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PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Class Y Shares
1285 Avenue of the Americas, New York, NY 10019
Prospectus -- January 1, 1997, as Supplemented June 6, 1997
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PaineWebber Asset Allocation Funds are designed for investors generally seeking
high total return. PaineWebber Balanced Fund invests primarily in a combination
of equity securities, investment grade bonds and money market instruments and
maintains a fixed income allocation of at least 25% at all times. PaineWebber
Tactical Allocation Fund follows a disciplined investment strategy that
actively allocates its assets between equity securities and U.S. Treasury notes
or U.S. Treasury bills.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference.
The Class Y shares described in this Prospectus are currently offered for sale
only to a limited group of investors, which include, for the Class Y shares of
Tactical Allocation Fund, the trustee of the PaineWebber Savings Investment
Plan ("PW SIP"). See "How to Buy Shares." Participants in the PW SIP can make
further inquiries by contacting Benefits Connection, 100 Halfday Road, Lincoln-
shire, IL 60069 or by calling 1-888-PWebber (1-888-793-2237):
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A Statement of Additional Information dated January 1, 1997 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your
investment executive at PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Prospectus Page 1
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PaineWebber Tactical Allocation Fund
Balanced Fund
Table of Contents
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<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 6
Investment Objectives & Policies........................................... 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 10
The Funds' Investments..................................................... 11
How to Buy Shares.......................................................... 16
How to Sell Shares......................................................... 17
Management................................................................. 18
Determining the Shares' Net Asset Value.................................... 19
Dividends & Taxes.......................................................... 19
General Information........................................................ 20
</TABLE>
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Prospectus Page 2
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PaineWebber Tactical Allocation Fund
Balanced Fund
The Funds at a Glance
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The Funds offered by this Prospectus are not intended to provide a complete
investment program, but one or both of them may be appropriate as a component
of an investor's overall portfolio. Some common reasons to invest in these
Funds are to finance college educations, plan for retirement or diversify a
portfolio. When selling shares, investors should be aware that they may get
more or less for their shares than they originally paid for them. As with any
mutual fund, there is no assurance that the Funds will achieve their goals.
BALANCED FUND
GOAL: To increase the value of your investment by investing in a combination
of equity securities, investment grade bonds and money market instruments,
while maintaining a fixed income allocation of at least 25% at all times.
INVESTMENT OBJECTIVE: High total return with low volatility.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests in equity securities, its price will rise and fall.
Certain investment grade debt securities in which the Fund may invest have
speculative characteristics. The debt instruments in which the Fund may invest
are subject to interest rate risk, which means that their prices can be
expected to decrease when interest rates rise. The Fund may invest in
mortgage- and asset-backed securities, which involve additional risks, such as
those relating to the prepayment of principal on the underlying obligations.
The Fund may invest in U.S. dollar-denominated securities of foreign
companies, which can involve more risk than investing in the securities of
U.S. companies. The Fund also may invest up to 10% of its total assets in high
yield, high risk convertible securities, which are considered predominantly
speculative and involve major risk exposure to adverse conditions. The Fund
may use derivatives, such as options and futures, in its investment
activities, which may involve additional risks. Investors may lose money by
investing in the Fund; your investment is not guaranteed.
SIZE: On November 30, 1996, the Fund had over $197.8 million in assets.
TACTICAL ALLOCATION FUND
GOAL: To increase the value of your investment by following a disciplined
investment strategy that actively allocates the Fund's assets between equity
securities and U.S. Treasury notes or U.S. Treasury bills.
INVESTMENT OBJECTIVE: Total return, consisting of long-term capital
appreciation and current income.
RISKS: Although the Fund seeks total return, it may not achieve as high a
level of either capital appreciation or current income as a fund that has only
one of those objectives as its primary objective. The Fund invests in equity
securities included in the Standard and Poor's 500 Composite Stock Price Index
(the "S&P 500 Index"). Equity securities historically have shown greater
growth potential than other types of securities, but they have also shown
greater volatility. Because the Fund invests in equity securities, its price
will rise and fall. The Fund may invest in U.S. dollar-denominated securities
of foreign companies, which can involve more risk than investing in the
securities of U.S. companies. The U.S. Treasury notes and U.S. Treasury bills
in which the Fund may invest are subject to interest rate risk, which means
that their prices can be expected to decrease when interest rates rise. The
Fund may use derivatives, such as options and futures, in its investment
activities, which may involve additional risks. Investors may lose money by
investing in the Fund; your investment is not guaranteed.
SIZE: On November 30, 1996, the Fund had over $209.4 million in assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of
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Prospectus Page 3
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PaineWebber Tactical Allocation Fund
Balanced Fund
The Funds at a Glance
(Continued)
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PaineWebber Incorporated ("PaineWebber"), is the investment adviser and
administrator of Balanced Fund and Tactical Allocation Fund (each a "Fund"
and, collectively, the "Funds").
WHO SHOULD INVEST
BALANCED FUND is for investors who want high total return with low volatility
through investments in equity securities, investment grade bonds and money
market instruments. The Fund is designed for investors who want an investment
that maintains a fixed income allocation at all times, yet has the flexibility
to change its investment mix in response to changing market conditions. Over
time, the 25% minimum in fixed income investments should result in a lower
risk profile for the Fund than if it could invest 100% of its assets in
stocks.
TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a disciplined
investment strategy that actively allocates assets between equity securities
included in the S&P 500 Index and U.S. Treasury notes or U.S. Treasury bills.
The Fund is designed for investors who want to participate in the broad stock
market, yet want the flexibility to take a more defensive posture when a
secular decline in stock prices is projected. This disciplined approach to
investing in stocks attempts to shift the asset mix in anticipation of, not in
response to, changing market trends.
* * * *
See page 9 for a summary of the differences between Balanced Fund and Tactical
Allocation Fund.
HOW TO PURCHASE CLASS Y SHARES
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value next calculated after PaineWebber's New York
City headquarters or PFPC Inc., the Funds' transfer agent ("Transfer Agent")
receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares. As
a result, 100% of their purchase is immediately invested. Investors also do
not pay a redemption fee or contingent deferred sales charge when they sell
Class Y shares.
