have significant
effect on the Fund's portfolio strategies.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $3,301,876 $336,970
1999 $2,651,000 $328,247
1998 $2,249,821 $302,055
</TABLE>

For the fiscal year ended June 30, 2000, the brokerage commissions paid to
Merrill Lynch and its affiliates represented 10.19% of the aggregate brokerage
commissions paid and involved 10.97% of the Fund's dollar amount of transactions
involving payment of brokerage commissions.

30
<PAGE> 394

The value of the Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of June 30,
2000 was as follows:

<TABLE>
<CAPTION>
REGULAR AGGREGATE
BROKER-DEALER HOLDINGS
------------- -----------
<S> <C>
ABN AMRO Holding N.V. $15,431,424
</TABLE>

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

Shareholders interested in transferring their Class B or Class C shares
from a selected securities dealer or other financial intermediary and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent.

31
<PAGE> 395

Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from a selected securities dealer or
other financial intermediary to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at a selected securities dealer or
other financial intermediary for those shares.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class I, Class A, Class B and Class C shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege and any shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.

32
<PAGE> 396

computing the CDSC that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B shares is
"tacked" to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
another Mercury fund ("new Mercury Fund") after having held the Fund's Class B
shares for two-and-a-half years. The 3% CDSC that generally would apply to a
redemption would not apply to the exchange. Four years later the investor may
decide to redeem the Class B shares of new Mercury Fund and receive cash. There
will be no CDSC due on this redemption since by "tacking" the
two-and-a-half-year holding period of the Fund's Class B shares to the four-year
holding period for the new Mercury Fund Class B shares, the investor will be
deemed to have held the new Mercury Fund Class B shares for more than six years.

Exchanges for Shares of a Money Market Fund. Class I and Class A shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class I or Class A shares of affiliate-advised
Funds; Class B shares of Summit have an exchange privilege back into Class B or
Class C shares of affiliate-advised Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC
and toward satisfaction of any Conversion Period with respect to Class B shares.
Class B shares of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain fee-based programs for which
alternative exchange arrangements may exist. Please see your financial
consultant for further information.

Prior to October 12, 1998, exchanges from other affiliate-advised Funds
into a money market fund were directed to certain affiliate-advised money market
funds other than Summit. Shareholders who exchanged affiliate-advised Fund
shares for such other money market funds and subsequently wish to exchange those
money market fund shares for shares of the Fund will be subject to the CDSC
schedule applicable to such Fund shares, if any. The holding period for those
money market fund shares will not count toward satisfaction of the holding
period requirement for reduction of the CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period. However, the holding period for Class B or Class C shares of the Fund
received in exchange for such money market fund shares will be aggregated with
the holding period for the fund shares originally exchanged for such money
market fund shares for purposes of reducing the CDSC or satisfying the
Conversion Period.

FEE-BASED PROGRAMS

periods within such Program may be subject to a fee based on the current value
of such shares. These Programs also generally prohibit such shares from being
transferred to another account, to another broker-dealer or to the Transfer
Agent. Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales charges
and distribution and account maintenance fees) in order for the investment not
to be subject to Program fees. Additional information regarding certain specific
Programs (including charges and limitations on transferability applicable to
shares that may be held in such Programs) is available in each such Program's
client agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if he or she is an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. You may also add to your account by automatically investing a specific
amount in the Fund on a periodic basis through your selected securities dealer
or other financial intermediary. The current minimum for such automatic
additional investments is $100. This minimum may be waived or revised under
certain circumstances.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

34
<PAGE> 398

With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class A shares, a
shareholder must make a new election to join the systematic withdrawal program
with respect to the Class A shares. If an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her financial consultant.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities or foreign
currencies, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of stock, securities, or
foreign currencies or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies; and (2) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies). In addition, in order not to be subject to Federal taxation, the
Fund must distribute to its shareholders at least 90% of its investment company
taxable income earned in each year.

shares as a result of the account maintenance and distribution fees applicable
to the Class B and Class C shares. Similarly, the per share dividends on Class A
shares will be lower than the per share dividends on Class I shares as a result
of the account maintenance fees applicable with respect to the Class A shares.
See "Pricing of Shares -- Determination of Net Asset Value." Shares are issued
and outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order.

Special rules apply to the treatment of certain forward foreign currency
exchange contracts (Section 1256 contracts) held by the Fund. At the end of each
year, such investments held by the Fund must be "marked to market" for Federal
income tax purposes; that is, treated as having been sold at their fair market
value on the last day of the Fund's taxable year. Except to the extent that any
gains or losses recognized on such deemed sales and actual dispositions are
treated as "Section 988" gains or losses, as described below, sixty percent of
any such gains or losses will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss.

Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or loss. Similarly, gains or losses
on forward foreign currency exchange contracts or dispositions of debt
securities denominated in a foreign currency attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to in the Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, and any ordinary
dividend distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, thereby reducing each shareholder's basis in his or her Fund
shares.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I, Class A, Class
B and Class C shares in accordance with a formula specified by the Commission.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class I and Class A
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period as in the case of Class B and
Class C shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that account
maintenance and the distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE SINCE
YEAR YEARS INCEPTION
----- ----- ---------
<S> <C> <C> <C> <C>
Class I*.............................. 15.60% 13.38% 13.31% (Since 10/1/90)
Class A*.............................. 15.36% N/A 16.26% (Since 6/2/99)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In order to reflect the reduced sales charges in the case of Class I or
Class A shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take

37
<PAGE> 401

into account the CDSC and therefore may reflect greater total return since, due
to the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) Index, Standard
& Poor's 500 Composite Stock Price Index and other published indexes. When
comparing its performance to a market index, the Fund may refer to various
statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, the Fund may refer in
advertising or sales literature to (i) mutual fund performance ratings, rankings
and comparisons (including risk-adjusted ratings, rankings and comparisons),
(ii) other comparisons of mutual fund data including assets, expenses, fees and
other data, and (iii) other discussions reported in or assigned by Barron's,
Business Week, CDA Investment Technology, Inc., Financial World, Forbes
Magazine, Fortune Magazine, Lipper Inc., Money Magazine, U.S. News & World
Report, The Wall Street Journal and other industry publications. The Fund may
also make reference to awards that may be given to the Investment Adviser. As
with other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the Trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share,
except that the Class A, B and C shares are subject to distribution and account
maintenance fees payable under the Plans of Distribution. Upon a fund's
liquidation, all shareholders would share pro rata in the net assets of the fund
available for distribution to shareholders. If they deem it advisable and in the
best interest of shareholders, the Board of Trustees may create additional
classes of shares. The Board of Trustees has created ten funds and ten series of
shares, and may create additional funds and series in the future, which have
separate assets and liabilities.

38
<PAGE> 402

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

39
<PAGE> 403

INDEPENDENT AUDITORS

CUSTODIAN

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

The Care Group LLC, PO Box 30532, New Brunswick, NJ 08989 -- 51.10% of
Class A shares.

Martin, Tate, Morrow & Marston, PO Box 30532, New Brunswick, NJ
08989 -- 10.15% of Class A shares.

40
<PAGE> 404

Worldwide Flight Services, Inc., PO Box 30532, New Brunswick, NJ
08989 -- 9.17% of Class A shares.

Abell Corp., PO Box 30532, New Brunswick, NJ 08989 -- 7.85% of Class A
shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 27.87% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 10.67% of Class I shares.

Salomon Smith Barney, Inc., 333 W. 34th Street, New York, NY
10001-2402 -- 5.09% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.01% of the Fund's outstanding shares.

41
<PAGE> 405

Code #: MHW-SAI-1030-1000
<PAGE> 406

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW GLOBAL VALUE FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Global Value Fund (the "Fund") is a fund of the Mercury HW Funds
(the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to provide current income and long-term growth
of income, accompanied by growth of capital. The Fund seeks to achieve its
investment objective by investing primarily in U.S. and international stocks. No
assurance can be given that the investment objective of the Fund will be
realized. For more information on the Fund's investment objective and policies,
see "Investment Objective and Policies."

The Fund offers a single class (Class I) of shares. Only certain investors
are eligible to purchase Class I shares. See "Purchase of Shares."

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 407

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 5
Foreign Securities........................................ 7
Foreign Currency Options and Related Risks................ 7
Forward Foreign Currency Exchange Contracts............... 8
Foreign Investment Risks.................................. 9
Swap Agreements........................................... 11
Illiquid Securities....................................... 11
Borrowing................................................. 12
When-Issued Securities.................................... 12
Real Estate Investment Trusts............................. 13
Shares of Other Investment Companies...................... 13
Limited Partnerships...................................... 13
Short Sales Against-the-Box............................... 13
Corporate Loans........................................... 13
Initial Public Offerings.................................. 13
Temporary Defensive Position.............................. 13
Management of the Fund...................................... 14
Advisory Arrangements..................................... 15
Accounting and Administrative Services.................... 17
Code of Ethics............................................ 17
Purchase of Shares.......................................... 18
Class I Shares............................................ 18
Reduced Initial Sales Charges............................. 19
Redemption of Shares........................................ 20
Redemption................................................ 21
Repurchase................................................ 22
Reinstatement Privilege -- Class I Shares................. 22
Pricing of Shares........................................... 23
Determination of Net Asset Value.......................... 23
Computation of Offering Price Per Share................... 24
Portfolio Transactions and Brokerage........................ 24
Transactions in Portfolio Securities...................... 24
Shareholder Services........................................ 26
Investment Account........................................ 26
Exchange Privilege........................................ 27
Fee-Based Programs........................................ 27
Retirement Plans.......................................... 28
Automatic Investment Plans................................ 28
Automatic Dividend Reinvestment Plan...................... 28
Systematic Withdrawal Plans............................... 28
Dividends and Tax Status.................................... 29
Performance Data............................................ 30
General Information......................................... 32
Description of Shares..................................... 32
Issuance of Fund Shares for Securities.................... 33
Redemption in Kind........................................ 33
Independent Auditors...................................... 33
Custodian................................................. 33
Transfer Agent............................................ 33
Legal Counsel............................................. 33
Reports to Shareholders................................... 33
Shareholder Inquiries..................................... 34
Additional Information.................................... 34
Principal Holders......................................... 34
</TABLE>

2
<PAGE> 408

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

3
<PAGE> 409

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

Except for U.S. Treasury securities, obligations of U.S. government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities 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 U.S. itself in the event the
agency or instrumentality does not meet its commitment. The Fund will invest in
securities of such

4
<PAGE> 410

instrumentality only when the Investment Adviser is satisfied that the credit
risk with respect to any instrumentality is acceptable.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

DERIVATIVE INSTRUMENTS

5
<PAGE> 411

techniques to hedge against changes in interest rates, foreign currency exchange
rates, or securities prices or as part of its overall investment strategies. The
Fund may also purchase and sell options relating to foreign currencies for the
purpose of increasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another. The Fund will mark as
segregated cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions), to cover its obligations
under forward contracts, swap agreements and options to avoid leveraging of the
Fund.

6
<PAGE> 412

FOREIGN SECURITIES

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

7
<PAGE> 413

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency, or (2) the Fund maintains in a
segregated account cash, U.S. government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily, in an amount not less than
the value of the Fund's total assets committed to the consummation of the
contracts. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment decisions
made with regard to overall diversification strategies. However, the Investment
Adviser believes it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the Fund will be
served.

8
<PAGE> 414

FOREIGN INVESTMENT RISKS

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

9
<PAGE> 415

10
<PAGE> 416

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

ILLIQUID SECURITIES

11
<PAGE> 417

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. In addition, Rule 144A
securities are generally not deemed illiquid if they are freely tradable in
their primary market offshore. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

BORROWING

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

INITIAL PUBLIC OFFERINGS

TEMPORARY DEFENSIVE POSITION

13
<PAGE> 419

MANAGEMENT OF THE FUND

14
<PAGE> 420

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

ADVISORY ARRANGEMENTS

15
<PAGE> 421

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, as a result of its agreement to limit Fund expenses,
Merrill Lynch Investment Managers, L.P. waived its fee in the amounts of
$52,639, $52,154 and $44,469, respectively. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid no advisory fees and Merrill Lynch Investment
Managers, L.P. reimbursed the Fund in the amounts of $8,974, $16,239 and
$67,175, respectively.

ACCOUNTING AND ADMINISTRATIVE SERVICES

CODE OF ETHICS

17
<PAGE> 423

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues a single class (Class I) of shares. Each share of the Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights.

CLASS I SHARES

Class I shares will be subject to an initial sales charge, unless you
qualify for a reduction or waiver of the sales charge. See "Reduced Initial
Sales Charges."

18
<PAGE> 424

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon shares
issued as a result of the automatic reinvestment of dividends.

19
<PAGE> 425

Intent executed within 90 days of such purchase if the Distributor is informed
in writing of this intent within such 90-day period. The value of Class I shares
of the Fund and of other Mercury mutual funds presently held, at cost or maximum
offering price (whichever is higher), on the date of the first purchase under
the Letter of Intent, may be included as a credit toward the completion of such
Letter, but the reduced sales charge applicable to the amount covered by such
Letter will be applied only to new purchases. If the total amount of shares does
not equal the amount stated in the Letter of Intent (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the execution of such
Letter, the difference between the sales charge on the Class I shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class I shares equal to 5.0% of the intended
amount will be held in escrow during the 13-month period (while remaining
registered in the name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.0% of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be subject
to a further reduced sales charge based on the right of accumulation, the
purchaser will be entitled on that purchase and subsequent purchases to that
further reduced percentage sales charge but there will be no retroactive
reduction of the sales charges on any previous purchase.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

20
<PAGE> 426

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

be refused if the caller is unable to provide: the account number, the name and
address registered on the account and the social security number registered on
the account. The Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.

REPURCHASE

REINSTATEMENT PRIVILEGE -- CLASS I SHARES

22
<PAGE> 428

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

Portfolio securities, including ADRs, EDRs or GDRs, that are traded on
stock exchanges are valued at the last sale price (regular way) on the exchange
on which such securities are traded, as of the close of regular trading on the
day the securities are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Long positions in securities traded
in the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC market prior to the
time of valuation. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last ask price. Options purchased by the Fund are valued at their
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for shares of the
Fund based on the net asset value of the Fund's shares on June 30, 2000 is as
follows:

<TABLE>
<S> <C>
Net Assets.................................................. $6,410,672
==========
Number of Shares Outstanding................................ 588,825
==========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 10.89
Sales Charge (for Class I Shares; 5.25% of Offering Price;
(5.54% of net amount invested))*.......................... .60
----------
Offering Price.............................................. $ 11.49
==========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

24
<PAGE> 430

are higher than in the United States, although the Fund will endeavor to achieve
the best net results in effecting its portfolio transactions. There generally is
less governmental supervision and regulation of foreign stock exchanges and
brokers than in the United States.

Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, Global Depositary Receipts ("GDRs") or other securities convertible into
foreign equity securities. ADRs, EDRs and GDRs may be listed on stock exchanges,
or traded in over-the-counter markets in the United States or Europe, as the
case may be. ADRs, like other securities traded in the United States, will be
subject to negotiated commission rates. The Fund's ability and decisions to
purchase or sell portfolio securities of foreign issuers may be affected by laws
or regulations relating to the convertibility and repatriation of assets.
Because the shares of the Fund are redeemable on a daily basis in U.S. dollars,
the Fund intends to manage the portfolio so as to give reasonable assurance that
it will be able to obtain U.S. dollars to the extent necessary to meet
anticipated redemptions. Under present conditions, it is not believed that these
considerations will have significant effect on the Fund's portfolio strategies.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $17,315 $892
1999 $11,346 $173
1998 $22,157 $414
</TABLE>

25
<PAGE> 431

For the fiscal year ended June 30, 2000, the brokerage commissions paid to
Merrill Lynch and its affiliates represented 5.15% of the aggregate brokerage
commissions paid and involved 5.33% of the Fund's dollar amount of transactions
involving payment of brokerage commissions.

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

26
<PAGE> 432

EXCHANGE PRIVILEGE

FEE-BASED PROGRAMS

27
<PAGE> 433

termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based on the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account, to another broker-dealer or to the
Transfer Agent. Additional information regarding certain specific Programs
(including charges and limitations on transferability applicable to shares that
may be held in such Programs) is available in each such Program's client
agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

28
<PAGE> 434

reinvested automatically in Fund shares. A shareholder's systematic withdrawal
plan may be terminated at any time, without a charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities or foreign
currencies, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of stock, securities, or
foreign currencies or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies; and (2) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies). In addition, in order not to be subject to Federal taxation, the
Fund must distribute to its shareholders at least 90% of its investment company
taxable income earned in each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, annually. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement of a
redemption order.

contracts, dividend income from foreign corporations and income from certain
other sources will not constitute qualified dividends. Corporate shareholders
should consult their tax advisers regarding other requirements applicable to the
dividends-received deduction. Individual shareholders are not eligible for the
dividends-received deduction.

PERFORMANCE DATA

redeemable value of such investment at the end of each period. Average annual
total return is computed assuming all dividends and distributions are reinvested
and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE SINCE
YEAR INCEPTION
----- ---------
<S> <C> <C> <C>
Class I*....................................... -1.37% 6.75% (Since 1/2/97)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the Morgan
Stanley Capital International World Index, Standard & Poor's 500 Composite Stock
Price Index and other published indexes. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, the Fund may refer in advertising or sales literature to
(i) mutual fund performance ratings, rankings and comparisons (including
risk-adjusted ratings, rankings and comparisons), (ii) other comparisons of
mutual fund data including assets, expenses, fees and other data, and (iii)
other discussions reported in or assigned by Barron's, Business Week, CDA
Investment Technology, Inc., Financial World, Forbes Magazine, Fortune Magazine,
Lipper Inc., Money Magazine, U.S. News & World Report, The Wall Street Journal
and other industry publications. The Fund may also make reference to awards that
may be given to the Investment Adviser. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

31
<PAGE> 437

GENERAL INFORMATION

DESCRIPTION OF SHARES

32
<PAGE> 438

Federal, state or local taxes which may be payable by the Fund or its
shareholders, no amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of at least 67% of the Trust's outstanding
shares at a meeting at which more than 50% of its outstanding shares are present
in person or represented by proxy. The holders of shares have no preemptive or
conversion rights. Shares when issued pursuant to the Prospectus are fully paid
and non-assessable, except as set forth above.

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

33
<PAGE> 439

year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

John F. Hotchkis, 800 W. 6th Street #728, Los Angeles, CA
90017 -- 32.57% of Class I shares.

Victoria Niles, 400 Atrium Drive, 1st Floor, Somerset, NJ
08873 -- 16.04% of Class I shares.

Sarah Ketterer, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 5.09% of Class I shares.

As of September 19, 2000, the following shareholder owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

MLSIP, P.O. Box 30532, New Brunswick, NJ 08989 -- 8.01% of Class I
shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.62% of the Fund's outstanding shares.