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Prospectus Page 4
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PaineWebber Tactical Allocation Fund
Balanced Fund
Expense Table
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The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds. Expenses
shown below represent those incurred for the most recent fiscal year for
Tactical Allocation Fund and are estimated for Balanced Fund based on the
expenses incurred by its Class A shares for the period March 1, 1996 to August
31, 1996.
<TABLE>
<CAPTION>
CLASS Y
-------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge on Purchases of Shares (as a % of offering price). None
Sales Charge on Reinvested Dividends (as a % of offering price)........ None
Maximum Contingent Deferred Sales Charge (as a % of net asset value at
the time of purchase or sale, whichever is less)...................... None
ANNUAL FUND OPERATING EXPENSES (as a % of average net assets) (1)
BALANCED FUND
Management Fees........................................................ 0.75%
12b-1 Fees............................................................. 0.00
Other Expenses (estimated)............................................. 0.34
----
Total Operating Expenses (estimated)................................... 1.09%
====
TACTICAL ALLOCATION FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses......................................................... 0.45
----
Total Operating Expenses............................................... 0.95%
====
</TABLE>
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(1)Class Y shares may be purchased by participants in the INSIGHT Advisory
Program ("INSIGHT") sponsored by PaineWebber, when purchased through that
program. Participation in INSIGHT is subject to payment of an advisory fee
at the maximum annual rate of 1.50% of assets held through INSIGHT
(generally charged quarterly in advance), which may be charged to the
INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Fund.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the example is required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds. THIS EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would, directly or indirectly, pay the following expenses on a
$1,000 investment in a Fund, assuming (1) a 5% annual return, (2) reinvestment
of all dividends and other distributions and (3) percentage amounts listed
under "Annual Fund Operating Expenses" remain the same for years shown.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
BALANCED FUND................................... $26 $81 $138 $292
TACTICAL ALLOCATION FUND........................ $25 $76 $131 $279
</TABLE>
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Prospectus Page 5
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PaineWebber Tactical Allocation Fund
Balanced Fund
Financial Highlights
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TACTICAL ALLOCATION FUND
The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements, accompanying notes and the report of Ernst & Young LLP,
independent auditors, which appear in the Fund's Annual Report to Shareholders
for the fiscal year ended August 31, 1996, and are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes, as well as the financial information in the table below relating to
each of the two fiscal years ended August 31, 1996 and August 31, 1995, have
been audited by Ernst & Young LLP. The financial information for the year
ended August 31, 1994 and the prior periods was audited by other auditors,
whose report on this data was unqualified. Further information about the
Fund's performance is also included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568.
BALANCED FUND
During the fiscal period ended August 31, 1996, no Class Y shares of Balanced
Fund were outstanding and thus no financial information for that period is
available.
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
------------------------------------------
CLASS Y
------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED MAY 10, 1993+
AUGUST 31, TO AUGUST 31,
-------------------------- --------------
1996 1995** 1994 1993
------- ------- ------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of peri-
od................................. $ 14.88 $ 13.79 $ 13.52 $ 12.90
------- ------- ------- -------
Net investment income............... 0.30 0.23 0.25 0.09
Net realized and unrealized gains
from investment transactions....... 2.24 2.09 0.33 0.60
------- ------- ------- -------
Net increase from investment opera-
tions.............................. 2.54 2.32 0.58 0.69
------- ------- ------- -------
Dividends from net investment in-
come............................... (0.16) (0.26) (0.27) (0.07)
Distributions from net realized
gains from investment
transactions....................... (1.06) (0.97) (0.04) --
------- ------- ------- -------
Total dividends and distributions to
shareholders....................... (1.22) (1.23) (0.31) (0.07)
------- ------- ------- -------
Net asset value, end of period...... $ 16.20 $ 14.88 $ 13.79 $ 13.52
======= ======= ======= =======
Total investment return (1)......... 17.70% 18.79% 4.41% 5.30%
======= ======= ======= =======
Ratios/ supplemental data:
Net assets, end of period (000's).. $12,803 $ 2,506 $ 3,880 $ 3,379
Expenses to average net assets..... 0.95% 1.23% 0.88% 0.81%*
Net investment income to average
net assets........................ 1.38% 1.86% 1.90% 1.96%*
Portfolio turnover rate............ 6% 53% 4% 0%
Average commission rate paid per
share on common stock investments
purchased/sold (2)................ $0.0250 -- -- --
</TABLE>
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+ Commencement of issuance of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. Total investment
returns for periods of less than one year have not been annualized.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.
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Prospectus Page 6
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PaineWebber Tactical Allocation Fund
Balanced Fund
Investment Objectives & Policies
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The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards. See the summary on page 9
for the differences between Balanced Fund and Tactical Allocation Fund.
BALANCED FUND
Balanced Fund's investment objective is high total return with low volatility.
The Fund pursues this objective by investing primarily in a combination of
three asset classes: stocks (equity securities), bonds (investment grade
bonds) and cash (money market securities). The portion invested in each of
these asset classes is based on Mitchell Hutchins' judgment of the best
allocation of the Fund's assets. However, the Fund maintains a fixed income
allocation (including bonds and cash) of at least 25%.
The Fund may invest in a broad range of:
. Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;
. Investment grade bonds, that is, bonds that, at the time of purchase, are
assigned one of the four highest grades by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc.
("Moody's"), are comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, are determined by
Mitchell Hutchins to be of comparable quality;
. U.S. government securities;
. Convertible securities rated at least B by S&P or Moody's, comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Securities rated BB or B by S&P (or Ba or B by Moody's)
are below investment grade and regarded as having predominantly speculative
characteristics with respect to the ability to pay interest and repay
principal. While such securities may have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. The Fund will not invest more than 10% of
its total assets in convertible securities rated below investment grade; and
.High quality money market securities.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve
its objective by using a disciplined investment strategy that allocates its
assets between common stocks and U.S. Treasury notes or U.S. Treasury bills.
In seeking total return, the Fund shifts its asset mix among an equity portion
designed to track the performance of the S&P 500 Index (the Fund holds
approximately 450 of the 500 stocks in the S&P 500 Index), a bond portion,
consisting of five-year U.S. Treasury notes, and a cash portion, consisting of
30-day U.S. Treasury bills. The allocation among these three segments is based
on the asset mix recommendation of the Mitchell Hutchins Tactical Allocation
Model.
The Fund seeks to achieve total return during all economic and financial
market cycles, with lower volatility than that of the S&P 500 Index, by
investing in common stocks held in the S&P 500 Index, but can take a more
defensive posture when the Model signals a potential bear market, prolonged
downturn in stock prices or significant loss in value.
* * * *
As with any mutual fund, there is no assurance that either Fund will achieve
its investment objective. Each Fund's net asset value fluctuates based upon
changes in the value of its portfolio securities.
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Prospectus Page 7
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PaineWebber Tactical Allocation Fund
Balanced Fund
Investment Philosophy & Process
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BALANCED FUND
Mitchell Hutchins believes that superior performance can be obtained by
reallocating assets from time to time before changes in the consensus outlook
of investors have been fully discounted by the market. Mitchell Hutchins also
believes that returns on stocks and bonds reflect the consensus expectations
for key economic variables, such as interest rates, profit growth and
inflation. To implement this strategy for the Fund, Mitchell Hutchins:
. Regularly surveys key investment advisors and generates a consensus forecast
of economic variables affecting returns on equity securities, bonds and
money market instruments; and
. Applies fundamental valuation techniques to the consensus data to determine
the asset allocation it believes to be optimal.
Once the Fund's asset allocation is determined, the portfolio managers
specializing in each asset class select individual securities for each portion
of the portfolio. Mitchell Hutchins regularly monitors the outlooks for key
economic variables and shifts the asset allocation mix when there are
significant changes in expected returns.
The Fund uses the following investment process to determine the individual
securities for each portion of the Fund:
. EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price
momentum. This Model screens a universe of small- to large-capitalization
companies in ten different business sectors to identify undervalued
companies with strong earnings momentum that rank well in three measures:
--VALUE: projected dividends, cash flow, earnings and book value;
--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and
--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
The equity securities ranking in the top 20% of the Factor Valuation Model's
universe are screened twice a month. Then the portfolio managers take a closer
look at those equity securities that rank higher based on value and momentum.
Mitchell Hutchins applies traditional analysis and may speak to the management
of these companies, as well as those of their competitors.
. DEBT SECURITIES. Mitchell Hutchins selects these securities based on its
analysis of their maturity and risk structures (comparing yields on U.S.
Treasury securities to yields on riskier types of debt securities).
. MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these
securities is based on its judgment of how they can further the Fund's
investment objective.
As of August 31, 1996, the Fund's assets were allocated as follows: equity
securities, 54.3%; bonds, 39.5%; and cash, 6.2%. At February 29, 1996, the
asset allocation looked like this: equity securities, 59%; bonds, 30%; and
cash, 11%.
TACTICAL ALLOCATION FUND
Mitchell Hutchins allocates the Fund's assets between stocks and either bonds
or cash, based on the Tactical Allocation Model's quantitative assessment of
the projected rates of return of each asset class. The Tactical Allocation
Model embraces the concept that incremental return to the S&P 500 Index can be
achieved through the tactical allocation of portfolio assets across three main
asset classes--stocks, bonds and cash. This disciplined approach to investing
in stocks attempts to shift the asset mix in anticipation of, not in response
to, changing market trends. The emphasis of this Model is to avoid or reduce
exposure to the stock market during down cycles and to track the S&P 500 Index
in periods of strongly positive market performance. In contrast to a typical
S&P 500 Index fund that maintains a 100% allocation to the Index at all times,
the Fund is designed to take a more defensive posture when the Tactical
Allocation Model signals a potential bear market, prolonged downturn in stock
prices or significant loss in value.
The basic premise of the Tactical Allocation Model is that investors accept
the risk of owning stocks, measured as volatility of return, because they
expect a return advantage. This expected return advantage of owning stocks is
called the equity risk premium
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Prospectus Page 8
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PaineWebber Tactical Allocation Fund
Balanced Fund
DIFFERENCES BETWEEN BALANCED FUND AND TACTICAL ALLOCATION FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND TACTICAL ALLOCATION FUND
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<S> <C> <C>
Investment Objective High total return with low Total return, consisting of long-
volatility. term capital appreciation and
current income.
- -------------------------------------------------------------------------------
Asset Allocation Decision Based on Mitchell Hutchins' Based on the Mitchell Hutchins
fundamental valuations for each Tactical Allocation Model.
asset class using its consensus
forecast for certain economic
variables.
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Asset Mix Fixed income allocation: at Tactical Allocation Model signals
least 25% at all times. a stock segment of 100%, 75%,
50%, 25% or 0% and selects bonds
or cash for balance. Fund may
deviate from Model only to pay
its expenses, dividends and other
obligations.
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Stock Selection Discretionary, based on the When there is a stock allocation,
Mitchell Hutchins Factor invests in about 450 of the 500
Valuation Model, which evaluates common stocks that make up the
companies' potential for rapid S&P 500 Index.
earnings growth.
- -------------------------------------------------------------------------------
Fixed Income Selection Discretionary, may select from When there is a bond allocation,
broad range of debt securities five-year U.S. Treasury notes.
with government or private When there is a cash allocation,
issuers. 30-day U.S. Treasury bills.
</TABLE>
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("ERP"). The Model projects the stock market's expected ERP based on several
factors including:
. current price of stocks and their expected future dividends;
. three to five-year, "bottom-up" company earnings projections; and
. yield-to-maturity of the one-year U.S. Treasury bill.
When the stock market's ERP is high, the Tactical Allocation Model signals the
Fund to invest 100% in stocks. Conversely, when the ERP decreases below
certain threshold levels, the Model signals the Fund to reduce its exposure to
stocks. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or
0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the Fund's assets. The Model will recommend either bonds (five-year U.S.
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make
this determination, the Model calculates the risk premium available for the
notes. This "bond risk premium" ("BRP") is calculated based on the yield-to-
maturity of the five-year U.S. Treasury note and the one-year U.S. Treasury
bill.
Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets dictated by the Tactical Allocation
Model, any material amounts resulting from appreciation or receipt of
dividends, distributions, interest payments and proceeds from securities
maturing in each of the asset classes are reallocated (or "rebalanced") to the
extent practicable to re-establish the Model's recommended asset
allocation mix.
The Fund deviates from the recommendations of the Tactical Allocation Model
only to the extent necessary to:
. Maintain an amount in cash, not expected to exceed 2% of its total assets
under normal market conditions, to pay Fund operating expenses, dividends
and other distributions on its shares and to meet anticipated sales of
shares by Fund investors; and
. Qualify as a regulated investment company for federal income tax purposes.
See "Dividends & Taxes."
As a result, even if the Tactical Allocation Model does not recommend an
allocation to cash, the Fund still may hold cash.
As of August 31, 1996, 100% of the Fund's assets were allocated to stocks, and
as of February 29, 1996, the Fund's assets were allocated as follows: 99% to
stocks, 0% to bonds and 1% to cash.
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Prospectus Page 9
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PaineWebber Tactical Allocation Fund
Balanced Fund
Performance
- --------------------------------------------------------------------------------
This chart shows the total returns for Class Y shares of Tactical Allocation
Fund. Past results are not a guarantee of future results. No Class Y shares for
Balanced Fund were outstanding during 1996, so no performance is presented for
that Fund. Average annual returns for periods from inception through Tactical
Allocation Fund's fiscal year end are shown below the performance chart.
TACTICAL ALLOCATION FUND
[GRAPHIC APPEARS HERE]
5/10/93-12/31/93 6.65%
1994 -0.28%
1995 35.48%
1996 21.79%
As Class Y shares commenced operations on May 10, 1993, the 1993 return
represents the period from May 10, 1993 to December 31, 1993. Investment
advisory functions for the Fund were transferred from Kidder Peabody Asset
Management, Inc. to Mitchell Hutchins on February 13, 1995.
AVERAGE ANNUAL RETURNS
As of August 31, 1996
<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Inception Date......................................................... 5/10/93
One Year............................................................... 17.70%
Life................................................................... 13.88%
</TABLE>
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in a Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. One-, five- and ten-year periods
will be shown, unless the Fund or class has been in existence for a shorter
period. If so, returns will be shown for the period since inception. Total
return calculations assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report to Shareholders, which may be obtained without
charge by contacting the Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
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Prospectus Page 10
<PAGE>
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PaineWebber Tactical Allocation Fund
Balanced Fund
The Funds' Investments
- -------------------------------------------------------------------------------
BALANCED FUND
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and
common stock purchase warrants and rights. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, which are
convertible into common stock.
U.S. GOVERNMENT SECURITIES in which the Fund may invest include direct
obligations of the U.S. government (such as U.S. Treasury bills, notes and
bonds) and obligations issued or guaranteed by U.S. government agencies and
instrumentalities.
BONDS (including notes and debentures) are used by corporations and
governments to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and must repay the amount borrowed at
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.
ASSET-BACKED SECURITIES are debt obligations backed by specific types of
assets. The most common type of asset-backed securities is mortgage-backed
bonds, which represent a direct or indirect interest (participation) in--or
are secured by and payable from--a pool of mortgage loans secured by real
property. They are sold by U.S. government agencies, such as the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage Association, and
private corporations. Investors typically receive payments out of the interest
and principal on the underlying mortgages. The growth of mortgage-backed
securities and the secondary mortgage market in which they are traded has
helped keep mortgage money available for home financing.
Mortgage-backed securities include:
. Single- and multi-class pass-through securities, representing pooled debt
obligations repackaged as shares, that pass income from debtors through the
intermediary to investors;
. Collateralized mortgage obligations ("CMOs"), which are more complex
versions of mortgage-backed bonds. Evaluating the risks and rewards of CMOs
requires special knowledge.
When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds are paid off more quickly than investors may expect.
When interest rates rise, mortgage-backed bonds may be paid off more slowly
than originally expected.
Other asset-backed securities are structured similar to mortgage-backed
securities, except that the underlying assets are not first lien mortgage
loans or interests in them. Instead, these securities represent underlying
assets such as motor vehicle installment sales contracts, home equity loans,
leases of various types of real and personal property and receivables from
revolving credit (credit card) agreements.
ZERO COUPON SECURITIES are securities that make no periodic interest payments
but instead are sold at a deep discount from their face value. The buyer of
such a security receives the rate of return by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. There
are many kinds of zero coupon securities. The most commonly known is the zero
coupon bond, which either may be issued at a deep discount by a corporation or
may be created by a brokerage firm when it strips (separates) the coupons
(unmatured interest payments) off a bond and sells the principal and the
coupons separately. This technique is used frequently with U.S. Treasury
bonds; these issues include CATS (Certificates of Accrual Treasury Securities)
and TIGRs (Treasury Income Growth Receipts).
Because zero coupon securities bear no interest and holders do not receive
interest payments, they are generally more sensitive to changes in interest
rates
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PaineWebber Tactical Allocation Fund
Balanced Fund
than other U.S. government securities. For example, when interest rates fall,
the value of zero coupon securities rises more rapidly than bonds paying out
interest on a current basis because the zero coupon securities have locked in
a particular rate of reinvestment that becomes more attractive the further
rates fall. However, when interest rates rise, their value falls more
dramatically.
MONEY MARKET INSTRUMENTS in which the Fund may invest include:
. U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies and
instrumentalities;
. Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;
. Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts not greater than are fully insured by the Federal Deposit
Insurance Corporation (the aggregate amount of these deposits may not exceed
5% of the value of the Fund's assets);
. Commercial paper and other short-term corporate obligations; and
. Variable and floating-rate securities and repurchase agreements.
In addition, the Fund may hold cash and may invest in participation interests
in the money market securities mentioned above without limitation. These
participation interests are the interests of securities held by others on a
pro-rata basis.