34
<PAGE> 440

Code #: MHW-SAI-1020-1000
<PAGE> 441

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW BALANCED FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Balanced Fund (the "Fund") is a fund of Mercury HW Funds (the
"Trust"). The Trust is a diversified, open-end, management investment company
which is organized as a Massachusetts business trust. The investment objective
of the Fund is to seek to preserve capital while producing a high total return.
The Fund seeks to achieve its investment objective by investing primarily in
stocks of U.S. companies and investment grade bonds. No assurance can be given
that the investment objective of the Fund will be realized. For more information
on the Fund's investment objective and policies, see "Investment Objective and
Policies."

------------------------

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Fund, dated October 6, 2000 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling the Fund at
1-800-236-4479 or your financial consultant or other financial intermediary or
by writing to the Fund at Financial Data Services, Inc., P.O. Box 41621,
Jacksonville, Florida 32232-1621. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement of Additional
Information is incorporated by reference into the Prospectus. The Fund's audited
financial statements are incorporated in this Statement of Additional
Information by reference to its annual report for the fiscal year ended June 30,
2000. You may request copies of the annual report at no charge by calling
1-800-236-4479 between 8:30 a.m. and 5:30 p.m. (Eastern time) on any business
day.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 442

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Municipal Obligations..................................... 5
Corporate Debt Securities................................. 6
Convertible Securities.................................... 6
Mortgage-Related Securities............................... 7
Asset-Backed Securities................................... 10
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. 10
Duration.................................................. 11
Derivative Instruments.................................... 11
Foreign Securities........................................ 13
Foreign Investment Risks.................................. 13
Swap Agreements........................................... 14
Risk Factors Relating to Investing in High Yield
Securities.............................................. 14
Illiquid Securities....................................... 15
Reverse Repurchase Agreements............................. 16
Dollar Rolls.............................................. 16
Borrowing................................................. 16
When-Issued Securities.................................... 16
Real Estate Investment Trusts............................. 17
Shares of Other Investment Companies...................... 17
Limited Partnerships...................................... 17
Short Sales Against-the-Box............................... 17
Corporate Loans........................................... 17
Initial Public Offerings.................................. 17
Temporary Defensive Position.............................. 18
Management of the Fund...................................... 18
Advisory Arrangements..................................... 20
Accounting and Administrative Services.................... 21
Code of Ethics............................................ 21
Purchase of Shares.......................................... 22
Class I and Class A Shares................................ 22
Reduced Initial Sales Charges............................. 23
Distribution Plan......................................... 25
Redemption of Shares........................................ 26
Redemption................................................ 26
Repurchase................................................ 27
Reinstatement Privilege -- Class I and Class A Shares..... 27
Pricing of Shares........................................... 28
Determination of Net Asset Value.......................... 28
Computation of Offering Price Per Share................... 29
Portfolio Transactions and Brokerage........................ 29
Transactions in Portfolio Securities...................... 29
Shareholder Services........................................ 31
Investment Account........................................ 31
Exchange Privilege........................................ 31
Fee-Based Programs........................................ 32
Retirement Plans.......................................... 33
Automatic Investment Plans................................ 33
Automatic Dividend Reinvestment Plan...................... 33
Systematic Withdrawal Plans............................... 33
Dividends and Tax Status.................................... 34
Performance Data............................................ 35
General Information......................................... 36
Description of Shares..................................... 36
Issuance of Fund Shares for Securities.................... 38
Redemption in Kind........................................ 38
Independent Auditors...................................... 38
Custodian................................................. 38
Transfer Agent............................................ 38
Legal Counsel............................................. 38
Reports to Shareholders................................... 38
Shareholder Inquiries..................................... 38
Additional Information.................................... 39
Principal Holders......................................... 39
Appendix -- Description of Ratings.......................... A-1
</TABLE>

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TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to preserve capital while producing
a high total return. Reference is made to the discussion under "How the Fund
Invests" and "Investment Risks" in the Prospectus for information with respect
to the Fund's investment objective and policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

invest or deal in real estate. (For the purposes of this restriction,
forward foreign currency exchange contracts are not deemed to be
commodities or commodity contracts.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

11. Purchase or sell foreign currencies.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

The term "bond" or "bonds" as used in the Prospectus and this Statement of
Additional Information is intended to include all manner of fixed-income
securities, debt securities, asset-backed and mortgage-backed securities and
other debt obligations unless specifically defined or the context requires
otherwise.

U.S. GOVERNMENT SECURITIES

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instrumentality only when the Investment Adviser is satisfied that the credit
risk with respect to any instrumentality is acceptable.

MUNICIPAL OBLIGATIONS

The Fund may invest in municipal obligations. The two principal
classifications of municipal bonds, notes and commercial paper are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in municipal
lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the issuance of debt. Certain lease
obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on an annual or other periodic basis. Consequently, continued
lease payments on those lease obligations containing "non-appropriation" clauses
are dependent on future legislative actions. If such legislative actions do not
occur, the holders of the lease obligations may experience difficulty in
exercising their rights, including disposition of the property.

federal alternative minimum tax on the portion of a distribution attributable to
these obligations. Interest on private activity obligations will be considered
exempt from federal income taxes; however, shareholders should consult their own
tax advisers to determine whether they may be subject to the federal alternative
minimum tax.

Resource recovery obligations are a type of municipal revenue obligation
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Usually, a private corporation will be involved and the revenue cash
flow will be supported by fees or units paid by municipalities for the use of
the facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.

Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.

A variable rate obligation is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.

Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.

Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Fund's investment objective is
dependent in part on the continuing ability of the issuers of municipal
securities in which the Fund invests to meet their obligations for the payment
of principal and interest when due. Obligations of issuers of municipal
securities are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Bankruptcy
Reform Act of 1978, as amended. Therefore, the possibility exists that, as a
result of litigation or other conditions, the ability of any issuer to pay, when
due, the principal of and interest on its municipal securities may be materially
affected.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers rated investment grade (any of the four highest grades) by a major
rating agency or, if unrated, of comparable quality in the Investment Adviser's
opinion. A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of common stock or other equity securities of the
same or a different issuer. Convertible securities rank senior to common stock
in a corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but

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lower than that afforded by a similar non-convertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying common stock.

MORTGAGE-RELATED SECURITIES

The Fund may invest in residential or commercial mortgage-related
securities, including mortgage pass-through securities, collateralized mortgage
obligations ("CMOs"), adjustable rate mortgage securities, CMO residuals,
stripped mortgage-related securities, floating and inverse floating rate
securities and tiered index bonds.

Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through 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. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose the Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to repayment has been purchased at a premium, in the event
of prepayment, the value of the premium would be lost.

There are currently three types of mortgage pass-through securities: (1)
those issued by the U.S. government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (2) those issued by private issuers that represent
an interest in or are collateralized by pass-through securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or pass-through securities without a
government guarantee but usually having some form of private credit enhancement.

Ginnie Mae is a wholly-owned United States government corporation within
the Department of Housing and Urban Development. Ginnie Mae is authorized to
guarantee, with the full faith and credit of the United States government, the
timely payment of principal and interest on securities issued by the
institutions approved by Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.

Obligations of Fannie Mae and Freddie Mac are not backed by the full faith
and credit of the United States government. In the case of obligations not
backed by the full faith and credit of the United States government, the Fund
must look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury
to meet their obligations, but the U.S. Treasury is under no obligation to lend
to Fannie Mae or Freddie Mac.

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<PAGE> 448

loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.

Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets the Fund's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private
mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Investment Adviser determines that the
securities meet the Fund's quality standards.

Collateralized Mortgage Obligations. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by whole mortgage loans or
private mortgage pass-through securities but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae,
Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be
treated as a Real Estate Mortgage Investment Conduit ("REMIC"). All future
references to CMOs also include REMICs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection through
a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies pursuant to
a rule adopted by the Commission, and the Fund may invest in the securities of
such issuers without the limitations imposed by the 1940 Act on investments by
the Fund in other investment companies. In addition, in reliance on an earlier
Commission interpretation, the Fund's investments in certain other qualifying
CMOs, which cannot or do not rely on the rule, are also not subject to the
limitation of the 1940 Act on acquiring interests in other investment companies.
In order to be able to rely on the Commission's interpretation, these CMOs must
be unmanaged, fixed asset issuers, that: (1) invest primarily in mortgage-backed
securities; (2) do not issue redeemable securities; (3) operate under general
exemptive orders exempting them from all provisions of the 1940 Act; and (4) are
not registered or regulated under the 1940 Act as investment companies. To the
extent that the Fund selects CMOs that cannot rely on the rule or do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.

The Fund may also invest in, among other things, parallel pay CMOs, Planned
Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating rate
CMOs. Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. PAC bonds generally require payments of a
specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing market index or rate. Typical
indexes would include the eleventh district cost-of-funds index ("COFI"), the
London Interbank Offered Rate ("LIBOR"), one-year Treasury yields, and ten-year
Treasury yields.

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Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise more rapidly to levels above that of
the ARM's maximum rate, the ARM's coupon may represent a below market rate of
interest. In these circumstances, the market value of the ARM security will
likely have fallen.

Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.

CMO Residuals. CMO residuals are derivative mortgage securities 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,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act of 1933, as amended ("Securities Act"). CMO residuals,
whether or not registered under such Act, may be subject to certain restrictions
on transferability, and may be deemed "illiquid" and subject to the Fund's
limitations on investment in illiquid securities.

Stripped Mortgage-Related Securities. Stripped mortgage-related securities
("SMBS") are derivative multi-class 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.

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<PAGE> 450

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 "IO class"), while
the other class will receive all of the principal (the "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 the Fund's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the security
is in one of the highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to the Fund's limitations on investment in illiquid
securities.

Inverse Floaters. An inverse floater is a debt instrument with a floating
or variable interest rate that moves in the opposite direction to the interest
rate on another security or index level. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.

ASSET-BACKED SECURITIES

The Fund may invest in various types of asset-backed securities. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through or in a pay-through structure similar to the CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objective and policies of the Fund.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage-related and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund may invest a portion of its assets in
derivative mortgage-related securities which are highly sensitive to changes in
prepayment and interest rates. The Investment Adviser will seek to manage these
risks (and potential benefits) by diversifying its investments in such
securities and through hedging techniques.

from such prepayments, and its ability to reinvest the returns of principal at
comparable yields is subject to generally prevailing interest rates at that
time. Conversely, slower than expected prepayments may effectively change a
security that was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities tend to fluctuate more in
response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.

Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.

DURATION

In selecting securities for the Fund, the Investment Adviser makes use of
the concept of duration for fixed-income securities. Duration is a measure of
the expected life of a fixed-income security. Duration incorporates a bond's
yield, coupon interest payments, final maturity and call features into one
measure. 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, the market
values of debt obligations may respond differently to changes in the level and
structure of interest rates.

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
things 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.

Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen the Fund's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.

Short futures or put options positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.

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 is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Investment Adviser will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.

DERIVATIVE INSTRUMENTS

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and securities indexes and enter into forward contracts. The Fund also may enter
into swap agreements with respect to interest rates and securities indexes. The
Fund may use these techniques to hedge against changes in interest rates, or
securities prices or as part of its overall investment strategies. The Fund will
mark as segregated cash, U.S. government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under forward contracts, swap agreements and options to avoid
leveraging of the Fund.

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<PAGE> 453

FOREIGN SECURITIES

The Fund may invest in American Depositary Receipts ("ADRs") or other
securities convertible into securities of issuers based in foreign countries and
other foreign securities that can be purchased and sold in U.S. dollars. ADRs
are receipts, usually issued by a U.S. bank or trust company, evidencing
ownership of the underlying securities. Generally, ADRs are issued in registered
form, denominated in U.S. dollars, and are designed for use in the U.S.
securities markets.

FOREIGN INVESTMENT RISKS

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

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Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

A description of security ratings is attached as an Appendix. Lower-rated
or unrated (that is, high yield) securities are more likely to react to
developments affecting market risk (such as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity)
and credit risk (such as the issuer's inability to meet its obligations) than
are more highly rated securities, which react primarily to movements in the
general level of interest rates. The Investment Adviser considers both credit
risk and market risk in making investment decisions for the Fund.

that highly leveraged issuers may be unable to service their debt obligations
upon maturity. In addition, the secondary market for high yield securities,
which is concentrated in relatively few market makers, may not be as liquid as
the secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Investment Adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower-rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value prior
to the sale.

Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements that have a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemption within seven days. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments. Also
market quotations are less readily available. The judgment of the Investment
Adviser may at times play a greater role in valuing these securities than in the
case of unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

15
<PAGE> 456

security; and (4) the nature of the security and the nature of the marketplace
trades (for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (1) it must be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSROs"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the Investment
Adviser; and (2) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest. Investing in Rule 144A
securities could have the effect of increasing the level of Fund illiquidity to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements, whereby the Fund
sells securities concurrently with entering into an agreement to repurchase
those securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
limit applicable to borrowings.

DOLLAR ROLLS

The Fund may use dollar rolls as part of its investment strategy. In a
dollar roll, the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities (same
type and coupon) on a specified future date from the same party. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction.

The Fund will mark as segregated cash, U.S. government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, equal
in value to their obligations with respect to dollar rolls. Dollar rolls involve
the risk that the market value of the securities retained by the Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. If the buyer of the securities under a dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Dollar rolls are speculative techniques involving
leverage and are considered borrowings by the Fund for purposes of the limit
applicable to borrowings.

BORROWING

WHEN-ISSUED SECURITIES

16
<PAGE> 457

may be sold prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in determining the Fund's net asset
value. The Fund will also mark as segregated with its custodian cash, U.S.
government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its obligations for when-issued
securities.

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

INITIAL PUBLIC OFFERINGS

17
<PAGE> 458

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

company); Trustee or Director of 67 registered investment companies (consisting
of 72 portfolios) for which the Investment Adviser or an affiliate is the
adviser.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

19
<PAGE> 460

ADVISORY ARRANGEMENTS

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, the Fund paid Merrill Lynch Investment Managers, L.P.
$446,629, $747,848 and $761,196, respectively. For the fiscal years ended June
30, 2000 and 1999, as a result of its agreement to limit Fund expenses, Merrill
Lynch Investment Managers, L.P. waived a portion of its fee in the amounts of
$154,800 and $26,952, respectively.

ACCOUNTING AND ADMINISTRATIVE SERVICES

Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee
ranging from $16.00 to $22.00 per account (depending on the level of services
required) and certain other fees relating to special processing of sub-transfer
agency relationships. The Transfer Agent is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system.

CODE OF ETHICS

21
<PAGE> 462

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

CLASS I AND CLASS A SHARES

Investors may elect to purchase Class A shares or, if an eligible investor,
Class I shares.

Investors who are eligible to purchase Class I shares should purchase Class
I shares rather than Class A shares, because there is an account maintenance fee
imposed on Class A shares.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.

23
<PAGE> 464

of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I or Class A shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan and/or the aggregate amount invested by the plan in specified
investments. Minimum purchase requirements may be waived or varied for such
plans. For additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements, call your plan
administrator or your selected securities dealer or other financial
intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

Purchase Privileges of Certain Persons. Trustees of the Trust and of other
investment companies advised by the Investment Adviser or its affiliates,
directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes the
Investment Adviser, Merrill Lynch Investment Managers, L.P., Merrill Lynch
Investment Managers International Limited and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), employees of certain
selected securities dealers, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class I shares of the Fund at net
asset value. The Fund realizes economies of scale and reduction of sales-
related expenses by virtue of the familiarity of these persons with the Fund.
Employees and Trustees wishing to purchase shares of the Fund must satisfy the
Fund's suitability standards.

24
<PAGE> 465

DISTRIBUTION PLAN

For the fiscal year ended June 30, 2000, the Fund made payments of $33 to
the Distributor under the Rule 12b-1 Plan for the Distributor Class shares
(which were redesignated as Class A shares). These payments were compensation
for providing distribution-related services such as advertising, printing and
mailing prospectuses to other than current shareholders, and training sales
personnel regarding the Fund.

25
<PAGE> 466

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

26
<PAGE> 467

tenants who are divorced, the address has changed within the last 30 days or
share certificates have been issued on the account.

REPURCHASE

REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES

27
<PAGE> 468

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

28
<PAGE> 469

NYSE is generally 4:00 p.m., Eastern time. Any additions or withdrawals to be
effected on that day will then be effected. The investor's percentage of the
aggregate beneficial interests in the Fund will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Fund as of the time of determination on such day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Fund effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Fund as of such
time on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in the Fund by all
investors in the Fund. The percentage so determined will then be applied to
determine the value of the investor's interest in the Fund after the close of
regular trading on the NYSE on the next determination of net asset value of the
Fund.

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for Class I and
Class A shares of the Fund based on the net asset value of the Fund's shares on
June 30, 2000 is as follows:

<TABLE>
<CAPTION>
CLASS I CLASS A
----------- -------
<S> <C> <C>
Net Assets.................................................. $65,071,734 $21,340
=========== =======
Number of Shares Outstanding................................ 4,187,251 1,378
=========== =======
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 15.54 $ 15.49
Sales Charge (for Class I and Class A Shares; 5.25% of
Offering Price; (5.54% of net amount invested))*.......... 0.86 0.86
----------- -------
Offering Price.............................................. $ 16.40 $ 16.35
=========== =======
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

29
<PAGE> 470

primary beneficiary of the supplemental research services received as a result
of portfolio transactions effected for such other accounts or investment
companies.

Foreign equity securities may be held by the Fund in the form of ADRs,
other securities convertible into foreign equity securities and other foreign
securities that can be purchased and sold in U.S. dollars. ADRs may be listed on
stock exchanges, or traded in over-the-counter markets in the United States.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates. The Fund's ability and decisions to purchase or
sell portfolio securities of foreign issuers may be affected by laws or
regulations relating to the convertibility and repatriation of assets. Because
the shares of the Fund are redeemable on a daily basis in U.S. dollars, the Fund
intends to manage the portfolio so as to give reasonable assurance that it will
be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, it is not believed that these
considerations will have significant effect on the Fund's portfolio strategies.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $20,103 $-0-
1999 $26,518 $-0-
1998 $23,692 $-0-
</TABLE>

30
<PAGE> 471

factors deemed relevant, the Board of Trustees made a determination not to seek
such recapture. The Trustees will reconsider this matter from time to time.

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

EXCHANGE PRIVILEGE

the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.

FEE-BASED PROGRAMS

32
<PAGE> 473

exchange thereof to another class at net asset value. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based on the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account, to another broker-dealer or to the
Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial sales charges and
account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding certain specific Programs
(including charges and limitations on transferability applicable to shares that
may be held in such Programs) is available in each such Program's client
agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

33
<PAGE> 474

24th day of each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
shares will be redeemed at the net asset value determined after the close of
regular trading on the NYSE on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit for withdrawal payment
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's systematic
withdrawal plan may be terminated at any time, without a charge or penalty, by
the shareholder, the Fund, the Transfer Agent or the Distributor.