TACTICAL ALLOCATION FUND
STOCK PORTION. In its stock portion, the Fund attempts to duplicate, before
the deduction of operating expenses, the investment results of the S&P 500
Index by investing in approximately 450 of the 500 common stocks included in
that Index. The S&P 500 Index, which is chosen by S&P on a statistical basis
and may change from time to time, emphasizes large capitalization stocks and
is based on such factors as the market capitalization and trading activity of
each stock and its adequacy as a representative of stocks in a particular
industry sector. The Fund attempts to achieve a correlation between the
performance of the stock portion and that of the S&P 500 Index of at least
0.95, before the deduction of operating expenses (a correlation of 1.00 would
be perfect, which would mean that the net asset value of the stock portion
increased or decreased in exactly the same proportion as changes in the
Index).
BOND PORTION. In its bond portion, the Fund invests in U.S. Treasury notes
having five years remaining to maturity at the beginning of the then-current
calendar year or, if those instruments are unavailable at favorable prices, in
U.S. Treasury notes with remaining maturities as close as possible to five
years. The Fund does not invest in bonds and cash simultaneously, except as
noted below.
CASH PORTION. In its cash portion, the Fund invests in U.S. Treasury bills
with remaining maturities of 30 days or, if those instruments are unavailable
at favorable prices, in U.S. Treasury bills with remaining maturities as close
as possible to 30 days. Limited amounts of the Fund's assets are normally
invested in cash, generally to pay expenses.
RISKS
Under normal circumstances, Balanced Fund invests primarily in equity
securities, bonds, U.S. government securities, mortgage- and asset-backed
securities and money market instruments, and Tactical Allocation Fund invests
primarily in equity securities and U.S. government securities. Following is a
discussion of risks that are common to each Fund:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential compared to other types of investments. However, their prices
generally fluctuate more than other securities, reflecting changes in a
company's financial condition and in overall market and economic conditions.
As with all investments, higher returns are typically accompanied by higher
risks; thus, common stocks represent the riskiest investment in a company. It
is possible that a Fund may experience a substantial or complete loss on an
individual equity investment.
INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and the prices of bonds and U.S. government securities will
fall, lowering the value of the Funds' investments. Long-term bonds, including
U.S. government securities, are generally more sensitive to interest rate
changes than short-term bonds, including U.S. government securities. Adverse
changes in economic conditions can affect an issuer's ability to pay principal
and interest.
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Prospectus Page 12
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PaineWebber Tactical Allocation Fund
Balanced Fund
FOREIGN SECURITIES. Balanced Fund may invest in U.S. dollar-denominated
securities of foreign issuers that are traded on recognized U.S. exchanges or
in the U.S. over-the-counter ("OTC") market. Because the S&P 500 Index can
include common stocks of foreign issuers, Tactical Allocation Fund is also
subject to certain risks associated with investments in U.S. dollar-
denominated securities of foreign issuers.
Investing in securities of foreign companies can involve more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate.
Values may also be affected by foreign tax laws, changes in foreign economic
or monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies. In general, less
information may be available about foreign companies than about U.S.
companies, and they are generally not subject to the same accounting, auditing
and financial reporting standards as are U.S. companies.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives" because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used in hedging and related
strategies. There is only limited consensus as to what constitutes a
"derivative" security. However, in Mitchell Hutchins' view, derivative
securities also include "stripped" securities and specially structured types
of mortgage- and asset-backed securities, such as interest only and principal
only classes of securities. The market value of derivative instruments and
securities sometimes is more volatile than that of other investments, and each
type of derivative instrument may pose its own special risks. Mitchell
Hutchins takes these risks into account in its management of the Funds.
COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of the board of each Fund, monitors and evaluates
the creditworthiness of the parties with which each Fund does business.
In addition to these general risks, investments in each Fund are subject to
other risk considerations:
BALANCED FUND
BOND RATINGS. The Fund invests in a broad range of investment grade bonds.
Investment grade quality means that the securities are rated within the four
highest categories by S&P or Moody's. Moody's fourth highest category (Baa)
includes securities which, in its opinion, have speculative features.
The Fund may invest up to 10% of its total assets in convertible bonds rated
lower than investment grade, that is, below BBB by S&P or Baa by Moody's, but
no lower than B by S&P or Moody's. These bonds, which are commonly referred to
as "junk bonds", are considered to be predominantly speculative with respect
to the issuer's ability to pay interest and repay principal and may be more
sensitive to adverse conditions. The Fund's policy of investing a portion of
its assets in lower rated securities thus entails greater risks than those
associated with investment in higher rated securities. The Fund also may
invest in securities that are comparably rated by another NRSRO and unrated
securities deemed by Mitchell Hutchins to be of comparable quality.
Credit ratings attempt to evaluate the safety of principal and interest
payments and do not evaluate the volatility of the bond's value or its
liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than the rating indicates. There is a risk that rating
agencies will downgrade bonds.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently on mortgage- and
asset-backed securities (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. Generally, prepayments on fixed-rate mortgage loans
will increase during a period of falling interest rates and decrease during a
period of rising interest rates. Mortgage- and asset-backed securities may
also decrease in value as a result of increases in interest rates and may
benefit less than other fixed income securities from declining interest rates
because of the risk of prepayment. Actual prepayment experience may cause the
yield of mortgage-backed securities to differ from the assumed average life
yield. Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting the Fund's yield.
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Prospectus Page 13
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PaineWebber Tactical Allocation Fund
Balanced Fund
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are structured in
a manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of this.
IOs are entitled to receive all or a portion of the interest, but none (or
only a nominal amount) of the principal payments, from the underlying mortgage
assets. If the mortgage assets underlying an IO experience greater than
anticipated principal prepayments, then the total amount of interest payments
allocable to the IO class, and therefore the yield to investors, generally
will be reduced. In some instances, an investor in an IO may fail to recoup
all of his or her initial investment, even if the security is government
issued or guaranteed or is rated AAA or the equivalent. Conversely, PO classes
are entitled to receive all or a portion of the principal payments, but none
of the interest, from the underlying mortgage assets. PO classes are purchased
at substantial discounts from par, and the yield to investors will be reduced
if principal payments are slower than expected. Some IOs and POs, as well as
other CMO classes, are structured to have special protections against the
effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins seeks to manage the Fund's
investments in mortgage-backed securities so that the volatility of the Fund's
portfolio, taken as a whole, is consistent with the Fund's investment
objective. If market interest rates or other factors that affect the
volatility of securities held by the Fund change in ways that Mitchell
Hutchins does not anticipate, the Fund's ability to meet its investment
objective may be reduced.