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock or securities or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies; and (2) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies). In addition, in order not to be subject to
Federal taxation, the Fund must distribute to its shareholders at least 90% of
its investment company taxable income earned in each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, quarterly. All net realized capital gains, if any,
are distributed to the Fund's shareholders at least annually. The per share
dividends on Class A shares will be lower than the per share dividends on Class
I shares as a result of the account maintenance fees applicable with respect to
the Class A shares. See "Pricing of Shares -- Determination of Net Asset Value."
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order.

34
<PAGE> 475

year, and all undistributed ordinary income and capital gains for the preceding
respective one-year period. The Fund intends to meet these distribution
requirements to avoid excise tax liability. The Fund also intends to continue
distributing to shareholders all of the excess of net long-term capital gain
over net short-term capital loss on sales of securities. If the net asset value
of shares of the Fund should, by reason of a distribution of realized capital
gains, be reduced below a shareholder's cost, such distribution would to that
extent be a return of capital to that shareholder even though taxable to the
shareholder, and a sale of shares by a shareholder at net asset value at that
time would result in a capital loss for Federal income tax purposes.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I and Class A
shares in accordance with a formula specified by the Commission.

average annual data, may be quoted and (2) the maximum applicable sales charges
will not be included with respect to annual or annualized rates of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
----- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class I*.................... -9.30% 7.32% 9.07% 10.20% (Since 8/13/85)
Class A*.................... N/A N/A N/A -3.63% (Since 10/12/99)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the Lehman
Brothers Government/Credit Intermediate Bond Index, Standard & Poor's 500
Composite Stock Price Index and other published indexes. When comparing its
performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. In addition, the Fund may refer in advertising
or sales literature to (i) mutual fund performance ratings, rankings and
comparisons (including risk-adjusted ratings, rankings and comparisons), (ii)
other comparisons of mutual fund data including assets, expenses, fees and other
data, and (iii) other discussions reported in or assigned by Barron's, Business
Week, CDA Investment Technology, Inc., Financial World, Forbes Magazine, Fortune
Magazine, Lipper Inc., Money Magazine, U.S. News & World Report, The Wall Street
Journal and other industry publications. The Fund may also make reference to
awards that may be given to the Investment Adviser. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

36
<PAGE> 477

beneficial interest and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interest
in the particular fund. Each share represents an interest in a fund
proportionately equal to the interest of each other share, except that the Class
A shares are subject to account maintenance fees payable under the Plan of
Distribution. Upon a fund's liquidation, all shareholders would share pro rata
in the net assets of the fund available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create additional classes of shares. The Board of Trustees has
created ten funds and ten series of shares, and may create additional funds and
series in the future, which have separate assets and liabilities.

37
<PAGE> 478

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
38
<PAGE> 479

ADDITIONAL INFORMATION

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

Sovereign Military Order of Malta Endowment, 465 California Street,
Suite 450, San Francisco, CA 94104-1814 -- 7.48% of Class I shares.

Indiana Sugars, Inc., P.O. Box 30532, New Brunswick, NJ 08989 -- 99.84%
of Class A shares.

As of September 19, 2000, the following shareholder owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 51.15% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.16% of the Fund's outstanding shares.

39
<PAGE> 480

APPENDIX -- DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

"Aaa" -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

"Aa" -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

"Baa" -- Bonds which are rated Baa are considered as medium-grade obligations
(that is, they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.

"Ba" -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

"B" -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Moody's applies numerical modifiers "1," "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
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 company
ranks in the lower end of that generic rating category.

SHORT-TERM DEBT RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of these characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above,

A-1
<PAGE> 481

but to a lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

MUNICIPAL BOND RATINGS:

Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

"A" -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB" -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its commitment on the
obligation.

Obligations rated BB and B are regarded as having significant speculative
characteristics. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS:

"A-1" -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.

FITCH IBCA, INC. AND DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

"AAA" -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

"AA" -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A-2
<PAGE> 482

"A" -- High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.

"BBB" -- Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

"BB" -- Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

"B" -- Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

PLUS (+) MINUS (--) -- Plus and minus signs may be appended to a rating to
denote relative status within major rating categories. Such suffixes are not
added to the "AAA" long-term rating category or to short-term ratings other than
"F1."

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

"B" -- Speculative. Minimal capacity for timely payment of financial commitments
plus vulnerability to near-term adverse changes in financial and economic
conditions.

A-3
<PAGE> 483

Code #: MHW-SAI-1000-1000
<PAGE> 484

STATEMENT OF ADDITIONAL INFORMATION

MERCURY TOTAL RETURN BOND FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury Total Return Bond Fund (the "Fund") is a fund of Mercury HW Funds
(the "Trust"). The Trust is a diversified, open-end management investment
company which is organized as a Massachusetts business trust. The investment
objective of Fund is to seek to maximize long-term total return. The Fund seeks
to achieve its investment objective by investing primarily in a diversified
portfolio of bonds of different maturities. No assurance can be given that the
investment objective of the Fund will be realized. For more information on the
Fund's investment objective and policies, see "Investment Objective and
Policies."

The Fund is a "feeder" fund that invests all of its assets in the Total
Return Bond Master Portfolio (the "Portfolio") of the Fund Asset Management
Master Trust (the "Master Trust"). The Portfolio has the same objective as the
Fund. All investments will be made at the Master Trust level. The Fund's
investment results will correspond directly to the investment results of the
Portfolio. There can be no assurance that the Fund will achieve its investment
objective.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 485

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 5
U.S. Government Securities................................ 5
Municipal Obligations..................................... 5
Corporate Debt Securities................................. 7
Convertible Securities.................................... 7
Mortgage-Related Securities............................... 7
Asset-Backed Securities................................... 10
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. 11
Duration.................................................. 11
Derivative Instruments.................................... 12
Foreign Securities........................................ 16
Foreign Currency Options and Related Risks................ 17
Forward Foreign Currency Exchange Contracts............... 18
Foreign Investment Risks.................................. 19
Swap Agreements........................................... 21
Risk Factors Relating to Investing in High Yield
Securities.............................................. 21
Illiquid Securities....................................... 22
Reverse Repurchase Agreements............................. 23
Dollar Rolls.............................................. 23
Borrowing................................................. 23
Loans of Portfolio Securities............................. 23
When-Issued Securities.................................... 24
Real Estate Investment Trusts............................. 24
Shares of Other Investment Companies...................... 24
Short Sales Against-the-Box............................... 24
Corporate Loans........................................... 24
Temporary Defensive Position.............................. 24
Management of the Fund...................................... 25
Management and Advisory Arrangements...................... 27
Administration Arrangements............................... 28
Code of Ethics............................................ 29
Purchase of Shares.......................................... 29
Initial Sales Charge Alternatives -- Class I and Class A
Shares.................................................. 30
Reduced Initial Sales Charges............................. 31
Deferred Sales Charge Alternatives -- Class B and Class C
Shares.................................................. 33
Distribution Plans........................................ 35
Limitations on the Payment of Deferred Sales Charges...... 37
Redemption of Shares........................................ 37
Redemption................................................ 37
Repurchase................................................ 38
Reinstatement Privilege -- Class I and Class A Shares..... 39
Pricing of Shares........................................... 39
Determination of Net Asset Value.......................... 39
Computation of Offering Price Per Share................... 40
Portfolio Transactions and Brokerage........................ 41
Transactions in Portfolio Securities...................... 41
Shareholder Services........................................ 42
Investment Account........................................ 43
Exchange Privilege........................................ 43
Fee-Based Programs........................................ 45
Retirement Plans.......................................... 45
Automatic Investment Plans................................ 45
Automatic Dividend Reinvestment Plan...................... 46
Systematic Withdrawal Plans............................... 46
Dividends and Tax Status.................................... 47
Performance Data............................................ 48
General Information......................................... 50
Description of Shares..................................... 50
Issuance of Fund Shares for Securities.................... 52
Redemption in Kind........................................ 52
Independent Auditors...................................... 52
Custodian................................................. 52
Transfer Agent............................................ 52
Legal Counsel............................................. 52
Reports to Shareholders................................... 52
Shareholder Inquiries..................................... 53
Additional Information.................................... 53
Principal Holders......................................... 53
Statement of Assets and Liabilities (Portfolio)............. 54
Report of Independent Accountants........................... 55
Appendix--Description of Ratings............................ A-1
</TABLE>

2
<PAGE> 486

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return.

The Fund is a "feeder" fund that invests all of its assets in the
Portfolio, which has the same investment objective as the Fund. All investments
will be made at the Portfolio level. This structure is sometimes called a
"master/feeder" structure. The Fund's investment results will correspond
directly to the investment results of the Portfolio. For simplicity, however,
this Statement of Additional Information, like the Prospectus, uses the term
"Fund" to include the Portfolio. There can be no assurance that the investment
objective of the Fund or the investment objective of the Portfolio will be
realized. The investment objective of the Fund is a fundamental policy of the
Fund and may not be changed without the approval of a majority of the Fund's
outstanding voting securities as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). The investment objective of the Portfolio is a
fundamental policy of the Portfolio and may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities as defined in the
1940 Act. Reference is made to the discussion under "How the Fund Invests" and
"Investment Risks" in the Prospectus for information with respect to the Fund's
and the Portfolio's investment objective and policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under the 1940 Act, the vote of
the holders of a "majority" of the Fund's outstanding voting securities means
the vote of the holders of the lesser of (1) 67% of the shares of the Fund
represented at a meeting at which the holders of more than 50% of its
outstanding shares are represented or (2) more than 50% of the outstanding
shares.

Except as noted, the Fund may not:

1. Purchase any security, other than obligations of the U.S. government,
its agencies, or instrumentalities ("U.S. government securities"), if
as a result: (i) with respect to 75% of its total assets, more than 5%
of the Fund's total assets (determined at the time of investment) would
then be invested in securities of a single issuer; or (ii) more than
25% of the Fund's total assets (determined at the time of investment)
would be invested in one or more issuers having their principal
business activities in a single industry; provided that the Fund may
invest all of its assets in an open-end management investment company,
or portfolio thereof, with substantially the same investment objective
and policies as the Fund, without regard to the limitations set forth
in this paragraph.

4. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings. (The Fund may borrow from banks or
enter into reverse repurchase agreements and pledge assets in
connection therewith, but only if immediately after each borrowing
there is asset coverage of 300%.)

5. Purchase any security (other than U.S. government securities) if as a
result, with respect to 75% of the Fund's total assets, the Fund would
then hold more than 10% of the outstanding voting securities of an
issuer; provided that the Fund may invest all of its assets in an
open-end management investment company, or portfolio thereof, with
substantially the same investment objective and policies as the Fund,
without regard to the limitations set forth in this paragraph.

6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws; provided that the
purchase by the Fund of securities issued by an open-end management
investment company, or portfolio thereof, with substantially the same
investment objective and policies as the Fund shall not constitute an
underwriting for purposes of this paragraph.

7. Make investments for the purpose of exercising control or management;
provided that the Fund may invest all of its assets in an open-end
management investment company, or portfolio thereof, with substantially
the same investment objective and policies as the Fund, without regard
to the limitations set forth in this paragraph.

8. Participate on a joint or joint and several basis in any trading
account in securities.

The Fund has adopted the following non-fundamental investment restriction.
The Fund may not make loans, (i) except through repurchase agreements or (ii)
having an aggregate market value in excess of one-third of the total assets of
the Fund. The acquisition of debt obligations in which the Fund may invest is
not considered the making of a loan.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

The Fund may buy and sell commodities and commodity contracts and real
estate and interests in real estate to the extent set forth in the Prospectus
and Statement of Additional Information.

REPURCHASE AGREEMENTS

A repurchase agreement is an agreement where the seller agrees to
repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is more than
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the repurchase agreement. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of these instruments declines, the Fund will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
In such circumstances, the Fund could experience a delay or be prevented from
disposing of the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

4
<PAGE> 488

BONDS

U.S. GOVERNMENT SECURITIES

MUNICIPAL OBLIGATIONS

5
<PAGE> 489

Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the Federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from Federal income
taxes; however, shareholders should consult their own tax advisers to determine
whether they may be subject to the Federal alternative minimum tax.

6
<PAGE> 490

or other conditions, the ability of any issuer to pay, when due, the principal
of and interest on its municipal securities may be materially affected.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the Prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.

MORTGAGE-RELATED SECURITIES

interest in or are collateralized by pass-through securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or pass-through securities without a
government guarantee but usually having some form of private credit enhancement.

Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued
by originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.

8
<PAGE> 492

companies. In order to be able to rely on the Commission's interpretation, these
CMOs must be unmanaged, fixed asset issuers, that: (1) invest primarily in
mortgage-backed securities; (2) do not issue redeemable securities; (3) operate
under general exemptive orders exempting them from all provisions of the 1940
Act; and (4) are not registered or regulated under the 1940 Act as investment
companies. To the extent that the Fund selects CMOs that cannot rely on the rule
or do not meet the above requirements, the Fund may not invest more than 10% of
its assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.

9
<PAGE> 493

rate adjustments are based. As described below with respect to stripped
mortgage-related securities, in certain circumstances the Fund may fail to
recoup fully its initial investment in a CMO residual.

ASSET-BACKED SECURITIES

10
<PAGE> 494

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, the Fund's ability to maintain positions in high-yielding
mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. Conversely, slower than expected
prepayments may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities tend to fluctuate more in response to interest rate changes, leading
to increased net asset value volatility. Prepayments may also result in the
realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the loss of opportunity to realize capital gains
in the future from possible future appreciation.

DURATION

11
<PAGE> 495

DERIVATIVE INSTRUMENTS

To the extent consistent with its investment objective and policies and the
investment restrictions listed in this Statement of Additional Information, the
Fund may purchase and write call and put options on securities, securities
indexes and foreign currencies and enter into forward contracts, futures
contracts and use options on futures contracts. The Fund also may enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Fund may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates, or securities prices or as
part of its overall investment strategies. The Fund may also purchase and sell
options relating to foreign currencies for the purpose of increasing exposure to
a foreign currency or to shift exposure to foreign currency fluctuations from
one country to another. The Fund will mark as segregated cash, U.S. government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under forward contracts,
futures contracts, swap agreements and options to avoid leveraging of the Fund.

12
<PAGE> 496

Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate, foreign currency or index futures contracts. An interest rate,
foreign currency or index futures contract provides for the future sale by one
party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.

The Fund may purchase and write call and put options on futures. Options on
futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.

The Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. The Fund's hedging activities may include sales of futures contracts
as an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.

The Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or future commission merchant a
specified amount of cash or U.S. government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon

13
<PAGE> 497

termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, the Fund
will mark to market its open futures positions.

The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, the Fund will maintain with its custodian (and mark-to-market
on a daily basis) cash, U.S. government securities, equity securities or other
liquid, unencumbered assets that, when added to the amounts deposited as margin
with a futures commission merchant as the custodian, are equal to the market
value of the futures contract. Alternatively, the Fund may "cover" its position
by purchasing a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Fund.

When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited as margin with a futures commission merchant as the custodian,
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).

When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited as margin with a futures commission merchant as
the custodian, equal the total market value of the futures contract underlying
the call option. Alternatively, the Fund may cover its position by entering into
a long position in the same futures contract at a price no higher than the
strike price of the call option, by owning the instruments underlying the
futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Fund.

When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.

14
<PAGE> 498

rules, or to non-hedging positions for which the aggregate initial margin and
premiums will not exceed 5% of the liquidation value of the Portfolio's assets.

Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.

The particular securities comprising the index underlying the index
financial futures contract may vary from the securities held by the Fund. As a
result, the Fund's ability to hedge effectively all or a portion of the value of
its securities through the use of such financial futures contracts will depend
in part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The correlation between futures contracts on
U.S. government securities and the securities held by the Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such futures contracts and the prices of securities
held by the Fund may be greater. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.

The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. The Fund will enter into a futures position only if,
in the judgment of the Investment Adviser, there appears to be an actively
traded secondary market for such futures contracts.

The successful use of transactions in futures and related options also
depends on the ability of the Investment Adviser to forecast correctly the
direction and extent of interest rate movements within a given time frame. To
the extent interest rates remain stable during the period in which a futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on a hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.

Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by the
Fund of margin deposits in

15
<PAGE> 499

the event of the bankruptcy of a broker with whom the Fund has an open position
in a financial futures contract.

The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased.

FOREIGN SECURITIES

The Fund may also invest in fixed-income securities of issuers located in
emerging foreign markets. Emerging markets generally include every country in
the world other than the United States, Canada, Japan, Australia, Malaysia, New
Zealand, Hong Kong, South Korea, Singapore and most Western European countries.
In determining what countries constitute emerging markets, the Investment
Adviser will consider, among other things, data, analysis and classification of
countries published or disseminated by the International Bank for Reconstruction
and Development (commonly known as the World Bank) and the International Finance
Corporation. Currently, investing in many emerging markets may not be desirable
or feasible, because of the lack of adequate custody arrangements for the Fund's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop,
the Fund expects to expand and further broaden the group of emerging markets in
which it invests.

From time to time, emerging markets have offered the opportunity for higher
returns in exchange for a higher level of risk. Accordingly, the Investment
Adviser believes that the Fund's ability to invest in emerging markets
throughout the world can assist in the overall diversification of the Fund's
portfolio.

The Fund may invest in the following types of emerging market fixed-income
securities: (1) fixed-income securities issued or guaranteed by governments,
their agencies, instrumentalities or political subdivisions, or by government
owned, controlled or sponsored entities, including central banks (collectively,
"Sovereign Debt"), including Brady Bonds (described below); (2) interests in
issuers organized and operated for the purpose of restructuring the investment
characteristics of Sovereign Debt; (3) fixed-income securities issued by banks
and other business entities; and (4) fixed-income securities denominated in or
indexed to the currencies of emerging markets. Fixed-income securities held by
the Fund may take the form of bonds, notes, bills, debentures, bank debt
obligations, short-term paper, loan participations, assignments and interests
issued by entities organized and operated for the purpose of restructuring the
investment characteristics of any of the foregoing. There is no requirement with
respect to the maturity of fixed-income securities in which the Fund may invest.

The Fund may invest in Brady Bonds and other Sovereign Debt of countries
that have restructured or are in the process of restructuring Sovereign Debt
pursuant to the Brady Plan. "Brady Bonds" are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund ("IMF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in
respect of new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank
16
<PAGE> 500

and/or the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a discount.

Emerging market fixed-income securities generally are considered to be of a
credit quality below investment grade, even though they often are not rated by
any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Investment Adviser's analysis of credit risk and its
consideration of a number of factors, including: (1) prospects for relative
economic growth among the different countries in which the Fund may invest; (2)
expected levels of inflation; (3) government policies influencing business
conditions; (4) the outlook for currency relationships; and (5) the range of the
individual investment opportunities available to international investors. The
Investment Adviser's emerging market sovereign credit analysis includes an
evaluation of the issuing country's total debt levels, currency reserve levels,
net exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular
fixed-income securities will be selected based upon a credit risk analysis of
potential issuers, the characteristics of the security, the interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, an analysis of the anticipated volatility and liquidity of the
particular debt instruments, and the tax implications to the Fund. The emerging
market fixed-income securities in which the Fund may invest are not subject to
any minimum credit quality standards.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

effected only by negotiating directly with the other party to the option
contract, unless a secondary market for the options develops. Although the Fund
intends to enter into foreign currency options only with dealers which agree to
enter into, and which are expected to be capable of entering into, closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an option at a favorable price at any time prior to expiration. In
the event of insolvency of the counter-party, the Fund may be unable to
liquidate a foreign currency option. Accordingly, it may not be possible to
effect closing transactions with respect to certain options, with the result
that the Fund would have to exercise those options that it had purchased in
order to realize any profit.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

18
<PAGE> 502

FOREIGN INVESTMENT RISKS

Foreign Market Risk. The Fund may invest a portion of its assets in foreign
securities. Foreign security investment involves special risks not present in
U.S. investments that can increase the chances that the Fund will lose money.
Prices of foreign securities may fluctuate more than prices of securities traded
in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

19
<PAGE> 503

"currency risk" which is the possibility that a stronger U.S. dollar will reduce
returns for U.S. investors investing overseas and a weak U.S. dollar will
increase returns for U.S. investors investing overseas.

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

20
<PAGE> 504

return earned thereon for some period. If the Fund cannot settle or is delayed
in settling a sale of securities, it may lose money if the value of the security
then declines or, if it has contracted to sell the security to another party,
the Fund could be liable to that party for any losses incurred.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

21
<PAGE> 505

difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower-rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value prior
to the sale.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements that have a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemption within seven days. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments. Also
market quotations are less readily available. The judgment of the Investment
Adviser may at times play a greater role in valuing these securities than in the
case of unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

22
<PAGE> 506

NRSRO, or, if unrated, be of comparable quality in the view of the Investment
Adviser; and (2) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest. Investing in Rule 144A
securities could have the effect of increasing the level of Fund illiquidity to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities. In addition, Rule 144A securities are generally
not deemed illiquid if they are freely tradable in their primary market
offshore. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.

REVERSE REPURCHASE AGREEMENTS

DOLLAR ROLLS

BORROWING

The Fund may borrow for temporary or emergency purposes. This borrowing may
be unsecured. The 1940 Act requires the Fund to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed. Borrowing subjects the Fund to
interest costs which may or may not be recovered by appreciation of the
securities purchased, and can exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. This is the
speculative factor known as leverage.

LOANS OF PORTFOLIO SECURITIES

For the purpose of achieving income, the Fund may lend its portfolio
securities, provided: (1) the loan is secured continuously by collateral
consisting of short-term, high quality debt securities, including U.S.
government securities, negotiable certificates of deposit, bankers' acceptances
or letters of credit, maintained on a daily marked-to-market basis in an amount
at least equal to the current market value of the securities loaned; (2) the
Fund may at any time call the loan and obtain the return of the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.

23
<PAGE> 507

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

TEMPORARY DEFENSIVE POSITION

certificates of deposit, bankers' acceptances, high quality commercial paper,
demand notes and repurchase agreements.

MANAGEMENT OF THE FUND

The Trustees oversee the actions of the Fund's Investment Adviser and other
service providers and decide upon matters of general policy. The Trustees also
review the actions of the Trust's officers, who conduct and supervise the daily
business operations of the Trust. The same individuals serve as Trustees of the
Master Trust. The Trustees (* denotes "interested" Trustee as defined in the
1940 Act, due to the relationship with the Investment Adviser) and officers of
the Trust are:

25
<PAGE> 509

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter..................................... $ -0- $ -0-
Robert L. Burch III................................ $27,859 $ 34,000
John A. G. Gavin................................... $27,859 $ 25,000
Joe Grills......................................... $27,859 $232,333
Nigel Hurst-Brown.................................. $ -0- $ -0-
Robert B. Hutchinson**............................. $12,000 $ 34,000
Madeleine A. Kleiner............................... $27,859 $ 18,000
Merle T. Welshans**................................ $12,000 $ 34,000
Richard R. West.................................... $27,859 $422,225
</TABLE>

---------------
* Each Trustee also serves as a Trustee of the Mercury HW Variable Trust, the
Master Trust and Merrill Lynch Investment Managers Funds, Inc. Messrs. Grills
and West also serve on the boards of other investment companies advised by
the Investment Adviser or its advisory affiliates.

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

26
<PAGE> 510

MANAGEMENT AND ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Fund currently invests all of its
assets in shares of the Portfolio. Accordingly, the Fund does not invest
directly in portfolio securities and does not require investment advisory
services. All portfolio management occurs at the level of the Master Trust. The
Master Trust has entered into an investment advisory agreement for the Portfolio
with the Investment Adviser as investment adviser (the "Advisory Agreement").
Subject to the supervision of the Trustees, the Investment Adviser is
responsible for the actual management of the Portfolio and continuously reviews
the Portfolio's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
office space, facilities, equipment and necessary personnel for management of
the Master Trust. The Investment Adviser receives for its services to the
Portfolio a monthly fee at an annual rate of 0.30% of the Portfolio's average
daily net assets. For purposes of this calculation, average daily net assets is
determined at the end of each month on the basis of the average net assets of
the Portfolio for each day during the month.

Prior to October 6, 2000, the Fund did not invest its shares in the
Portfolio and the Trust on behalf of the Fund was party to an investment
advisory agreement under which it paid Merrill Lynch Investment Managers, L.P.,
an affiliate of the Investment Adviser, a fee at the annual rate of 0.55% of the
Fund's average daily net assets. For the fiscal years ended June 30, 2000, 1999
and 1998, the Fund paid Merrill Lynch Investment Managers, L.P. $372,532,
$342,503 and $39,539, respectively. As a result of its agreement to limit Fund
expenses, for these years Merrill Lynch Investment Managers, L.P. waived a
portion of its fee in the amount of $358,311, $125,162 and $86,499,
respectively.

Securities held by the Portfolio may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients of the Investment Adviser or an affiliate when one or more clients of
the Investment Adviser or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the
Investment Adviser or an affiliate acts as manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or an affiliate during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.

Payment of Master Trust Expenses. The Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay, or cause
an affiliate to pay, for maintaining its staff and personnel and to provide
office space, facilities and necessary personnel for the Master Trust. The
Investment Adviser is also obligated to pay, or cause an affiliate to pay, the
fees of all officers and Trustees who are affiliated persons of the Investment
Adviser or any sub-adviser or of an affiliate of the Investment Adviser or any
sub-adviser. The Portfolio pays, or causes to be paid, all other expenses
incurred in the operation of the Portfolio (except to the extent paid by FAM
Distributors, Inc. (the "Distributor")), including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies, shareholder
reports, copies of the Registration Statement, charges of the custodian, any
sub-custodian and the transfer agent, expenses of portfolio transactions,
expenses of redemption of shares, Commission fees, expenses of registering the
shares under Federal, state or non-U.S. laws, fees and actual out-of-pocket
expenses of non-interested Trustees, accounting and pricing costs (including the
daily calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Portfolio. Accounting services are provided to the
Portfolio by the Investment Adviser or an affiliate of the Investment Adviser,
and the Portfolio reimburses the Investment Adviser or an affiliate of the
Investment Adviser for its costs in connection with such services.

27
<PAGE> 511

of the Investment Adviser as defined under the 1940 Act because of their
ownership of its voting securities and their power to exercise a controlling
influence over its management or policies.

Duration and Termination. Unless earlier terminated as described below, the
Advisory Agreement will continue in effect for two years from its effective
date. Thereafter, it will remain in effect from year to year if approved
annually (a) by the Board of Trustees of the Master Trust or by a majority of
the outstanding shares of the Portfolio and (b) by a majority of the Trustees of
the Master Trust who are not parties to the Advisory Agreement or interested
persons (as defined in the 1940 Act) of any such party. The Advisory Agreement
is not assignable and will automatically terminate in the event of its
assignment. In addition, such contract may be terminated by the vote of a
majority of the outstanding voting securities of the Portfolio or by the
Investment Adviser without penalty on 60 days' written notice to the other
party.

ADMINISTRATION ARRANGEMENTS

The Fund has entered into an Administration Agreement (the "Administration
Agreement") with the Investment Adviser acting as Administrator (the
"Administrator"). The Administrator receives for its services to the Fund
monthly compensation at the annual rate of 0.25% of the average daily net assets
of the Fund.

The Administration Agreement obligates the Administrator to provide certain
administrative services to the Fund and to pay, or cause its affiliates to pay,
for maintaining its staff and personnel and to provide office space, facilities
and necessary personnel for the Fund. The Administrator is also obligated to
pay, or cause its affiliates to pay, the fees of those officers and Trustees who
are affiliated persons of the Administrator or any of its affiliates. The Fund
pays, or causes to be paid, all other expenses incurred in the operation of the
Fund (except to the extent paid by the Distributor), including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, shareholder reports and prospectuses and statements of additional
information, charges of the custodian, any sub-custodian and Financial Data
Services, Inc. (the "Transfer Agent"), expenses of portfolio transactions,
expenses of redemption of shares, Commission fees, expenses of registering the
shares under Federal, state or non-U.S. laws, fees and actual out-of-pocket
expenses of Trustees who are not affiliated persons of the Administrator, or of
an affiliate of the Administrator, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. The Distributor will pay certain of the expenses
of the Fund incurred in connection with the continuous offering of its shares.
Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the 1940 Act. See "Purchase of
Shares -- Distribution Plan." Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.

Duration and Termination. Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years from its effective
date. Thereafter it will remain in effect from year to year if approved annually
(a) by the Board of Trustees and (b) by a majority of the Trustees who are not
parties to such contract or interested persons (as defined in the 1940 Act) of
any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.

Transfer Agency Services. The Transfer Agent, a subsidiary of ML & Co.,
acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer
Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives a fee ranging from $16.00 to $20.00 per
account (depending on the level of services required), and certain other fees
relating to special processing of sub-transfer agency relationships. The
Transfer Agent is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. For purposes of the Transfer Agency Agreement, the term "account"

28
<PAGE> 512

includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system.

CODE OF ETHICS

The Board of Trustees of the Master Trust and the Trust each have approved
a Code of Ethics under Rule 17j-1 of the 1940 Act that covers the Master Trust,
the Fund, the Investment Adviser and the Distributor (the "Code of Ethics"). The
Code of Ethics significantly restricts the personal investing activities of all
employees of the Investment Adviser and the Distributor and, as described below,
imposes additional, more onerous, restrictions on fund investment personnel.

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

29
<PAGE> 513

shareholders may vote upon any material changes to expenses charged under the
Distribution Plan for Class A shares). Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."

INITIAL SALES CHARGE ALTERNATIVES -- CLASS I AND CLASS A SHARES

Investors who prefer an initial sales charge alternative may elect to
purchase Class A shares or, if an eligible investor, Class I shares.

30
<PAGE> 514

the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.

Class I shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class I shares. Investors
who beneficially owned Investor Class shares or who currently beneficially own
Class I shares of the Fund in a shareholder account are entitled to purchase
additional Class I shares of the Fund in that account at net asset value.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by the Investment Adviser or any of its affiliates. Also eligible
to purchase Class I shares at net asset value are participants in certain
investment programs including certain managed accounts for which a trust
institution, thrift or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain programs sponsored by the Investment Adviser or its
affiliates, and investors with accounts with financial intermediaries who
participate in transaction fee programs and invest at least $250,000 for their
customers in the Fund. Class I shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the participant has $3 million or more
initially invested in affiliate-advised investment companies. In addition, Class
I shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees, to members of the Boards of investment companies
advised by the Investment Adviser or its affiliates, including the Fund, and to
employees of certain selected securities dealers or other financial
intermediaries. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises investment
discretion. Investors qualifying for significantly reduced initial sales charges
may find the initial sales charge alternative particularly attractive, because
similar sales charge reductions are not available with respect to the deferred
sales charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class A shares, the
account maintenance fee. Although some investors who previously purchased Class
I shares may no longer be eligible to purchase Class I shares of other
affiliate-advised funds, those previously purchased Class I shares, together
with Class A, Class B and Class C share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class A account
maintenance fees will cause Class A shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class I shares.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.

31
<PAGE> 515

(b) an amount equal to the then current net asset value or cost, whichever is
higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other Mercury mutual funds. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by the
purchaser or the purchaser's selected securities dealer or other financial
intermediary, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such confirmation.
The right of accumulation may be amended or terminated at any time. Shares held
in the name of a nominee or custodian under pension, profit-sharing, or other
employee benefit plans may not be combined with other shares to qualify for the
right of accumulation.

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I or Class A shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan and/or the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares with a waiver of
the CDSC upon redemption, based on similar criteria. Such Class B shares will
convert into Class A shares approximately ten years after the plan purchases the
first share of any Mercury mutual fund. Minimum purchase requirements may be
waived or varied for such plans. For additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other
arrangements, call your plan administrator or your selected securities dealer or
other financial intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

32
<PAGE> 516

ML & Co. and its subsidiaries (the term "subsidiaries," when used herein with
respect to ML & Co., includes the Investment Adviser, Merrill Lynch Investment
Managers, L.P., Merrill Lynch Investment Managers International Limited and
certain other entities directly or indirectly wholly owned and controlled by ML
& Co.), employees of certain selected securities dealers, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class I shares of the Fund at net asset value. The Fund realizes economies of
scale and reduction of sales-related expenses by virtue of the familiarity of
these persons with the Fund. Employees and Trustees wishing to purchase shares
of the Fund must satisfy the Fund's suitability standards.

DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES

Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class A shares of the Fund after a conversion period of approximately ten years,
and thereafter investors will be subject to lower ongoing fees.

33
<PAGE> 517

The following table sets forth the Class B CDSC:

The charge may also be reduced or waived in other instances, such as: (a)
redemptions by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers; (b) redemptions in connection with participation in certain
fee-based programs of the Investment Adviser or its affiliates; (c) redemptions
in connection with participation in certain fee-based programs of selected
securities dealers and other financial intermediaries that have agreements with
the Investment Adviser or Distributor; or (d) withdrawals through the Systematic
Withdrawal Plan of up to 10% per year of your account value at the time the plan
is established. See "Shareholder Services -- Fee-Based Programs" and
"-- Systematic Withdrawal Plans."

Conversion of Class B Shares to Class A Shares. After approximately ten
years (the "Conversion Period"), Class B shares of the Fund will be converted
automatically into Class A shares of the Fund. Class A shares are subject to an
ongoing account maintenance fee of 0.25% of the average daily net assets of the
Fund but are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class A shares will occur at
least once each month (on the "Conversion Date") on the basis of the relative
net asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class A shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes.

34
<PAGE> 518

The Conversion Period may be modified for investors that participate in
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."

Class C shares that are redeemed within one year of purchase may be subject
to a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no Class C CDSC will be assessed
on shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends and then of shares held longest during the one-year
period. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption. The Class C CDSC
may be waived in connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Systematic Withdrawal Plans.
See "Shareholder Services -- Systematic Withdrawal Plans."

DISTRIBUTION PLANS

35
<PAGE> 519

The Distribution Plans for each of the Class B and Class C shares provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.75% of the average daily net assets of the Class B and Class C shares in
order to compensate the Distributor and selected securities dealers or other
financial intermediaries (pursuant to sub-agreements) for providing shareholder
and distribution services, and bearing certain distribution-related expenses of
the Fund, including payments to securities dealers and other financial
intermediaries for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through securities dealers
and other financial intermediaries without the assessment of an initial sales
charge and at the same time permit the Distributor to compensate securities
dealers and other financial intermediaries in connection with the sale of the
Class B and Class C shares. In this regard, the purpose and function of the
ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class I and Class A shares of the Fund in that
the ongoing distribution fees and deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.

Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from each
Distribution Plan may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information will be presented annually as of December 31 of each
year on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated basis, revenues consist of the
account maintenance fees, the distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the distribution fees and
CDSCs and the expenses consist of financial consultant compensation.

For the fiscal year ended June 30, 2000, the Fund made payments of $46,828
to the Distributor under the Rule 12b-1 Plan for the Distributor Class shares
(which were redesignated as Class A shares). These payments were compensation
for providing distribution-related services such as advertising, printing and
mailing prospectuses to other than current shareholders, and training sales
personnel regarding the Fund.

36
<PAGE> 520

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

Rights of Survivorship, contra broker transactions and institutional accounts.
In certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority.

REPURCHASE

38
<PAGE> 522

REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

The principal assets of the Fund will normally be its interest in the
underlying Portfolio, which will be valued at its net asset value. Net asset
value of the Portfolio is computed by dividing the value of the securities held
by the Portfolio plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
investment advisory fees, are accrued daily.

The per share net asset value of Class A, Class B and Class C shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. Moreover, the per share net asset
value of the Class B and Class C shares of the Fund generally will be lower than
the per share net asset value of Class A shares of the Fund, reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes of the
Fund will tend to converge (although not necessarily meet) immediately after the
payment of dividends which will differ by approximately the amount of the
expense accrual differentials between the classes.

prior to the time of valuation. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market. When the Portfolio writes an option, the amount of the
premium received is recorded on the books of the Master Trust as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last ask price. Options purchased by the Portfolio are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Other
investments, including financial futures contracts and related options, are
stated at market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Master Trust. Such
valuations and procedures will be reviewed periodically by the Board of Trustees
of the Master Trust.

Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the NYSE is open for trading. The value of each investor's
(including the Fund's) interest in the Portfolio will be determined as of the
close of regular trading on the NYSE by multiplying the net asset value of the
Portfolio by the percentage, effective for that day, that represents that
investor's share of the aggregate interests in the Portfolio. The close of
regular trading on the NYSE is generally 4:00 p.m., Eastern time. Any additions
or withdrawals to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of the time of
determination on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio after the close of regular trading on the
NYSE on the next determination of net asset value of the Portfolio.