See Appendix B to the Statement of Additional Information for more information
concerning the types of mortgage-backed securities in which the Fund may
invest.
RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. government securities. Zero coupon
securities pay no interest to holders prior to maturity. However, a portion of
the original issue discount on the zero coupon securities must be included in
the Fund's income. Accordingly, to continue to qualify for tax treatment as a
regulated investment company and to avoid certain excise taxes (see "Taxes" in
the Statement of Additional Information), the Fund may be required to
distribute as dividends amounts that are greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
The Fund will not be able to purchase additional income-producing securities
with cash used to make such distributions, and its current income ultimately
may be reduced as a result. Zero coupon securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest in cash.
TACTICAL ALLOCATION FUND
LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both long-term capital appreciation and current income, in
following its asset allocation strategy, the Fund may not achieve as high a
level of either capital appreciation or current income as a fund that has only
one of those objectives as its primary objective. In addition, the need to
qualify as a regulated investment company for federal income tax purposes may
limit the Fund's ability to adhere rigidly to the recommendations of the
Tactical Allocation Model. See "Dividends & Taxes." In addition, the Fund is
also subject to the risk that the Tactical Allocation Model may not correctly
predict the appropriate times to shift the Fund's assets from one type of
investment to another.
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Prospectus Page 14
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PaineWebber Tactical Allocation Fund
Balanced Fund
INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund's stock
portion attempts to duplicate, before deduction of operating expenses, the
investment results of the S&P 500 Index, the investment results of the stock
portion generally are not identical to those of the S&P 500 Index. Deviations
from the performance of the S&P 500 Index may result from shareholder
purchases and sales of shares that occur daily, as well as from expenses borne
by the Fund.
INVESTMENT TECHNIQUES AND STRATEGIES
STRATEGIC INVESTMENTS. In an attempt to reduce the overall risk of its
investments, known as hedging or to enhance income or return, each Fund may
use certain types of strategic investments. These investments involve
derivative contracts, including options (on securities, futures and indexes)
and futures contracts (on stock indexes and debt securities). In addition, new
financial products and risk management techniques continue to be developed and
may be used if consistent with the Funds' investment objectives and policies.
Use of these strategies solely to enhance income may be considered a form of
speculation. Each Fund also may enter into interest rate swap agreements and
certain other interest rate protection transactions to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. The Funds' ability to use the strategies may be limited by
market conditions, regulatory limits and tax considerations. The Statement of
Additional Information contains further information on these strategies.
Each Fund may enter into options and futures contracts under which the full
value of its portfolio is at risk. Under normal circumstances, however, a
Fund's use of these strategies will place at risk a much smaller portion of
its assets.
The Funds might not use any strategic instrument, and there can be no
assurance that any strategy used will succeed. If Mitchell Hutchins is
incorrect in its judgment on interest rates, market values or other economic
factors in using a particular strategic instrument, a Fund might have lower
net income and a net loss on the investment. Each of these strategies involves
certain risks, which include:
. the fact that the skills needed to use strategic instruments are different
from those needed to select securities for the Funds,
. the possibility of imperfect correlation, or even no correlation, between
price movements of strategic instruments and price movements of the
securities being hedged,
. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and
. the possibility that a Fund is unable to close out or liquidate its
position.
PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate for a Fund (100% or
more) will involve correspondingly greater transaction costs, which will be
borne directly by that Fund, and may increase the potential for short-term
capital gains.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities, including repurchase agreements maturing in more than
seven days, certain cover for OTC options and securities whose disposition is
restricted under the federal securities laws. The Funds do not consider
securities that are eligible for resale under SEC Rule 144A to be illiquid if
Mitchell Hutchins has determined them to be liquid, based upon the trading
markets for the securities under procedures approved by the Funds' boards.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of the
Fund's total assets taken at market value. Lending securities enables the
Funds to earn additional income, but could result in a loss or delay in
recovering these securities.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. In a
typical repurchase agreement, a Fund buys a security and simultaneously agrees
to sell it back at an agreed-upon price and time, usually no more than seven
days after purchase. The time and price reflect a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. Risks
associated with repurchase agreements include a possible decline in the value
of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes insolvent.
OTHER INFORMATION. Each Fund may purchase securities on a when-issued basis or
may purchase or sell securities for delayed delivery. A Fund generally would
not pay for such securities or start earning
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Prospectus Page 15
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PaineWebber Tactical Allocation Fund
Balanced Fund
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How to Buy Shares
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interest on them until they are delivered, but it would immediately assume the
risks of ownership, including the risk of price fluctuation. Each Fund may
borrow money for temporary or emergency purposes, but not in excess of 10%
(Balanced Fund) or 20% (Tactical Allocation Fund) of its total assets,
including (in the case of Balanced Fund) reverse repurchase agreements
involving up to 5% of its total assets.
Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters or, with respect to Tactical Allocation Fund, for purchases by
the trustee of the PW SIP, by PFPC Inc., the Funds' transfer agent ("Transfer
Agent"). No initial or contingent deferred sales charge is imposed, nor are
Class Y shares subject to rule 12b-1 distribution or service fees. The Funds
and Mitchell Hutchins reserve the right to reject any purchase order and to
suspend the offering of the Class Y shares for a period of time. Mitchell
Hutchins, the distributor for each Fund's Class Y shares, has appointed
PaineWebber to serve as the exclusive dealer for each Fund's Class Y shares.
The following investors are eligible to buy Class Y shares of the Funds:
. a participant in INSIGHT when Class Y shares are purchased through that
program;
. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible Pricing SM System;
. an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either
5,000 or more eligible employees or
$50 million or more in assets; and
. an investment company advised by PaineWebber or an affiliate of PaineWebber.