COMPUTATION OF OFFERING PRICE PER SHARE

<TABLE>
<CAPTION>
CLASS I CLASS A
------------ -----------
<S> <C> <C>
Net Assets.................................................. $100,371,857 $43,939,313
============ ===========
Number of Shares Outstanding................................ 8,140,604 3,563,165
============ ===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 12.33 $ 12.33
Sales Charge (for Class I and Class A Shares; 4.25% of
Offering Price; (4.44% of net amount invested))*.......... 0.55 0.55
------------ -----------
Offering Price.............................................. $ 12.88 $ 12.88
============ ===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

40
<PAGE> 524

Class B and Class C shares are not subject to an initial sales charge but may be
subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" herein.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

Because the Fund will invest exclusively in shares of the Portfolio, it is
expected that all transactions in portfolio securities will be entered into by
the Master Trust. Subject to policies established by the Board of Trustees of
the Master Trust, the Investment Adviser is primarily responsible for the
execution of the Master Trust's portfolio transactions and the allocation of
brokerage. The Master Trust has no obligation to deal with any broker or group
of brokers in the execution of transactions in portfolio securities and does not
use any particular broker or dealer. In executing transactions with brokers and
dealers, the Investment Adviser seeks to obtain the best net results for the
Portfolio, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Portfolio does not necessarily pay the lowest
spread or commission available. In addition, consistent with the Conduct Rules
of the NASD and policies established by the Board of Trustees of the Master
Trust, the Investment Adviser may consider sales of Fund shares as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Portfolio; however, whether or not a particular broker or dealer sells shares of
the Fund neither qualifies nor disqualifies such broker or dealer to execute
transactions for the Portfolio.

Subject to obtaining the best net results, brokers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Portfolio. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. If in the judgment of the Investment Adviser the
Portfolio will benefit from supplemental research services, the Investment
Adviser is authorized to pay brokerage commissions to a broker furnishing such
services that are in excess of commissions that another broker may have charged
for effecting the same transactions. Certain supplemental research services may
primarily benefit one or more other investment companies or other accounts for
which the Investment Adviser exercises investment discretion. Conversely, the
Portfolio may be the primary beneficiary of the supplemental research services
received as a result of portfolio transactions effected for such other accounts
or investment companies.

The Master Trust anticipates that its brokerage transactions involving
securities of issuers domiciled in countries other than the United States
generally will be conducted primarily on the principal stock exchanges of such
countries. Brokerage commissions and other transaction costs on foreign stock
exchange transactions generally are higher than in the United States, although
the Master Trust will endeavor to achieve the best net results in effecting its
portfolio transactions. There generally is less governmental supervision and
regulation of foreign stock exchanges and brokers than in the United States.

Foreign equity securities may be held by the Master Trust in the form of
ADRs, EDRs, GDRs or other securities convertible into foreign equity securities.
ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in
over-the-counter markets in the United States or Europe, as the case may be.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates. The Master Trust's ability and decisions to
purchase or sell portfolio securities of foreign issuers may be affected by laws
or regulations relating to the convertibility and repatriation of assets.
Because the shares of the Fund are redeemable on a daily basis in U.S. dollars,
the Master Trust intends to manage the Portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary to
meet anticipated

41
<PAGE> 525

redemptions. Under present conditions, it is not believed that these
considerations will have significant effect on the Master Trust's portfolio
strategies.

The Master Trust may invest in certain securities traded in the OTC market
and intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the 1940 Act, persons affiliated with the Master
Trust and persons who are affiliated with such affiliated persons are prohibited
from dealing with the Portfolio as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Portfolio will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Portfolio may serve as its broker in OTC transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Portfolio may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch or an affiliate is a member or in a private placement in which Merrill
Lynch or an affiliate serves as placement agent except pursuant to procedures
approved by the Board of Trustees of the Master Trust that either comply with
rules adopted by the Commission or with interpretations of the Commission staff.
See "Investment Objective and Policies -- Investment Restrictions."

Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch or its affiliates acting as a
broker for the Master Trust in any of its portfolio transactions executed on any
such securities exchange of which it is a member, appropriate consents have been
obtained from the Master Trust and annual statements as to aggregate
compensation will be provided to the Master Trust. Securities may be held by, or
be appropriate investments for, the Master Trust as well as other funds or
investment advisory clients of the Investment Adviser or its affiliates.

The Fund paid no brokerage commissions for the last three fiscal years.

The Board of Trustees of the Master Trust has considered the possibility of
seeking to recapture for the benefit of the Portfolio brokerage commissions and
other expenses of portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the
Portfolio to the Investment Adviser. After considering all factors deemed
relevant, the Board of Trustees made a determination not to seek such recapture.
The Trustees will reconsider this matter from time to time.

Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or its affiliates
when one or more clients of the Investment Adviser or its affiliates are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Portfolio or other clients or
funds for which the Investment Adviser or an affiliate acts as investment
adviser, transactions in such securities will be made, insofar as feasible, for
the respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.

SHAREHOLDER SERVICES

42
<PAGE> 526

options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof, or from the Distributor or your
selected securities dealer or other financial intermediary. Certain of these
services are available only to U.S. investors.

INVESTMENT ACCOUNT

Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from a selected securities dealer or
other financial intermediary to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at a selected securities dealer or
other financial intermediary for those shares.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class I, Class A, Class B and Class C shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege and any shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.

43
<PAGE> 527

fund at any time as long as, at the time of the exchange, the shareholder is
eligible to acquire Class I shares of any Mercury mutual fund.

Exchanges of Class B and Class C Shares. In addition, the funds with Class
B or Class C shares outstanding ("outstanding Class B or Class C shares") offer
to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of another Mercury mutual fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund from which the exchange was
made. For purposes of computing the CDSC that may be payable on a disposition of
the new Class B or Class C shares, the holding period for the outstanding Class
B shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
another Mercury fund ("new Mercury Fund") after having held the Fund's Class B
shares for two-and-a-half years. The 3.0% CDSC that generally would apply to a
redemption would not apply to the exchange. Four years later the investor may
decide to redeem the Class B shares of new Mercury Fund and receive cash. There
will be no CDSC due on this redemption since by "tacking" the
two-and-a-half-year holding period of the Fund's Class B shares to the four-year
holding period for the new Mercury Fund Class B shares, the investor will be
deemed to have held the new Mercury Fund Class B shares for more than six years.

Class C shares of the Fund received in exchange for such money market fund
shares will be aggregated with the holding period for the fund shares originally
exchanged for such money market fund shares for purposes of reducing the CDSC or
satisfying the Conversion Period.

FEE-BASED PROGRAMS

Certain fee-based programs sponsored by affiliates of the Investment
Adviser, including pricing alternatives for securities transactions (each
referred to in this paragraph as a "Program"), may permit the purchase of Class
I shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class I shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified, as may the Conversion
Period applicable to the deposited shares. Termination of participation in
certain Programs may result in the redemption of shares held therein or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based on
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
certain specific Programs (including charges and limitations on transferability
applicable to shares that may be held in such Programs) is available in each
such Program's client agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

45
<PAGE> 529

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
of the close of regular trading on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined after the close of regular trading on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends on
all shares in the Investment Account are reinvested automatically in Fund
shares. A shareholder's systematic withdrawal plan may be terminated at any
time, without a charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.

46
<PAGE> 530

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities or foreign
currencies, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of stock, securities, or
foreign currencies or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies; and (2) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies). In addition, in order not to be subject to Federal taxation, the
Fund must distribute to its shareholders at least 90% of its investment company
taxable income earned in each year.

It is the Fund's intention to distribute substantially all of its net
investment income, if any, monthly. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class I and Class A shares as a result of the account maintenance
and distribution fees applicable to the Class B and Class C shares. Similarly,
the per share dividends on Class A shares will be lower than the per share
dividends on Class I shares as a result of the account maintenance fees
applicable with respect to the Class A shares. See "Pricing of
Shares -- Determination of Net Asset Value." Shares are issued and outstanding
as of the settlement date of a purchase order to the settlement date of a
redemption order.

any such gains or losses will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss.

The foregoing is a general and abbreviated summary of the Federal income
tax consequences of an investment in the Fund and is based on the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action, and
any such change may be prospective or retroactive. Ordinary income and capital
gains dividends may also be subject to state and local taxes. Investors are
urged to consult their attorneys or tax advisers regarding specific questions as
to Federal, foreign, state or local taxes.

Because the Portfolio will be classified as a partnership for Federal
income tax purposes, the Fund will be entitled to look to the underlying assets
of the Portfolio in which it has invested for purposes of satisfying various
requirements of the Code applicable to regulated investment companies. If any of
the facts upon which this classification is premised change in any material
respect then the Board of Trustees will determine, in its discretion, the
appropriate course of action for the Fund. One possible course of action would
be to withdraw the Fund's investment from the Portfolio and to retain an
investment adviser to manage the Fund's assets in accordance with the investment
policies applicable to the Fund.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I, Class A, Class
B and Class C shares in accordance with a formula specified by the Commission.

assuming all dividends and distributions are reinvested and taking into account
all applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class I and Class A shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period as in the case of Class B and Class C shares. Dividends paid by
the Fund with respect to all shares, to the extent any dividends are paid, will
be calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance and the distribution charges
and any incremental transfer agency costs relating to each class of shares will
be borne exclusively by that class.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE SINCE
YEAR YEARS INCEPTION
---- ----- ---------
<S> <C> <C> <C> <C>
Class I*................................. 2.59% 6.62% 8.08% (Since 12/6/94)
Class A*................................. 2.37% N/A 2.40% (Since 6/2/99)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

Yield. Annualized yield quotations used in the Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:

YIELD = 2 [((a - b) + 1)(6) - 1]
-----
cd

where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and "d" equals the maximum offering price per share on the
last day of the period.

Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest

49
<PAGE> 533

earned is calculated in this fashion for each debt obligation held by the Fund,
net investment income is then determined by totaling all such interest earned.

For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.

The 30-day yields for the Fund for the period ended June 30, 2000 were
7.12% (Investor Class) and 6.87% (Distributor Class).

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the Lehman
Brothers Aggregate Bond Index, Standard & Poor's 500 Composite Stock Price Index
and other published indexes. When comparing its performance to a market index,
the Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index, such as standard deviation and beta. In
addition, the Fund may refer in advertising or sales literature to (i) mutual
fund performance ratings, rankings and comparisons (including risk-adjusted
ratings, rankings and comparisons), (ii) other comparisons of mutual fund data
including assets, expenses, fees and other data, and (iii) other discussions
reported in or assigned by Barron's, Business Week, CDA Investment Technology,
Inc., Financial World, Forbes Magazine, Fortune Magazine, Lipper Inc., Money
Magazine, U.S. News & World Report, The Wall Street Journal and other industry
publications. The Fund may also make reference to awards that may be given to
the Investment Adviser. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Fund is a "feeder" fund that invests in the Portfolio. Investors in the
Fund will acquire an indirect interest in the Portfolio. The Portfolio accepts
investments from other feeder funds, and all of the feeders of the Portfolio
bear the Portfolio's expenses in proportion to their assets. This structure may
enable the Fund to reduce costs through economies of scale. A larger investment
portfolio also may reduce certain transaction costs to the extent that
contributions to and redemptions from the Master Trust from different feeders
may offset each other and produce a lower net cash flow. However, each feeder
can set its own transaction minimums, fund-specific expenses, and other
conditions. This means that one feeder could offer access to the same Portfolio
on more attractive terms, or could experience better performance, than another
feeder.

The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the Trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share,
except that the Class A, B and C shares are subject to distribution and account
maintenance fees payable under the Plans of Distribution. Upon a fund's
liquidation, all shareholders would share pro rata in the net assets of the fund
available for distribution to

50
<PAGE> 534

shareholders. If they deem it advisable and in the best interest of
shareholders, the Board of Trustees may create additional classes of shares. The
Board of Trustees has created ten funds and ten series of shares, and may create
additional funds and series in the future, which have separate assets and
liabilities.

The Declaration of Trust contains an express disclaimer of shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is unlikely and is limited to
the relatively remote circumstances in which the Trust would be unable to meet
its obligations.

Whenever the Master Trust holds a vote of its feeder funds, the Fund will
pass the vote through to its own shareholders. Smaller feeder funds may be
harmed by the actions of larger feeder funds. For example, a larger feeder fund
could have more voting power than the Fund over the operations of the Portfolio.
The Fund may withdraw from the Portfolio at any time and may invest all of its
assets in another pooled investment vehicle or retain an investment adviser to
manage the Fund's assets directly.

51
<PAGE> 535

The Master Trust is organized as a Delaware business trust. Whenever the
Fund is requested to vote on any matter relating to the Master Trust, the Trust
will hold a meeting of the Fund's shareholders and will cast its vote as
instructed by the Fund's shareholders.

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP, 100 E. Wisconsin Avenue, Milwaukee, Wisconsin
53202, has been selected as the independent auditors of the Fund and the Master
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.

CUSTODIAN

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109-3661, acts as custodian of the Portfolio's assets and the Fund's assets
(the "Custodian"). Under its contract with the Trust and the Fund, the Custodian
is authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Trust and the Fund to be held in its offices
outside the United States and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling the
Trust's and the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Trust's and the Fund's
investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Master Trust and the Fund.

REPORTS TO SHAREHOLDERS

52
<PAGE> 536

year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

Geneva Steel Union, PO Box 30532, New Brunswick, NJ 08989 -- 48.55% of
Class A shares.

Geneva Steel Management, PO Box 30532, New Brunswick, NJ 08989 -- 11.02%
of Class A shares.

David X. Marks Foundation, 801 S. Grand Ave. #10, Los Angeles, CA
90017-4613 -- 8.38% of Class I shares.

Golden Books Retirement Plan, 10101 Science Dr., Sturtevant, WI
53177-1757 -- 8.24% of Class I shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 24.81% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 24.63% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.00% of the Fund's outstanding shares.

53
<PAGE> 537

TOTAL RETURN BOND MASTER PORTFOLIO
OF
FUND ASSET MANAGEMENT MASTER TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 22, 2000

<TABLE>
<S> <C>
ASSETS:
Cash........................................................ $50,100
Prepaid offering costs (Note 3)............................. 6,000
-------
Total assets...................................... 56,100
Less liabilities and accrued expenses....................... 6,000
-------
Net Assets applicable to investors' interest in the
Portfolio (Note 1)........................................ $50,100
=======
</TABLE>

---------------
Notes to Financial Statement.

(1) Fund Asset Management Master Trust (the "Master Trust") was organized as a
Delaware business trust on July 7, 2000, and is registered under the
Investment Company Act of 1940 as an open-end diversified management
investment company. Total Return Bond Master Portfolio (the "Portfolio") is
a portfolio of the Master Trust. Mercury Total Return Bond Fund and Merrill
Lynch Total Return Bond Fund will invest all of their assets in the
Portfolio. To date, the Portfolio has not had any transactions other than
those relating to organizational matters, a $50,000 capital contribution to
the Portfolio by Mercury Total Return Bond Fund and a $100 partnership
contribution to the Portfolio by FAM Distributors, Inc. (the "Distributor").

(2) The Master Trust, on behalf of the Portfolio, has entered into an investment
advisory agreement with Fund Asset Management, L.P. (the "Investment
Adviser"). Under the terms of the investment advisory agreement, the
Investment Adviser is paid at the annual rate of 0.30% of the Portfolio's
average daily net assets. Certain officers and/or Trustees of the Master
Trust are officers and/or directors of the Investment Adviser.

(3) Prepaid offering costs consist of legal and printing fees related to
preparing the registration statement, and will be amortized over a 12 month
period beginning with the commencement of operations of the Portfolio. The
Investment Adviser, on behalf of the Portfolio, will incur organization
costs estimated at $20,000.

(4) The Portfolio intends to qualify as a partnership for federal income tax
purposes and thus believes it will not be subject to any federal income tax
on its income and net realized capital gains (if any). However, each
investor in the Portfolio will be taxed on its allocable share of the
Portfolio's income and capital gains for purposes of determining its federal
income tax liability.

54
<PAGE> 538

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees of Fund Asset Management
Master Trust and Shareholders of the Total Return
Bond Master Portfolio

In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the Total
Return Bond Master Portfolio (the "Portfolio", one of the two portfolios of Fund
Asset Management Master Trust) at September 22, 2000, in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Portfolio's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

October 2, 2000

55
<PAGE> 539

APPENDIX -- DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

SHORT-TERM DEBT RATINGS:

A-1
<PAGE> 540

MUNICIPAL BOND RATINGS:

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

COMMERCIAL PAPER RATINGS:

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

FITCH IBCA, INC. AND DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

A-2
<PAGE> 541

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

"B" -- Speculative. Minimal capacity for timely payment of financial commitments
plus vulnerability to near-term adverse changes in financial and economic
conditions.

A-3
<PAGE> 542

Code #: MHW-SAI-1090-1000
<PAGE> 543

STATEMENT OF ADDITIONAL INFORMATION

MERCURY LOW DURATION FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury Low Duration Fund (the "Fund") is a fund of the Mercury HW Funds
(the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to maximize long-term total return, consistent
with preservation of capital. The Fund seeks to achieve its investment objective
by investing primarily in a diversified portfolio of bonds of different
maturities. No assurance can be given that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."

The Fund is a "feeder" fund that invests all of its assets in the Low
Duration Master Portfolio (the "Portfolio") of the Fund Asset Management Master
Trust (the "Master Trust"). The Portfolio has the same objective as the Fund.
All investments will be made at the Master Trust level. The Fund's investment
results will correspond directly to the investment results of the Portfolio.
There can be no assurance that the Fund will achieve its investment objective.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 544

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 5
U.S. Government Securities................................ 5
Municipal Obligations..................................... 5
Corporate Debt Securities................................. 7
Convertible Securities.................................... 7
Mortgage-Related Securities............................... 7
Asset-Backed Securities................................... 11
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. 11
Duration.................................................. 11
Derivative Instruments.................................... 12
Foreign Securities........................................ 16
Foreign Currency Options and Related Risks................ 17
Forward Foreign Currency Exchange Contracts............... 18
Foreign Investment Risks.................................. 19
Swap Agreements........................................... 21
Risk Factors Relating to Investing in High Yield
Securities.............................................. 21
Illiquid Securities....................................... 22
Reverse Repurchase Agreements............................. 23
Dollar Rolls.............................................. 23
Borrowing................................................. 23
Loans of Portfolio Securities............................. 24
When-Issued Securities.................................... 24
Real Estate Investment Trusts............................. 24
Shares of Other Investment Companies...................... 24
Short Sales Against-the-Box............................... 24
Corporate Loans........................................... 24
Temporary Defensive Position.............................. 25
Management of the Fund...................................... 25
Management and Advisory Arrangements...................... 27
Administration Arrangements............................... 28
Code of Ethics............................................ 29
Purchase of Shares.......................................... 30
Initial Sales Charge Alternatives -- Class I and Class A
Shares.................................................. 31
Reduced Initial Sales Charges............................. 32
Deferred Sales Charge Alternatives -- Class B and Class C
Shares.................................................. 33
Distribution Plans........................................ 36
Limitations on the Payment of Deferred Sales Charges...... 37
Redemption of Shares........................................ 37
Redemption................................................ 38
Repurchase................................................ 38
Reinstatement Privilege -- Class I and Class A Shares..... 39
Pricing of Shares........................................... 39
Determination of Net Asset Value.......................... 39
Computation of Offering Price Per Share................... 41
Portfolio Transactions and Brokerage........................ 41
Transactions in Portfolio Securities...................... 41
Shareholder Services........................................ 43
Investment Account........................................ 43
Exchange Privilege........................................ 44
Fee-Based Programs........................................ 45
Retirement Plans.......................................... 46
Automatic Investment Plans................................ 46
Automatic Dividend Reinvestment Plan...................... 46
Systematic Withdrawal Plans............................... 46
Dividends and Tax Status.................................... 47
Performance Data............................................ 49
General Information......................................... 51
Description of Shares..................................... 51
Issuance of Fund Shares for Securities.................... 52
Redemption in Kind........................................ 52
Independent Auditors...................................... 52
Custodian................................................. 52
Transfer Agent............................................ 53
Legal Counsel............................................. 53
Reports to Shareholders................................... 53
Shareholder Inquiries..................................... 53
Additional Information.................................... 53
Principal Holders......................................... 53
Statement of Assets and Liabilities (Portfolio)............. 54
Report of Independent Accountants........................... 55
Appendix -- Description of Ratings.......................... A-1
</TABLE>

2
<PAGE> 545

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return,
consistent with preservation of capital.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under the 1940 Act, the vote of
the holders of a "majority" of the Fund's outstanding voting securities means
the vote of the holders of the lesser of (1) 67% of the shares of the Fund
represented at a meeting at which the holders of more than 50% of its
outstanding shares are represented or (2) more than 50% of the outstanding
shares.

Except as noted, the Fund may not:

1. Purchase any security, other than obligations of the U.S. government,
its agencies, or instrumentalities ("U.S. government securities"), if
as a result: (i) with respect to 75% of its total assets, more than 5%
of the Fund's total assets (determined at the time of investment) would
then be invested in securities of a single issuer; or (ii) more than
25% of the Fund's total assets (determined at the time of investment)
would be invested in one or more issuers having their principal
business activities in a single industry; provided that the Fund may
invest all of its assets in an open-end, management investment company,
or portfolio thereof, with substantially the same investment objective
and policies as the Fund, without regard to the limitations set forth
in this paragraph.

3
<PAGE> 546

amount to, the securities sold short (short sale against-the-box), and unless
not more than 25% of the Fund's net assets (taken at current value) is held as
collateral for such sales at any one time.

4. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings. (The Fund may borrow from banks or
enter into reverse repurchase agreements and pledge assets in
connection therewith, but only if immediately after each borrowing
there is asset coverage of 300%.)

8. Participate on a joint or joint and several basis in any trading
account in securities.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

The Fund may buy and sell commodities and commodity contracts and real
estate and interests in real estate to the extent set forth in the Prospectus
and Statement of Additional Information.

REPURCHASE AGREEMENTS

A repurchase agreement is an agreement where the seller agrees to
repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is more than
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the repurchase agreement. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of these instruments declines, the Fund will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
In such circumstances, the Fund could experience a delay or be prevented from
disposing of the collateral. To the extent that the proceeds
4
<PAGE> 547

from any sale of such collateral upon a default in the obligation to repurchase
are less than the repurchase price, the Fund will suffer a loss.

BONDS

U.S. GOVERNMENT SECURITIES

MUNICIPAL OBLIGATIONS

5
<PAGE> 548

although the principal revenue source is often supplemented by additional
security features which are intended to enhance the creditworthiness of the
issuer's obligations. In some cases, particularly revenue bonds issued to
finance housing and public buildings, a direct or implied "moral obligation" of
a governmental unit may be pledged to the payment of debt service. In other
cases, a special tax or other charge may augment user fees.

6
<PAGE> 549

continuing ability of the issuers of municipal securities in which the Fund
invests to meet their obligations for the payment of principal and interest when
due. Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978, as amended.
Therefore, the possibility exists that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.

CORPORATE DEBT SECURITIES

The Fund's investments in U.S. dollar or foreign currency denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Investment Adviser's opinion comparable
in quality to corporate debt securities in which the Fund may invest. The rate
of return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.

CONVERTIBLE SECURITIES

MORTGAGE-RELATED SECURITIES

7
<PAGE> 550

8
<PAGE> 551

9
<PAGE> 552

to prepayments on the related underlying mortgage assets, in the same manner as
an interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.

ASSET-BACKED SECURITIES

10
<PAGE> 553

equity loans, are being securitized in pass-through structures similar to the
mortgage pass-through or in a pay-through structure similar to the CMO
structure. Investments in these and other types of asset-backed securities must
be consistent with the investment objective and policies of the Fund.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

DURATION

11
<PAGE> 554

DERIVATIVE INSTRUMENTS

To the extent consistent with its investment objective and policies and the
investment restrictions listed in this Statement of Additional Information, the
Fund may purchase and write call and put options on securities, securities
indexes and foreign currencies and enter into forward contracts, futures
contracts and use options on futures contracts. The Fund also may enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Fund may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates, or securities prices or as
part of its overall investment strategies. The Fund may also purchase and sell
options relating to foreign currencies for the purpose of increasing exposure to
a foreign currency or to shift exposure to foreign currency fluctuations from
one country to another. The Fund will mark as segregated cash, U.S. government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under forward contracts,
futures contracts, swap agreements and options to avoid leveraging of the Fund.

can be no assurance that a liquid market will exist when the Fund seeks to close
out an option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, the Fund may be unable to close out a position.

When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or futures commission merchant a
specified amount of cash or U.S. government securities
13
<PAGE> 556

("initial margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified during the term of
the contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, the Fund
will mark to market its open futures positions.

Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, the Fund will maintain with its custodian (and mark-to-market
on a daily basis) cash, U.S. government securities, equity securities or other
liquid, unencumbered assets that, when added to the amounts deposited as margin
with a futures commission merchant or the custodian, are equal to the market
value of the futures contract. Alternatively, the Fund may "cover" its position
by purchasing a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Fund.

When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited as margin with a futures commission merchant or the custodian,
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).

When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited as margin with a futures commission merchant or
the custodian, equal the total market value of the futures contract underlying
the call option. Alternatively, the Fund may cover its position by entering into
a long position in the same futures contract at a price no higher than the
strike price of the call option, by owning the instruments underlying the
futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Fund.

14
<PAGE> 557

In order to comply with current applicable regulations of the CFTC pursuant
to which the Master Trust avoids being deemed a "commodity pool operator," the
Portfolio is limited in its futures trading activities to positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, or to non-hedging positions for which the aggregate
initial margin and premiums will not exceed 5% of the liquidation value of the
Portfolio's assets.

15
<PAGE> 558

FOREIGN SECURITIES

the International Monetary Fund ("IMF"). The Brady Plan framework, as it has
developed, contemplates the exchange of commercial bank debt for newly issued
Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and/or the IMF support the restructuring by providing funds pursuant
to loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

17
<PAGE> 560

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

Investment Adviser believes it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Fund will be served.

FOREIGN INVESTMENT RISKS

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

dollars. Similarly when the U.S. dollar decreases in value against a foreign
currency, your investment in a security denominated in that currency gains value
because the currency is worth more U.S. dollars. This risk is generally known as
"currency risk" which is the possibility that a stronger U.S. dollar will reduce
returns for U.S. investors investing overseas and a weak U.S. dollar will
increase returns for U.S. investors investing overseas.

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

20
<PAGE> 563

countries at times have not kept pace with the number of securities
transactions. These problems may make it difficult for a Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

21
<PAGE> 564

as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the Investment Adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower-rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value prior to the sale.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements that have a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemption within seven days. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments. Also
market quotations are less readily available. The judgment of the Investment
Adviser may at times play a greater role in valuing these securities than in the
case of unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

22
<PAGE> 565

addition, in order for commercial paper that is issued in reliance on Section
4(2) of the Securities Act to be considered liquid, (1) it must be rated in one
of the two highest rating categories by at least two nationally recognized
statistical rating organizations ("NRSROs"), or if only one NRSRO rates the
securities, by that NRSRO, or, if unrated, be of comparable quality in the view
of the Investment Adviser; and (2) it must not be "traded flat" (that is,
without accrued interest) or in default as to principal or interest. Investing
in Rule 144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. In addition, Rule 144A
securities are generally not deemed illiquid if they are freely tradable in
their primary market offshore. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

REVERSE REPURCHASE AGREEMENTS

DOLLAR ROLLS

BORROWING

LOANS OF PORTFOLIO SECURITIES

23
<PAGE> 566

Fund will receive any interest or dividends paid on the loaned securities; and
(4) the aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of the Fund.

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

24
<PAGE> 567

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

The Trustees oversee the actions of the Fund's Investment Adviser and other
service providers and decide upon matters of general policy. The Trustees also
review the actions of the Trust's officers, who conduct and supervise the daily
business operations of the Trust. The same individuals serve as Trustees of the
Master Trust. The Trustees (* denotes "interested" Trustee as defined in the
1940 Act, due to the relationship with the Investment Adviser) and officers of
the Trust are:

company); Director, Bowne & Co., Inc. (financial printers); Director,
Alexander's, Inc. (real estate company); Trustee or Director of 67 registered
investment companies (consisting of 72 portfolios) for which the Investment
Adviser or an advisory affiliate is the adviser.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

26
<PAGE> 569

For information as to ownership of shares, see "General
Information -- Principal Holders."

MANAGEMENT AND ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Fund currently invests all of its
assets in shares of the Portfolio. Accordingly, the Fund does not invest
directly in portfolio securities and does not require investment advisory
services. All portfolio management occurs at the level of the Master Trust. The
Master Trust has entered into an investment advisory agreement for the Portfolio
with the Investment Adviser as investment adviser (the "Advisory Agreement").
Subject to the supervision of the Trustees, the Investment Adviser is
responsible for the actual management of the Portfolio and continuously reviews
the Portfolio's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
office space, facilities, equipment and necessary personnel for management of
the Master Trust. The Investment Adviser receives for its services to the
Portfolio a monthly fee at an annual rate of 0.21% of the Portfolio's average
daily net assets. For purposes of this calculation, average daily net assets is
determined at the end of each month on the basis of the average net assets of
the Portfolio for each day during the month.

Prior to October 6, 2000, the Fund did not invest its shares in the
Portfolio and the Trust on behalf of the Fund was party to an investment
advisory agreement under which it paid Merrill Lynch Investment Managers, L.P.,
an affiliate of the Investment Adviser, a fee at the annual rate of 0.46% of the
Fund's average daily net assets. For the fiscal years ended June 30, 2000, 1999
and 1998, the Fund paid Merrill Lynch Investment Managers, L.P. $1,274,690,
$1,469,150 and $773,803, respectively. As a result of its agreement to limit
Fund expenses, for these years Merrill Lynch Investment Managers, L.P. waived a
portion of its fee in the amount of $524,134, $230,145 and $144,309,
respectively.

27
<PAGE> 570

ADMINISTRATION ARRANGEMENTS

The Administration Agreement obligates the Administrator to provide certain
administrative services to the Fund and to pay, or cause its affiliates to pay,
for maintaining its staff and personnel and to provide office space, facilities
and necessary personnel for the Fund. The Administrator is also obligated to
pay, or cause its affiliates to pay, the fees of those officers and Trustees who
are affiliated persons of the Administrator or any of its affiliates. The Fund
pays, or causes to be paid, all other expenses incurred in the operation of the
Fund (except to the extent paid by the Distributor), including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, shareholder reports and prospectuses and statements of additional
information, charges of the custodian, any sub-custodian and Financial Data
Services, Inc. (the "Transfer Agent"), expenses of portfolio transactions,
expenses of redemption of shares, Commission fees, expenses of registering the
shares under Federal, state or non-U.S. laws, fees and actual out-of-pocket
expenses of Trustees who are not affiliated persons of the Administrator, or of
an affiliate of the Administrator, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. The Distributor will pay certain of the expenses
of the Fund incurred in connection with the continuous offering of its shares.
Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the 1940 Act. See "Purchase of
Shares -- Distribution Plans." Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.

28
<PAGE> 571

reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. For purposes
of the Transfer Agency Agreement, the term "account" includes a shareholder
account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on
a recordkeeping system.

CODE OF ETHICS

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

pursuant to which the account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to expenses
charged under the Distribution Plan for Class A shares). Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege."

INITIAL SALES CHARGE ALTERNATIVES -- CLASS I AND CLASS A SHARES

Investors who prefer an initial sales charge alternative may elect to
purchase Class A shares or, if an eligible investor, Class I shares.

30
<PAGE> 573

however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.

Class I shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class I shares. Investors
who beneficially owned Investor Class shares or who currently beneficially own
Class I shares of the Fund in a shareholder account are entitled to purchase
additional Class I shares of the Fund in that account at net asset value.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by the Investment Adviser or any of its affiliates. Also eligible
to purchase Class I shares at net asset value are participants in certain
investment programs including certain managed accounts for which a trust
institution, thrift or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain programs sponsored by the Investment Adviser or its
affiliates, and investors with accounts with financial intermediaries who
participate in transaction fee programs and invest at least $250,000 for their
customers in the Fund. Class I shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the participant has $3 million or more
initially invested in affiliate-advised investment companies. In addition, Class
I shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees, to members of the Boards of investment companies
advised by the Investment Adviser or its affiliates, including the Fund, and to
employees of certain selected securities dealers or other financial
intermediaries. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises investment
discretion. Investors qualifying for significantly reduced initial sales charges
may find the initial sales charge alternative particularly attractive, because
similar sales charge reductions are not available with respect to the deferred
sales charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class I or Class A shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class A shares, the
account maintenance fee. Although some investors who previously purchased Class
I shares may no longer be eligible to purchase Class I shares of other
affiliate-advised funds, those previously purchased Class I shares, together
with Class A, Class B and Class C share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class A account
maintenance fees will cause Class A shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class I shares.

The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.

31
<PAGE> 574

offering price applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then current net
asset value or cost, whichever is higher, of the purchaser's combined holdings
of all classes of shares of the Fund and of other Mercury mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's selected
securities dealer or other financial intermediary, with sufficient information
to permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or custodian under
pension, profit-sharing, or other employee benefit plans may not be combined
with other shares to qualify for the right of accumulation.

Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class I or Class A shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan and/or the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares with a waiver of
the CDSC upon redemption, based on similar criteria. Such Class B shares will
convert into Class A shares approximately ten years after the plan purchases the
first share of any Mercury mutual fund. Minimum purchase requirements may be
waived or varied for such plans. For additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other
arrangements, call your plan administrator or your selected securities dealer or
other financial intermediary.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

32
<PAGE> 575

Purchase Privileges of Certain Persons. Trustees of the Trust and Trustees
of the Master Trust and of other investment companies advised by the Investment
Adviser or its affiliates, directors and employees of ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes the Investment Adviser, Merrill Lynch Investment Managers, L.P.,
Merrill Lynch Investment Managers, International, Limited and certain other
entities directly or indirectly wholly owned and controlled by ML & Co.),
employees of certain selected securities dealers, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I
shares of the Fund at net asset value. The Fund realizes economies of scale and
reduction of sales-related expenses by virtue of the familiarity of these
persons with the Fund. Employees and Trustees wishing to purchase shares of the
Fund must satisfy the Fund's suitability standards.

DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES

Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class A shares of the Fund after a conversion period of approximately ten years,
and thereafter investors will be subject to lower ongoing fees.

33
<PAGE> 576

The following table sets forth the Class B CDSC:

As discussed in the Prospectus under "Account Choices -- Pricing of
Shares -- Class B and C Shares -- Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an individual retirement
account ("IRA") or other retirement plan or redemption of Class B shares in
certain circumstances following the death of a Class B shareholder. In the case
of such withdrawal, the reduction or waiver applies to: (a) any partial or
complete redemption in connection with a distribution following retirement under
a tax-deferred retirement plan on attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA (certain
legal documentation may be required at the time of liquidation establishing
eligibility for qualified distribution); or (b) any partial or complete
redemption following the death or disability (as defined in the Code of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability, or if later, reasonably promptly
following completion of probate or in connection with involuntary termination of
an account in which Fund shares are held (certain legal documentation may be
required at the time of liquidation establishing eligibility for qualified
distribution).

34
<PAGE> 577

The Conversion Period may be modified for investors that participate in
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."

DISTRIBUTION PLANS

35
<PAGE> 578

The Distribution Plans for each of the Class B and Class C shares provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.65% of the average daily net assets of the Class B and Class C shares in
order to compensate the Distributor and selected securities dealers or other
financial intermediaries (pursuant to sub-agreements) for providing shareholder
and distribution services, and bearing certain distribution-related expenses of
the Fund, including payments to securities dealers and other financial
intermediaries for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through securities dealers
and other financial intermediaries without the assessment of an initial sales
charge and at the same time permit the Distributor to compensate securities
dealers and other financial intermediaries in connection with the sale of the
Class B and Class C shares. In this regard, the purpose and function of the
ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class I and Class A shares of the Fund in that
the ongoing distribution fees and deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.

For the fiscal year ended June 30, 2000, the Fund made payments of $19,883
to the Distributor under the Rule 12b-1 Plan for the Distributor Class shares
(which were redesignated as Class A shares). These payments were compensation
for providing distribution-related services such as advertising, printing and
mailing prospectuses to other than current shareholders, and training sales
personnel regarding the Fund.

36
<PAGE> 579

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

REPURCHASE

38
<PAGE> 581

REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

40
<PAGE> 583

COMPUTATION OF OFFERING PRICE PER SHARE

<TABLE>
<CAPTION>
CLASS I CLASS A
------------ -----------
<S> <C> <C>
Net Assets.................................................. $344,734,499 $16,006,768
============ ===========
Number of Shares Outstanding................................ 35,233,091 1,635,721
============ ===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 9.78 $ 9.79
Sales Charge (for Class I and Class A Shares; 3.00% of
Offering Price; (3.09% of net amount invested))*.......... 0.30 0.30
------------ -----------
Offering Price.............................................. $ 10.08 $ 10.09
============ ===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

Class B and Class C shares are not subject to an initial sales charge but may be
subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" herein.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

41
<PAGE> 584

Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch or its affiliates acting as a
broker for the Master Trust in any of its portfolio transactions executed on any
such securities exchange of which it is a member, appropriate consents have been
obtained from the Master Trust and annual statements as to aggregate
compensation will be provided to the Master Trust. Securities may be held by, or
be appropriate investments for, the Master Trust as well as other funds or
investment advisory clients of the Investment Adviser or its affiliates.

The Fund paid no brokerage commissions for the last three fiscal years.

The value of the Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of June 30,
2000 was as follows:

<TABLE>
<CAPTION>
REGULAR AGGREGATE
BROKER-DEALER HOLDINGS
------------- ---------
<S> <C>
Lehman Brothers............................................. $800,499
</TABLE>

42
<PAGE> 585

Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or its affiliates
when one or more clients of the Investment Adviser or its affiliates are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Portfolio or other clients or
funds for which the Investment Adviser or an affiliate acts as investment
adviser, transactions in such securities will be made, insofar as feasible, for
the respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at a selected
securities dealer or other financial intermediary for those shares.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class I, Class A, Class B and Class C shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege and any shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.