INSIGHT
An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing SM System and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized
asset allocation investment strategy using an appropriate combination of
funds, monitoring of investment performance and comprehensive quarterly
reports that cover market trends, portfolio summaries and personalized account
information.
Participation in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.5% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT
investment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50% reduction in the fee
otherwise payable for participation in INSIGHT. INSIGHT clients may elect to
have their INSIGHT fees charged to their PaineWebber accounts (by the
automatic redemption of money market fund shares) or, if a qualified plan,
invoiced.
Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-647-1568 for more information concerning
mutual funds that are available to INSIGHT participants or for other INSIGHT
program information.
PURCHASES BY THE TRUSTEE OF THE PW SIP
The Class Y shares of Tactical Allocation Fund also are offered for sale to
the trustee of the PW SIP, a defined contribution plan sponsored by Paine
Webber Group Inc. ("PW Group"). The trustee of the PW SIP purchases and
redeems these Class Y shares to implement the investment choices of individual
plan participants with respect to their PW SIP contributions. Individual plan
participants should consult the Summary Plan Description and other plan
material of the PW SIP (collectively, the "Plan Documents") for a description
of the procedures and limitations applicable to making and changing investment
choices.
Copies of the Plan Documents are available from the Benefits Connection, 100
Halfday Road, Lincolnshire, IL 60069 or by calling 1-888-PWebber (1-888-793-
2237).
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Prospectus Page 16
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PaineWebber Tactical Allocation Fund
Balanced Fund
As described in the Plan Documents, the average net asset value per share at
which Class Y shares of Tactical Allocation Fund are purchased or redeemed by
the trustee of the PW SIP for the accounts of individual participants might be
more or less than the net asset value per share prevailing at the time that
such participants made their investment choices or made their contributions to
the PW SIP.
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How to Sell Shares
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ACQUISITION OF CLASS Y SHARES BY OTHERS
Each Fund is authorized to offer Class Y shares to certain other investment
advisory programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants are the
only purchasers in this category.
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price as next calculated after the order is received and accepted. Share
prices are normally calculated at the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time).
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through the Transfer Agent, may sell shares by writing a "letter of
instruction." The letter of instruction must include:
. the investor's name and address;
. the Fund's name;
. the Fund account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.
The letter of instruction must be mailed to PFPC Inc., Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.
If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.
Because each Fund incurs fixed costs in maintaining shareholder accounts, each
Fund reserves the right to purchase back all Fund shares in any shareholder
account having a net asset value of less than $500. If the Fund elects to do
so, it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. The Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
SALES BY PARTICIPANTS IN PW SIP
The trustee of the PW SIP sells Class Y shares of Tactical Allocation Fund to
implement the investment choices of individual plan participants with respect
to their PW SIP contributions, as described in the Plan Documents referenced
under "How to Buy Shares" above. The price at which Class Y shares are sold by
the trustee of the PW SIP might be more or less than the price per share at
the time the participants made their investment choices.
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Prospectus Page 17
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PaineWebber Tactical Allocation Fund
Balanced Fund
Management
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Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation")
and Tactical Allocation Fund is a series of PaineWebber Investment Trust
("Trust"). The board of directors of the Corporation and the board of trustees
of the Trust oversee the Funds' operations and, as part of this overall
management responsibility, oversee various organizations responsible for the
day-to-day management of each Fund. Each board has appointed Mitchell Hutchins
as investment adviser and administrator responsible for the Fund's operations
(subject to the authority of the board).
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On November 30, 1996, Mitchell Hutchins was adviser or sub-
adviser of 30 investment companies with 64 separate portfolios and aggregate
assets of approximately $32 billion.
Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
ABOUT THE INVESTMENT ADVISER
As investment adviser for Balanced Fund and Tactical Allocation Fund, Mitchell
Hutchins makes and implements all investment decisions and supervises all
aspects of each Fund's operations.
T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995. Mr.
Barneby is a managing director and chief investment officer of quantitative
investments of Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins in
1994, after being with Vantage Global Management for one year. During the eight
years that Mr. Barneby was previously with Mitchell Hutchins, he was a senior
vice president responsible for quantitative management and asset allocation
models.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins responsible for overseeing
the management of equity investments. From March 1988 to March 1995, Mr.
Tincher worked for Chase Manhattan Private Bank where he was a vice president.
Mr. Tincher directed the U.S. funds management and equity research area at
Chase and oversaw the management of all Chase U.S. equity funds (the Vista
Funds and Trust Investment Funds).
Dennis L. McCauley is responsible for the day-to-day management of the debt
securities portion of Balanced Fund. Mr. McCauley is a managing director and
chief investment officer of fixed income investments of Mitchell Hutchins
responsible for overseeing all active fixed income investments, including
domestic and global taxable and tax-exempt mutual funds. Prior to joining
Mitchell Hutchins in 1994, Mr. McCauley worked for IBM Corporation where he was
director of fixed income investments responsible for developing and managing
investment strategy for all fixed income and cash management investments of
IBM's pension fund and self-insured medical funds. Mr. McCauley has also served
as vice president of IBM Credit Corporation's mutual funds and as a member of
the retirement fund investment committee.
Nirmal Singh and Craig M. Varrelman, CFA, assist Mr. McCauley in managing
Balanced Fund's debt securities. Mr. Singh and Mr. Varrelman are both first
vice presidents of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
September 1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where
he was a member of the portfolio management team. From 1990 to 1993, Mr. Singh
was a senior portfolio manager at Nomura Mortgage Fund Management Corporation.
Mr. Varrelman has been with Mitchell Hutchins as a portfolio manager since 1988
and manages fixed income portfolios with an emphasis on U.S. government
securities.
Susan Ryan is responsible for the day-to-day management of the portion of
Balanced Fund's assets invested in money market instruments. Ms. Ryan has been
with Mitchell Hutchins since 1982 and is a senior vice president of Mitchell
Hutchins.
Each of these managers first assumed responsibilities with respect to Balanced
Fund in August 1995.
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Prospectus Page 18
<PAGE>
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PaineWebber Tactical Allocation Fund
Balanced Fund
Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide input on market outlook, interest rate forecasts,
investment research and other considerations pertaining to each Fund's
investments.