44
<PAGE> 587

Class B shares to the four-year holding period for the new Mercury Fund Class B
shares, the investor will be deemed to have held the new Mercury Fund Class B
shares for more than six years.

FEE-BASED PROGRAMS

Certain fee-based programs sponsored by affiliates of the Investment
Adviser, including pricing alternatives for securities transactions (each
referred to in this paragraph as a "Program"), may permit the purchase of Class
I shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class I shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified, as may the Conversion
Period applicable to the deposited shares. Termination of participation in
certain Programs may result in the redemption of shares held therein or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based on
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
certain specific Programs

45
<PAGE> 588

(including charges and limitations on transferability applicable to shares that
may be held in such Programs) is available in each such Program's client
agreement and from the Transfer Agent at 1-800-236-4479.

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

AUTOMATIC DIVIDEND REINVESTMENT PLAN

SYSTEMATIC WITHDRAWAL PLANS

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
of the close of regular trading on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined after the close of regular trading on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends on
all shares in the Investment Account are reinvested automatically in Fund
shares. A shareholder's systematic withdrawal plan may be terminated at any
time, without a charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.

46
<PAGE> 589

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities or foreign
currencies, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of stock, securities, or
foreign currencies or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies; and (2) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies). In addition, in order not to be subject to Federal taxation, the
Fund must distribute to its shareholders at least 90% of its investment company
taxable income earned in each year.

47
<PAGE> 590

and capital gains dividends may also be subject to state and local taxes.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to Federal, foreign, state or local taxes.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I, Class A, Class
B and Class C shares in accordance with a formula specified by the Commission.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class I and Class A
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period as in the case of Class B and
Class C shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that account
maintenance and the distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE SINCE
YEAR YEARS INCEPTION
----- ----- ---------
<S> <C> <C> <C> <C>
Class I*.............................. 5.40% 6.19% 7.11% (Since 5/18/93)
Class A*.............................. N/A N/A 3.83% (Since 9/24/99)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

directed to such investors may take into account the reduced, and not the
maximum, sales charge or may take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or the
waiver of sales charges, a lower amount of expenses is deducted.

YIELD = 2 [((a - b) + 1)(6) - 1]
-------
cd

The 30-day yields for the Fund for the period ended June 30, 2000 were
7.19% (Investor Class) and 6.92% (Distributor Class).

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Merrill Lynch 1 - 3 Year U.S. Treasury Note Index, Standard & Poor's 500
Composite Stock Price Index and other published indexes. When comparing its
performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. In addition, the Fund may refer in advertising
or sales literature to (i) mutual fund performance ratings, rankings and
comparisons (including risk-adjusted ratings, rankings and comparisons), (ii)
other comparisons of mutual fund data including assets, expenses, fees and other
data, and (iii) other discussions reported in or assigned by Barron's, Business
Week, CDA Investment Technology, Inc., Financial World, Forbes Magazine, Fortune
Magazine, Lipper Inc., Money Magazine, U.S. News & World Report, The Wall Street
Journal and other industry publications. The Fund may also make reference to
awards that may be given to the Investment Adviser. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

50
<PAGE> 593

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the Trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share,
except that the Class A, B and C shares are subject to distribution and account
maintenance fees payable under the Plans of Distribution. Upon a fund's
liquidation, all shareholders would share pro rata in the net assets of the fund
available for distribution to shareholders. If they deem it advisable and in the
best interest of shareholders, the Board of Trustees may create additional
classes of shares. The Board of Trustees has created ten funds and ten series of
shares, and may create additional funds and series in the future, which have
separate assets and liabilities.

51
<PAGE> 594

shareholder liability is unlikely and is limited to the relatively remote
circumstances in which the Trust would be unable to meet its obligations.

Except for (1) changes which do not adversely affect the rights of Trust
shareholders; (2) a change in the name of the Trust, or a fund or series or
class thereof; (3) authorization of a new fund or series or class; (4) changes
to supply any omission or correct any ambiguous or defective provision; or (5)
changes required by any federal, state or similar regulatory authority or
required by the Code to eliminate or reduce any federal, state or local taxes
which may be payable by the Fund or its shareholders, no amendment may be made
to the Declaration of Trust without the affirmative vote of the holders of at
least 67% of the Trust's outstanding shares at a meeting at which more than 50%
of its outstanding shares are present in person or represented by proxy. The
holders of shares have no preemptive or conversion rights. Shares when issued
pursuant to the Prospectus are fully paid and non-assessable, except as set
forth above.

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

52
<PAGE> 595

foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Trust's and the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Trust's and the Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement. The Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Master Trust and the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholders owned of record, and
to the knowledge of the Fund, beneficially more than 5% of the outstanding
shares of the Fund:

Mutual, PO Box 30532, New Brunswick, NJ 08989 -- 45.56% of Class A
shares.

Common Health L.P., PO Box 30532, New Brunswick, NJ 08989 -- 33.71% of
Class A shares.

Segal, McCambridge, Singer & Mahoney, PO Box 30532, New Brunswick, NJ
08989 -- 16.72% of Class A shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 48.66% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 22.44% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.02% of the Fund's outstanding shares.

53
<PAGE> 596

LOW DURATION MASTER PORTFOLIO
OF
FUND ASSET MANAGEMENT MASTER TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 22, 2000

---------------
Notes to Financial Statement.

(1) Fund Asset Management Master Trust (the "Master Trust") was organized as a
Delaware business trust on July 7, 2000, and is registered under the
Investment Company Act of 1940 as an open-end diversified management
investment company. Low Duration Master Portfolio (the "Portfolio") is a
portfolio of the Master Trust. Mercury Low Duration Fund and Merrill Lynch
Low Duration Fund will invest all of their assets in the Portfolio. To date,
the Portfolio has not had any transactions other than those relating to
organizational matters, a $50,000 capital contribution to the Portfolio by
Mercury Low Duration Fund and a $100 partnership contribution to the
Portfolio by FAM Distributors, Inc. (the "Distributor").

(2) The Master Trust, on behalf of the Portfolio, has entered into an investment
advisory agreement with Fund Asset Management, L.P. (the "Investment
Adviser"). Under the terms of the investment advisory agreement, the
Investment Adviser is paid at the annual rate of 0.21% of the Portfolio's
average daily net assets. Certain officers and/or Trustees of the Master
Trust are officers and/or directors of the Investment Adviser.

54
<PAGE> 597

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees of Fund Asset Management
Master Trust and Shareholders of the Low Duration
Master Portfolio

In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the Low
Duration Master Portfolio (the "Portfolio", one of the two portfolios of Fund
Asset Management Master Trust) at September 22, 2000, in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Portfolio's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

October 2, 2000

55
<PAGE> 598

APPENDIX -- DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

SHORT-TERM DEBT RATINGS:

A-1
<PAGE> 599

MUNICIPAL BOND RATINGS:

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

COMMERCIAL PAPER RATINGS:

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

FITCH IBCA, INC. AND DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

A-2
<PAGE> 600

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

"B" -- Speculative. Minimal capacity for timely payment of financial commitments
plus vulnerability to near-term adverse changes in financial and economic
conditions.

A-3
<PAGE> 601

Code #: MHW-SAI-1070-1000
<PAGE> 602

STATEMENT OF ADDITIONAL INFORMATION

MERCURY SHORT-TERM INVESTMENT FUND

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury Short-Term Investment Fund (the "Fund") is a fund of Mercury HW
Funds (the "Trust"). The Trust is a diversified, open-end management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to maximize long-term total return, consistent
with preservation of capital. The Fund seeks to achieve its investment objective
by investing primarily in a diversified portfolio of bonds of different
maturities. No assurance can be given that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."

The Fund offers a single class (Class I) of shares. Only certain investors
are eligible to purchase Class I shares. See "Purchase of Shares."

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 603

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Municipal Obligations..................................... 5
Corporate Debt Securities................................. 6
Convertible Securities.................................... 6
Mortgage-Related Securities............................... 7
Asset-Backed Securities................................... 10
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. 10
Duration.................................................. 11
Derivative Instruments.................................... 11
Foreign Securities........................................ 15
Foreign Currency Options and Related Risks................ 16
Forward Foreign Currency Exchange Contracts............... 17
Foreign Investment Risks.................................. 19
Swap Agreements........................................... 20
Risk Factors Relating to Investing in High Yield
Securities.............................................. 21
Illiquid Securities....................................... 21
Reverse Repurchase Agreements............................. 22
Dollar Rolls.............................................. 22
Borrowing................................................. 23
Loans of Portfolio Securities............................. 23
When-Issued Securities.................................... 23
Real Estate Investment Trusts............................. 23
Shares of Other Investment Companies...................... 24
Short Sales Against-the-Box............................... 24
Corporate Loans........................................... 24
Temporary Defensive Position.............................. 24
Management of the Fund...................................... 24
Advisory Arrangements..................................... 26
Accounting and Administrative Services.................... 27
Code of Ethics............................................ 28
Purchase of Shares.......................................... 28
Class I Shares............................................ 29
Reduced Initial Sales Charges............................. 30
Redemption of Shares........................................ 31
Redemption................................................ 32
Repurchase................................................ 32
Reinstatement Privilege -- Class I Shares................. 33
Pricing of Shares........................................... 33
Determination of Net Asset Value.......................... 33
Computation of Offering Price Per Share................... 34
Portfolio Transactions and Brokerage........................ 35
Transactions in Portfolio Securities...................... 35
Shareholder Services........................................ 36
Investment Account........................................ 36
Exchange Privilege........................................ 37
Fee-Based Programs........................................ 38
Retirement Plans.......................................... 38
Automatic Investment Plans................................ 38
Automatic Dividend Reinvestment Plan...................... 38
Systematic Withdrawal Plans............................... 39
Dividends and Tax Status.................................... 39
Performance Data............................................ 41
General Information......................................... 42
Description of Shares..................................... 42
Issuance of Fund Shares for Securities.................... 43
Redemption in Kind........................................ 44
Independent Auditors...................................... 44
Custodian................................................. 44
Transfer Agent............................................ 44
Legal Counsel............................................. 44
Reports to Shareholders................................... 44
Shareholder Inquiries..................................... 44
Additional Information.................................... 44
Principal Holders......................................... 45
Appendix--Description of Ratings............................ A-1
</TABLE>

2
<PAGE> 604

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return,
consistent with preservation of capital. Reference is made to the discussion
under "How the Fund Invests" and "Investment Risks" in the Prospectus for
information with respect to the Fund's investment objective and policies.

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under the 1940 Act, the vote of
the holders of a "majority" of the Fund's outstanding voting securities means
the vote of the holders of the lesser of (1) 67% of the shares of the Fund
represented at a meeting at which the holders of more than 50% of its
outstanding shares are represented or (2) more than 50% of the outstanding
shares.

Except as noted, the Fund may not:

4. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings. (The Fund may borrow from banks or
enter into reverse repurchase agreements and pledge assets in
connection therewith, but only if immediately after each borrowing
there is asset coverage of 300%.)

6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
3
<PAGE> 605

7. Make investments for the purpose of exercising control or management.

8. Participate on a joint or joint and several basis in any trading
account in securities.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

The Fund may buy and sell commodities and commodity contracts and real
estate and interests in real estate to the extent set forth in the Prospectus
and Statement of Additional Information.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

4
<PAGE> 606

instrumentality only when the Investment Adviser is satisfied that the credit
risk with respect to any instrumentality is acceptable.

MUNICIPAL OBLIGATIONS

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

6
<PAGE> 608

affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.

MORTGAGE-RELATED SECURITIES

7
<PAGE> 609

8
<PAGE> 610

thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.

9
<PAGE> 611

interest (the "IO class"), while the other class will receive all of the
principal (the "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 the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.

ASSET-BACKED SECURITIES

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

net asset value volatility. Prepayments may also result in the realization of
capital losses with respect to higher yielding securities that had been bought
at a premium or the loss of opportunity to realize capital gains in the future
from possible future appreciation.

DURATION

DERIVATIVE INSTRUMENTS

foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. The Fund will mark as segregated cash, U.S. government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under forward contracts,
futures contracts, swap agreements and options to avoid leveraging of the Fund.

sale by one party and purchase by another party of a specified quantity of a
financial instrument, foreign currency or the cash value of an index at a
specified price and time. A futures contract on an index is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made.

When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or futures commission merchant, a
specified amount of cash or U.S. government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin", equal to the daily change in value of the futures
contract. This process is known as "marking to market". Variation margin does
not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open futures positions.

13
<PAGE> 615

futures commission merchant or the custodian, are equal to the market value of
the futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Fund.

When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited as margin with a futures commission merchant or the custodian,
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).

When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited as margin with a futures commission merchant or
the custodian, equal the total market value of the futures contract underlying
the call option. Alternatively, the Fund may cover its position by entering into
a long position in the same futures contract at a price no higher than the
strike price of the call option, by owning the instruments underlying the
futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Fund.

In order to comply with current applicable regulations of the CFTC pursuant
to which the Trust avoids being deemed a "commodity pool operator," the Fund is
limited in its futures trading activities to positions which constitute "bona
fide hedging" positions within the meaning and intent of applicable CFTC rules,
or to non-hedging positions for which the aggregate initial margin and premiums
will not exceed 5% of the liquidation value of the Fund's assets.

securities held by the Fund may be greater. The trading of futures contracts
also is subject to certain market risks, such as inadequate trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.

FOREIGN SECURITIES

because of the lack of adequate custody arrangements for the Fund's assets,
overly burdensome repatriation and similar restrictions, the lack of organized
and liquid securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, the Fund
expects to expand and further broaden the group of emerging markets in which it
invests.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

16
<PAGE> 618

foreign currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if
the Fund held securities denominated in a foreign currency and anticipated a
decline in the value of that currency against the U.S. dollar, it could hedge
against such a decline by purchasing a put option on the currency involved. The
markets in foreign currency options are relatively new, and the Fund's ability
to establish and close out positions in such options is subject to the
maintenance of a liquid secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

17
<PAGE> 619

FOREIGN INVESTMENT RISKS

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

19
<PAGE> 621

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

20
<PAGE> 622

assets, marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio. The Fund will not enter into a swap agreement with any single party
if the net amount owed or to be received under existing contracts with that
party would exceed 5% of the Fund's assets.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Investment Adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower-rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value prior
to the sale.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements that have a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemption within seven days. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments. Also
market

21
<PAGE> 623

quotations are less readily available. The judgment of the Investment Adviser
may at times play a greater role in valuing these securities than in the case of
unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. In addition, Rule 144A
securities are generally not deemed illiquid if they are freely tradable in
their primary market offshore. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

REVERSE REPURCHASE AGREEMENTS

DOLLAR ROLLS

22
<PAGE> 624

which there is an offsetting cash position or cash equivalent security position
that matures on or before the forward settlement date of the dollar roll
transaction.

BORROWING

LOANS OF PORTFOLIO SECURITIES

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

23
<PAGE> 625

SHARES OF OTHER INVESTMENT COMPANIES

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

24
<PAGE> 626

Partners (consulting) (since 1993); U.S. Ambassador to Mexico (1981 - 1986);
Director, Apex Mortgage Capital, Inc., Atlantic Richfield Co., International
Wire Corp. and Krause's Furniture, Inc.

Trust's fiscal year ended June 30, 2000 and the aggregate compensation paid to
the Trustees for service on the Trust's Board and that of any other fund for
which the Investment Adviser serves as investment adviser or which has an
investment adviser that is an affiliated person of the Investment Adviser ("Fund
Complex") for the year ended December 31, 1999.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 39,007
John A.G. Gavin................................... $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."

For information as to ownership of shares, see "General
Information -- Principal Holders."

ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Trust on behalf of the Fund has
entered into an investment advisory agreement (the "Advisory Agreement") with
the Investment Adviser acting as investment adviser. Subject to the supervision
of the Trustees, the Investment Adviser is responsible for the actual management
of the Fund and continuously reviews the Fund's holdings in light of its own
research analysis and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser. The Investment Adviser performs certain of the other
administrative services and provides all office space, facilities, equipment and
necessary personnel for management of the Fund. The Investment Adviser receives
for its services to the Fund a monthly fee at an annual rate of 0.40% of the
Fund's average daily net assets up to $100 million, 0.35% of the Fund's average
daily net assets from $100 million through $249,999,999, 0.30% of the Fund's
average daily net assets from $250,000,000 through $499,999,999 and 0.25% of the
Fund's average daily net assets over $500 million. For purposes of this
calculation, average daily net assets is determined at the end of each month on
the basis of the average net assets of the Fund for each day during the month.

Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.40% of the Fund's average daily net assets under $100,000,000, 0.35% of the
Fund's average daily net assets from $100,000,000 through $249,999,999, 0.30% of
the Fund's average daily net assets from $250,000,000 through $499,999,999, and
0.25% of the Fund's average daily net assets over $500,000,000. For the fiscal
years ended June 30, 2000, 1999 and 1998, the Fund paid Merrill Lynch Investment
Managers, L.P. $85,174, $84,035 and $0, respectively. As a result of its
agreement to limit Fund expenses, for these years Merrill Lynch Investment
Managers, L.P. waived a portion of its fee in the amount of $134,421, $85,670
and

26
<PAGE> 628

$94,570. For the year ended June 30, 1998, the Fund paid no advisory fees and
was reimbursed $11,030 by Merrill Lynch Investment Managers, L.P.

ACCOUNTING AND ADMINISTRATIVE SERVICES

Transfer Agent is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system.

CODE OF ETHICS

PURCHASE OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.

The Fund issues a single class of shares. Each share of the Fund represents
an identical interest in the investment portfolio of the Fund and has the same
rights.

that day. If the purchase orders are not received prior to 30 minutes after the
close of regular trading on the NYSE on that day, such orders shall be deemed
received on the next business day. Selected securities dealers or other
financial intermediaries have the responsibility of submitting purchase orders
to the Fund not later than 30 minutes after the close of regular trading on the
NYSE in order to purchase shares at that day's offering price.

CLASS I SHARES

Class I shares will be subject to an initial sales charge, unless you
qualify for a reduction or waiver of the sales charge. See "Reduced Initial
Sales Charges."

shares, together with Class A, Class B and Class C share holdings of other
Mercury mutual funds, will count toward a right of accumulation which may
qualify the investor for a reduced initial sales charge on new initial sales
charge purchases.

REDUCED INITIAL SALES CHARGES

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.

Reinvested Dividends. No initial sales charges are imposed upon shares
issued as a result of the automatic reinvestment of dividends.

Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class I shares of the Fund or any other Mercury
mutual funds made within a 13-month period starting with the first purchase
pursuant to the Letter of Intent. The Letter of Intent is available only to
investors whose accounts are established and maintained at the Fund's Transfer
Agent. The Letter of Intent is not available to employee benefit plans for which
affiliates of the Investment Adviser provide plan participant record-keeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class I shares; however, its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intent may be included
under a subsequent Letter of Intent executed within 90 days of such purchase if
the Distributor is informed in writing of this intent within such 90-day period.
The value of Class I shares of the Fund and of other Mercury mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intent, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the execution of such Letter, the difference between the
sales charge on the Class I shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class I
shares equal to 5.0% of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intent must be at least
5.0% of the dollar amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales charge based on the
right of accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge but there
will be no retroactive reduction of the sales charges on any previous purchase.

exchange from the Summit Cash Reserves Fund, a series of Financial Institutions
Series Trust ("Summit"), into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intent from the Fund.

Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.

REDEMPTION OF SHARES

Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any deferred sales charges that may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

31
<PAGE> 633

temporary source of cash to be used to meet redemption requests from Fund
shareholders in extraordinary or emergency circumstances.

REDEMPTION

REPURCHASE

32
<PAGE> 634

dealers for their customers at the net asset value next computed after the order
is placed. Shares will be priced at the net asset value calculated on the day
the request is received, provided that the request for repurchase is submitted
to the selected securities dealer or other financial intermediary prior to the
close of regular trading on the NYSE (generally, regular trading on the NYSE
closes at 4:00 p.m., Eastern time) and such request is received by the Fund from
such selected securities dealer or other financial intermediary not later than
30 minutes after the close of regular trading on the NYSE on the same day.

REINSTATEMENT PRIVILEGE -- CLASS I SHARES

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.

last available bid price for long positions, and at the last available ask price
for short positions. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Trustees as the primary market. Long positions in
securities traded in the OTC market are valued at the last available bid price
in the OTC market prior to the time of valuation. Short positions in securities
traded in the OTC market are valued at the last available ask price in the OTC
market prior to the time of valuation. Portfolio securities that are traded both
in the OTC market and on a stock exchange are valued according to the broadest
and most representative market. When the Fund writes an option, the amount of
the premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last ask price. Options purchased by the Fund are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for shares of the
Fund based on the net asset value of the Fund's shares on June 30, 2000 is as
follows:

<TABLE>
<S> <C>
Net Assets.................................................. $55,021,376
===========
Number of Shares Outstanding................................ 5,540,663
===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 9.93
Sales Charge (for Class I Shares; 2.00% of Offering Price;
(2.04% of net amount invested))*.......................... 0.20
-----------
Offering Price.............................................. $ 10.13
===========
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

34
<PAGE> 636

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

or its affiliates acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund. Securities may be held
by, or be appropriate investments for, the Fund as well as other funds or
investment advisory clients of the Investment Adviser or its affiliates.

The Fund paid no brokerage commissions for the last three fiscal years.

The value of the Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of June 30,
2000 was as follows:

<TABLE>
<CAPTION>
REGULAR AGGREGATE
BROKER-DEALER HOLDINGS
------------- ----------
<S> <C>
Bear Stearns $1,498,461
Lehman Brothers 900,562
</TABLE>

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

36
<PAGE> 638

must redeem the shares so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those shares.

EXCHANGE PRIVILEGE

37
<PAGE> 639

may suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor. The Fund may refuse to permit exchanges to prevent shareholders
from market-timing the Fund.

FEE-BASED PROGRAMS

RETIREMENT PLANS

AUTOMATIC INVESTMENT PLANS

AUTOMATIC DIVIDEND REINVESTMENT PLAN

38
<PAGE> 640

SYSTEMATIC WITHDRAWAL PLANS

If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her financial consultant.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities or foreign
currencies, be derived from payments with respect to securities loans, interest,
dividends and gains from the sale or other disposition of stock, securities, or
foreign currencies or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies; and (2) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment
companies). In addition, in order not to be subject to Federal taxation, the
Fund must distribute to its shareholders at least 90% of its investment company
taxable income earned in each year.

39
<PAGE> 641

Upon sale or exchange of shares of the Fund, a shareholder will realize
short-term or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund's shares. However, if a shareholder's shares must be
treated as long-term capital loss to the extent of capital gains dividends
received with respect to such shares.

40
<PAGE> 642

and the Treasury Regulations promulgated thereunder. The Code and Regulations
are subject to change by legislative or administrative action, and any such
change may be prospective or retroactive. Ordinary income and capital gains
dividends may also be subject to state and local taxes. Investors are urged to
consult their attorneys or tax advisers regarding specific questions as to
Federal, foreign, state or local taxes.

PERFORMANCE DATA

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE SINCE
YEAR YEARS INCEPTION
---- ----- ---------
<S> <C> <C> <C> <C>
Class I*............................... 4.75% 5.76% 5.94% (Since 5/18/93)
</TABLE>

---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.

YIELD = 2 [((a - b) + 1)(6) - 1]
cd

41
<PAGE> 643

entitled to receive dividends; and "d" equals the maximum offering price per
share on the last day of the period.

The 30-day yield for the Fund for the period ended June 30, 2000 was 6.41%
(Class I).

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Merrill Lynch 6 Month Treasury Bill Index, Standard & Poor's 500 Composite Stock
Price Index and other published indexes. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, the Fund may refer in advertising or sales literature to
(i) mutual fund performance ratings, rankings and comparisons (including
risk-adjusted ratings, rankings and comparisons), (ii) other comparisons of
mutual fund data including assets, expenses, fees and other data, and (iii)
other discussions reported in or assigned by Barron's, Business Week, CDA
Investment Technology, Inc., Financial World, Forbes Magazine, Fortune Magazine,
Lipper Inc., Money Magazine, U.S. News & World Report, The Wall Street Journal
and other industry publications. The Fund may also make reference to awards that
may be given to the Investment Adviser. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

42
<PAGE> 644

shares. The Board of Trustees has created ten funds and ten series of shares,
and may create additional funds and series in the future, which have separate
assets and liabilities.

The Declaration of Trust contains an express disclaimer of shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is unlikely and is limited to
the relatively remote circumstances in which the Trust would be unable to meet
its obligations.

ISSUANCE OF FUND SHARES FOR SECURITIES

43
<PAGE> 645

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

TRANSFER AGENT

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

44
<PAGE> 646

PRINCIPAL HOLDERS

As of September 19, 2000, the following shareholder owned of record, and to
the knowledge of the Fund, beneficially more than 5% of the outstanding shares
of the Fund:

United Airlines Inc., PO Box 92956, Chicago IL, 60675-2965 -- 12.07% of
Class I shares.

As of September 19, 2000, the following shareholders owned of record, but
not beneficially, more than 5% of the outstanding shares of the Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 54.11% of Class I shares.

National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 12.10% of Class I shares.

As of September 19, 2000, the Trust's officers and Trustees as a group
owned 0.03% of the Fund's outstanding shares.

45
<PAGE> 647

APPENDIX -- DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

SHORT-TERM DEBT RATINGS:

A-1
<PAGE> 648

MUNICIPAL BOND RATINGS:

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

COMMERCIAL PAPER RATINGS:

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

FITCH IBCA, INC. AND DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

A-2
<PAGE> 649

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

"B" -- Speculative. Minimal capacity for timely payment of financial commitments
plus vulnerability to near-term adverse changes in financial and economic
conditions.

A-3
<PAGE> 650

Code #: MHW-SAI-1080-1000
<PAGE> 651

STATEMENT OF ADDITIONAL INFORMATION

MERCURY HW EQUITY FUND FOR INSURANCE COMPANIES

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479

------------------------

Mercury HW Equity Fund for Insurance Companies (the "Fund") is a fund of
the Mercury HW Funds (the "Trust"). The Trust is a diversified, open-end,
management investment company which is organized as a Massachusetts business
trust. The investment objective of the Fund is to seek to provide current income
and long-term growth of income, accompanied by growth of capital. The Fund seeks
to achieve its investment objective by investing primarily in the common stocks
of large U.S. companies. No assurance can be given that the investment objective
of the Fund will be realized. For more information on the Fund's investment
objective and policies, see "Investment Objective and Policies."

The Fund offers a single class (Investor Class) of shares. Shares of the
Fund are offered only to insurance companies.

------------------------

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Fund, dated October 6, 2000 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling the Fund at
1-800-236-4479 or by writing to the address listed above. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its annual report for the
fiscal year ended June 30, 2000. You may request copies of the annual report at
no charge by calling 1-800-236-4479 between 8:30 a.m. and 5:30 p.m. (Eastern
time) on any business day.

------------------------

MERCURY ADVISORS -- INVESTMENT ADVISER

------------------------

The date of this Statement of Additional Information is October 6, 2000
<PAGE> 652

TABLE OF CONTENTS

2
<PAGE> 653

TRUST HISTORY

INVESTMENT OBJECTIVE AND POLICIES

Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

3
<PAGE> 654

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading
account in securities.

10. Make loans, except through repurchase agreements.

11. Purchase or sell foreign currencies.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

The Fund may invest in component parts of U.S. Treasury notes or bonds,
namely, either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

DERIVATIVE INSTRUMENTS

5
<PAGE> 656

and securities indexes and enter into forward contracts. The Fund also may enter
into swap agreements with respect to interest rates and securities indexes. The
Fund may use these techniques to hedge against changes in interest rates or
securities prices or as part of its overall investment strategies. The Fund will
mark as segregated cash, U.S. government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under swap agreements and options to avoid leveraging of the Fund.

6
<PAGE> 657

FOREIGN SECURITIES

FOREIGN INVESTMENT RISKS

EMU. For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU establishes a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in euros, and are now listed,
traded, declaring dividends and making other payments only in euros.

7
<PAGE> 658

Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

SWAP AGREEMENTS

ILLIQUID SECURITIES

8
<PAGE> 659

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organizations ("NRSROs") or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.

BORROWING

WHEN-ISSUED SECURITIES

normal settlement dates, generally from 15 to 45 days after the transaction. The
price that the Fund is obligated to pay on the settlement date may be different
from the market value on that date. While securities may be sold prior to the
settlement date, the Fund intends to purchase such securities with the purpose
of actually acquiring them, unless a sale would be desirable for investment
reasons. At the time the Fund makes a commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security each day in determining the Fund's net asset value. The Fund will also
mark as segregated with its custodian cash, U.S. government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, equal
in value to its obligations for when-issued securities.

REAL ESTATE INVESTMENT TRUSTS

SHARES OF OTHER INVESTMENT COMPANIES

LIMITED PARTNERSHIPS

The Fund can invest in limited partnership interests.

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

INITIAL PUBLIC OFFERINGS

10
<PAGE> 661

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

company); Trustee or Director of 67 registered investment companies (consisting
of 72 portfolios) for which the Investment Adviser or an advisory affiliate is
the adviser.

<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter..................................... $ -0- $ -0-
Robert L. Burch III................................ $27,859 $ 34,000
John A. G. Gavin................................... $27,859 $ 25,000
Joe Grills......................................... $27,859 $232,333
Nigel Hurst-Brown.................................. $ -0- $ -0-
Robert B. Hutchinson**............................. $12,000 $ 34,000
Madeleine A. Kleiner............................... $27,859 $ 18,000
Merle T. Welshans**................................ $12,000 $ 34,000
Richard R. West.................................... $27,859 $422,225
</TABLE>

** Messrs. Hutchinson and Welshans retired on November 12, 1999.

For information as to ownership of shares, see "General
Information -- Principal Holders."

12
<PAGE> 663

ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Trust on behalf of the Fund has
entered into an investment advisory agreement (the "Advisory Agreement") with
the Investment Adviser as investment adviser. Subject to the supervision of the
Trustees, the Investment Adviser is responsible for the actual management of the
Fund and continuously reviews the Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser. The Investment Adviser performs certain of the other administrative
services and provides all office space, facilities, equipment and necessary
personnel for management of the Fund. The Investment Adviser receives for its
services to the Fund a monthly fee at an annual rate of 0.60% on the first
$10,000,000 of the Fund's average daily net assets and 0.50% of average daily
net assets in excess of $10,000,000. For purposes of this calculation, average
daily net assets is determined at the end of each month on the basis of the
average net assets of the Fund for each day during the month.

Payment of Fund Expenses. The Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay, or cause an
affiliate to pay, for maintaining its staff and personnel and to provide office
space, facilities and necessary personnel for the Fund. The Investment Adviser
is also obligated to pay, or cause an affiliate to pay, the fees of all officers
and Trustees who are affiliated persons of the Investment Adviser and to pay all
other expenses incurred in the operation of the Fund, including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, shareholder reports, copies of the Registration Statement, charges of
the custodian, any sub-custodian and the transfer agent, expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under Federal, state or non-U.S. laws, fees and actual
out-of-pocket expenses of non-interested Trustees, accounting and pricing costs
(including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Fund.

13
<PAGE> 664

ACCOUNTING AND ADMINISTRATIVE SERVICES

CODE OF ETHICS

The Board of Trustees of the Trust has approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Trust and the Investment Adviser (the
"Code of Ethics"). The Code of Ethics significantly restricts the personal
investing activities of all employees of the Investment Adviser and, as
described below, imposes additional, more onerous, restrictions on fund
investment personnel.

The Code of Ethics requires that all employees of the Investment Adviser
pre-clear any personal securities investments (with limited exceptions, such as
mutual funds, high-quality short-term securities and direct obligations of the
U.S. government). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
the Investment Adviser include a ban on acquiring any securities in a "hot"
initial public offering. In addition, investment personnel are prohibited from
profiting on short-term trading in securities. No employee may purchase or sell
any security that at the time is being purchased or sold (as the case may be),
or to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Code of Ethics
provides for trading "blackout periods" which prohibit trading by investment
personnel of the Fund within seven calendar days before or after trading by the
Fund in the same or an equivalent security.

PURCHASE OF SHARES

Shares of the Fund are offered only to insurance companies. The minimum
initial investment in the Fund is $1,000,000. There is no minimum subsequent
investment.

The Fund issues a single class (Investor Class) of shares. Each share of
the Fund represents an identical interest in the investment portfolio of the
Fund and has the same rights.

The Fund offers its shares at a public offering price equal to the next
determined net asset value per share. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Transfer Agent.

The Fund may suspend the continuous offering of the Fund's shares at any
time in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected by
the Fund.

Investor Class shares are offered only to insurance companies investing a
minimum of $1,000,000 and also will be issued upon reinvestment of dividends on
outstanding Investor Class shares. Investors who own Investor Class shares are
entitled to purchase additional Investor Class shares of the Fund in that
account.

14
<PAGE> 665

REDEMPTION OF SHARES

Reference is made to "How to Redeem Shares" in the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Shareholders liquidating their holdings will receive upon redemption
all dividends reinvested through the date of redemption.

The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.

REDEMPTION

15
<PAGE> 666

bank). The Fund may delay or cause to be delayed the mailing of a redemption
check until such time as good payment (e.g., cash, Federal funds or certified
check drawn on a U.S. bank) has been collected for the purchase of such Fund
shares, which usually will not exceed 10 days. In the event that a shareholder
account held directly with the Transfer Agent contains a fractional share
balance, such fractional share balance will be automatically redeemed by the
Fund.

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Net asset value of the Fund is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. The fees payable to the Investment Adviser, are
accrued daily.

additions to or withdrawals from the investor's investment in the Fund effected
on such day, and (ii) the denominator of which is the aggregate net asset value
of the Fund as of such time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Fund by all investors in the Fund. The percentage so determined will then be
applied to determine the value of the investor's interest in the Fund after the
close of regular trading on the NYSE on the next determination of net asset
value of the Fund.

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

17
<PAGE> 668

Since transactions in the OTC market usually involve transactions with the
dealers acting as principal for their own accounts, the Fund will not deal with
affiliated persons, including Merrill Lynch and its affiliates, in connection
with such transactions. However, an affiliated person of the Fund may serve as
its broker in OTC transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch or an affiliate is a member or in a
private placement in which Merrill Lynch or an affiliate serves as placement
agent except pursuant to procedures approved by the Board of Trustees that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each such
service and copies of the various plans or how to change options with respect
thereto, can be obtained from the Fund by calling the telephone number on the
cover page hereof. Certain of these services are available only to U.S.
investors.

INVESTMENT ACCOUNT

18
<PAGE> 669

AUTOMATIC DIVIDEND REINVESTMENT PLAN

Shareholders may, at any time, by written notification or by telephone
(1-800-236-4479) to the Transfer Agent, elect to have subsequent dividends of
ordinary income and/or capital gains paid with respect to shares of the Fund in
cash, rather than reinvested in shares of the Fund (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.

DIVIDENDS AND TAX STATUS

Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock, securities or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies; and (2) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies). In addition, in order not to be subject to
Federal taxation, the Fund must distribute to its shareholders at least 90% of
its investment company taxable income earned in each year.

19
<PAGE> 670

PERFORMANCE DATA

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted.
Actual annual or annualized total return data generally will be lower than
average annual total return data since the average rates of return reflect
compounding of return; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.

Average annual total returns for the periods ended June 30, 2000 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE SINCE
YEAR YEARS INCEPTION
------- ----- ---------
<S> <C> <C> <C> <C>
Investor Class........................ -19.74% 10.92% 10.87% (Since 1/29/93)
</TABLE>

In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Standard & Poor's 500 Composite Stock Price Index and other published indexes.
When comparing its performance to a market index, the Fund may refer to various

20
<PAGE> 671

statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, the Fund may refer in
advertising or sales literature to (i) mutual fund performance ratings, rankings
and comparisons (including risk-adjusted ratings, rankings and comparisons),
(ii) other comparisons of mutual fund data including assets, expenses, fees and
other data, and (iii) other discussions reported in or assigned by Barron's,
Business Week, CDA Investment Technology, Inc., Financial World, Forbes
Magazine, Fortune Magazine, Lipper Inc., Money Magazine, U.S. News & World
Report, The Wall Street Journal and other industry publications. The Fund may
also make reference to awards that may be given to the Investment Adviser. As
with other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.

GENERAL INFORMATION

DESCRIPTION OF SHARES

21
<PAGE> 672

the election of Trustees or the ratification of the selection of accountants.
The Rule contains special provisions for cases in which an advisory contract is
approved by one or more, but not all, series. A change in investment policy may
go into effect as to one or more series whose holders so approve the change even
though the required vote is not obtained as to the holders of other affected
series.

ISSUANCE OF FUND SHARES FOR SECURITIES

REDEMPTION IN KIND

INDEPENDENT AUDITORS

CUSTODIAN

22
<PAGE> 673

TRANSFER AGENT

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

PRINCIPAL HOLDERS

As of September 19, 2000, Prudential Insurance Co., 290 W. Mount Pleasant
Ave. #1, Livingston, NJ 07039-2729, owned of record, and to the knowledge of the
Fund, beneficially 100% of the outstanding shares of the Fund and may be deemed
a controlling person of the Fund.

23
<PAGE> 674

Code #: MHW-SAI-1010-1000