Mitchell Hutchins personnel may engage in securities transactions for their
own accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee from Balanced
Fund for these services at the effective annual rate of 0.75% of the Fund's
average daily net assets and from Tactical Allocation Fund at the annual rate
of 0.50% of the Fund's average daily net assets.
Balanced Fund also pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for certain services not provided by
the Transfer Agent. Tactical Allocation Fund does not pay this fee. The Funds
incur other expenses, such as custody and transfer agency fees and
professional fees.
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Determining the Shares' Net Asset Value
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The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of its board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless its board determines that this does not represent fair value.
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Dividends & Taxes
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DIVIDENDS
Balanced Fund pays dividends semiannually from its net investment income and
also may distribute net short-term capital gains, if any, with a periodic
dividend. Tactical Allocation Fund pays an annual dividend from its net
investment income and short-term capital gain, if any. Net investment income
includes dividend income, accrued interest and discount, less amortization of
premium and accrued expenses. Substantially all of each Fund's net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), if any, and any undistributed net short-term capital gain, is
distributed at least annually. Each Fund may make additional distributions if
necessary to avoid income or excise taxes. While a Fund will not declare any
distribution in excess of the amount of its net investment income and net
short-term capital gain available at the time of declaration, it is possible
that net capital losses sustained after that time could convert a portion of
such a distribution to a non-taxable return of capital.
Dividends and other distributions paid on Class Y shares of a Fund are
calculated at the same time and in the same manner as dividends and
distributions on other classes of shares.
A Fund's dividends and other distributions are paid in additional Fund shares
of the same class at net asset value, unless the shareholder has requested
cash payments. Shareholders who wish to receive dividends and/or other
distributions in cash, either mailed to the shareholder by check or credited
to the shareholder's PaineWebber account, should contact their investment
executive at PaineWebber or one of its correspondent firms. For PW SIP
participants, Tactical Allocation Fund's Class Y dividends and other
distributions are paid in additional Class Y shares at net asset value unless
the Transfer Agent is instructed otherwise.
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Prospectus Page 19
<PAGE>
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PaineWebber Tactical Allocation Fund
Balanced Fund
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General Information
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TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay federal income tax on the part of its investment company taxable income
(generally consisting of net investment income and net short-term capital
gain) and net capital gain that it distributes to its shareholders. These
requirements may limit the ability of Tactical Allocation Fund to reallocate
its assets under certain circumstances.
Dividends from each Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to its shareholders
as ordinary income. Distributions of each Fund's net capital gain (whether
paid in cash or in additional Fund shares) are taxable to its shareholders as
long-term capital gain, regardless of how long they have held their Fund
shares. Shareholders not subject to tax on their income generally will not be
required to pay tax on distributions from the Funds.
YEAR-END TAX REPORTING
Each Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and any portion of those dividends that qualifies for special
treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding.
TAXES ON THE SALE OF FUND SHARES
When shareholders sell (redeem) shares, the sale may result in a taxable gain
or loss. This depends upon whether the shareholders receive more or less than
their adjusted basis for the shares. In addition, if a Fund's shares are
bought within 30 days before or after selling other shares of the Fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
* * * *
Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, please see the
further discussion in the Statement of Additional Information. Prospective
shareholders are urged to consult their tax advisors.
ORGANIZATION
BALANCED FUND
Balanced Fund is a diversified series of the Corporation, an open-end
management investment company that was incorporated in Maryland on October 29,
1985. The Corporation has authority to issue 10 billion shares of common stock
of separate series, par value $.001 per share; four billion of these shares
are classified as shares of Balanced Fund. Shares of one other series have
been authorized.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund is a diversified series of the Trust, an open-end
management investment company that was formed on March 28, 1991, as a business
trust under the laws of the Commonwealth of Massachusetts. The trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series, with a par value of $.001 per share. Shares of one other
series have been authorized.
SHARES
The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class represents an identical
interest in the respective Fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses
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Prospectus Page 20
<PAGE>
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
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PaineWebber Tactical Allocation Fund
Balanced Fund
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege. The different sales charges
and other expenses applicable to the different classes of shares of the Funds
will effect the performance of those classes.
Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends are likely to be higher on
the Class Y shares, which bear the lowest expenses, than on the other classes.
More information concerning Class A, Class B and Class C shares may be
obtained from an investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about the other Fund.
The boards have considered this factor in approving the use of a single,
combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Corporation or the Trust may elect all of its board members. The shares of
a Fund will be voted together except that only the shareholders of a
particular class of a Fund may vote on matters affecting only that class. The
shares of each series of the Corporation or the Trust will be voted
separately, except when an aggregate vote of all securities is required by
law.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Corporation or the Trust may remove a board member through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. A meeting will be called to vote on the removal of a board member at
the written request of holders of 10% of the Corporation's or Trust's
outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information is available to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Funds' custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds'
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
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Prospectus Page 21
<PAGE>
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PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Class Y Shares
Prospectus -- January 1, 1997, as supplemented June 6, 1997
- --------------------------------------------------------------------------------
[ ]PAINEWEBBER BOND FUNDS [ ]PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Financial Services Growth Fund
Fund Growth Fund
Low Duration U.S. Growth and Income Fund
Government Income Fund Small Cap Fund
Strategic Income Fund Utility Income Fund
U.S. Government Income
Fund
[ ] PAINEWEBBER TAX-FREE [ ]PAINEWEBBER GLOBAL FUNDS
BOND FUNDS
Asia Pacific Growth Fund
California Tax-Free Emerging Markets Equity Fund
Income Fund Global Equity Fund
Municipal High Income Global Income Fund
Fund
National Tax-Free
Income Fund
New York Tax-Free
Income Fund
[ ]PAINEWEBBER MONEY MARKET
FUND
[ ] PAINEWEBBER
ASSETALLOCATION FUNDS
Balanced Fund
Tactical Allocation
Fund
A prospectus containing more complete information for any of the above
funds, including charges and expenses, can be obtained from a PaineWebber
investment executive or correspondent firm. Please read it carefully before
investing. It is important you have all the information you need to make a
sound investment decision.
