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PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- NOVEMBER 30, 1998
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PaineWebber Asset Allocation Funds are designed for investors
generally seeking high total return. PaineWebber Balanced Fund
invests in a combination of equity securities, bonds and money
market instruments and maintains a fixed income allocation of at
least 25% at all times. PaineWebber Tactical Allocation Fund follows
a systematic investment strategy that 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
this Prospectus carefully and retain a copy for future reference.
A Statement of Additional Information dated November 30, 1998 has
been filed with the Securities and Exchange Commission ("SEC" or
"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 PaineWebber investment executive, PaineWebber's correspondent
firms or by calling toll-free 1-800-647-1568. In addition, the
Commission maintains a website (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by
reference, and other information regarding registrants that file
electronically with the Commission.
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of seven broad
categories, which are presented here. Generally, investors seeking
to maximize return must assume greater risk. The Funds offered by
this Prospectus are both in the ASSET ALLOCATION category.
o MONEY MARKET FUND for income and stability by
investing in high-quality, short- term
investments.
o BOND FUNDS for income by investing mainly in
bonds.
o TAX-FREE BOND FUNDS for income exempt from
federal income tax and, in some cases, state and
local income taxes, by investing in municipal
bonds.
o ASSET ALLOCATION FUNDS for high total return by
investing in stocks and bonds.
o STOCK FUNDS for long-term growth by investing
mainly in equity securities.
o GLOBAL FUNDS for long-term growth by investing
mainly in foreign stocks or high current income
by investing mainly in global debt instruments.
o FUNDS OF FUNDS for either long-term growth of
capital; total return; or income and,
secondarily, growth of capital by investing in
other PaineWebber mutual funds.
A complete listing of the PaineWebber Family of Mutual Funds is
found on the back cover of this Prospectus.
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED
TO IN THIS PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR DISTRIBUTOR MAY
NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE 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 Balanced Fund Tactical Allocation Fund
TABLE OF CONTENTS
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Page
----
The Funds at a Glance................... 3
Expense Table........................... 5
Investment Objectives & Policies........ 7
Investment Philosophy & Process......... 8
Performance............................. 10
The Funds' Investments.................. 13
Flexible PricingSM...................... 19
How to Buy Shares....................... 22
How to Sell Shares...................... 23
Other Services.......................... 24
Management.............................. 25
Determining the Shares' Net Asset
Value................................. 27
Dividends & Taxes....................... 27
General Information..................... 28
Financial Highlights.................... 30
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Prospectus Page 2
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PaineWebber Balanced Fund Tactical Allocation 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, bonds and money market instruments, while maintaining a fixed
income allocation of at least 25% at all times (including bonds and cash).
INVESTMENT OBJECTIVE: High total return with low volatility.
RISKS: Although Balanced Fund seeks total return, it may not achieve as high a
level of either of the two components of total return -- capital appreciation
and current income -- as a fund that has only one of those objectives as its
primary objective. 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 bonds in which the Fund may invest have
speculative characteristics. The bonds 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 may 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 bonds, including
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; the
investment is not guaranteed.
SIZE: On October 31, 1998 Balanced Fund had over $242 million in assets.
TACTICAL ALLOCATION FUND
GOAL: To increase the value of your investment by following a systematic
investment strategy that allocates Tactical Allocation 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 Tactical Allocation 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 & 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 may 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;
the investment is not guaranteed.
SIZE: On October 31, 1998, Tactical Allocation Fund had over $1.5 billion in
assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of each Fund.
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Prospectus Page 3
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PaineWebber Balanced Fund Tactical Allocation Fund
THE FUNDS AT A GLANCE
(Continued)
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MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
WHO SHOULD INVEST
BALANCED FUND is for investors who want total return, consisting of long-term
capital appreciation and current income, with relatively low volatility through
investments in equity securities, 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 (including bonds and cash) should result in a lower risk
profile for the Fund and lower volatility than if it could invest 100% of its
assets in equity securities.
TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a systematic
investment strategy that 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 cyclical decline in
stock prices is anticipated. 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 certain significant differences between Balanced
Fund and Tactical Allocation Fund.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% of the public offering price. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their
Class B shares within six years after purchase. After six years, Class B shares
convert to Class A shares, which have lower ongoing expenses and no contingent
deferred sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% is charged on shares sold
within one year of purchase. Class C shares never convert to any other class of
shares.
CLASS Y SHARES
Class Y shares are offered only to limited groups of investors. The price is the
net asset value. 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 contingent deferred sales charge when they sell
Class Y shares. Class Y shares have lower ongoing expenses than any other class
of shares.
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Prospectus Page 4
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PaineWebber Balanced Fund Tactical Allocation Fund
EXPENSE TABLE
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The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below are based on those incurred for the most recent fiscal
year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... 4.5% None None None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net
asset value at the time of sale, whichever is less)..... None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
BALANCED FUND
Management Fees............................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees.................................................. 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.26 0.28 0.25 0.14
----- ----- ----- -----
Total Operating Expenses.................................... 1.26% 2.03% 2.00% 0.89%
----- ----- ----- -----
----- ----- ----- -----
TACTICAL ALLOCATION FUND
Management Fees............................................. 0.46% 0.46% 0.46% 0.46%
12b-1 Fees.................................................. 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.24 0.25 0.24 0.21
----- ----- ----- -----
Total Operating Expenses.................................... 0.95% 1.71% 1.70% 0.67%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if a shareholder sells these shares within one year
after purchase, a contingent deferred sales charge of 1% of the offering price
or the net asset value of the shares at the time of sale by the shareholder,
whichever is less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees. Class Y
shares may be purchased by participants in certain investment programs that are
sponsored by PaineWebber and that may invest in PaineWebber mutual funds ("PW
Programs"), when Class Y shares are purchased through that PW Program.
Participation in a PW Program is subject to an advisory fee at the effective
maximum annual rate of 1.5% of assets held through that PW Program. This
account charge is not included in the table because investors who are not PW
Program participants also are permitted to purchase Class Y shares.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees.......................................... 0.25% 0.25% 0.25% None
12b-1 distribution fees..................................... None 0.75 0.75 None
</TABLE>
For more information, see "Management" and "Flexible Pricing(Service Mark)."
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Prospectus Page 5
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PaineWebber Balanced Fund Tactical Allocation Fund
EXPENSE TABLE
(Continued)
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples 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 examples is required by regulations of the SEC applicable to
all mutual funds. THESE EXAMPLES 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 pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
BALANCED FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................ $57 $ 83 $111 $ 190
Class B (Assuming sale of all
shares at end of period)......... $71 $ 94 $129 $ 198
Class B (Assuming no sale of
shares).......................... $21 $ 64 $109 $ 198
Class C (Assuming sale of all
shares at end of period)......... $30 $ 63 $108 $ 233
Class C (Assuming no sale of
shares).......................... $20 $ 63 $108 $ 233
Class Y............................ $ 9 $ 28 $ 49 $ 110
TACTICAL ALLOCATION FUND
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................ $54 $ 74 $ 95 $ 156
Class B (Assuming sale of all
shares at end of period)......... $67 $ 84 $113 $ 163
Class B (Assuming no sale of
shares).......................... $17 $ 54 $ 93 $ 163
Class C (Assuming sale of all
shares at end of period)......... $27 $ 54 $ 92 $ 201
Class C (Assuming no sale of
shares).......................... $17 $ 54 $ 92 $ 201
Class Y............................ $ 7 $ 21 $ 37 $ 83
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain the
same for years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at the
time of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales
charge at the time of sale, which declines over a period of six years.
Ten-year figures assume that Class B shares convert to Class A shares at the
end of the sixth year.
o CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for sales
of shares within one year of purchase.
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Prospectus Page 6
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PaineWebber Balanced Fund Tactical Allocation Fund
INVESTMENT OBJECTIVES & POLICIES
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The Funds' investment objectives may not be changed without shareholder
approval. The Funds' other investment policies, except where noted, are not
fundamental and may be changed by their respective boards. See the summary on
page 9 for certain significant differences between Balanced Fund and Tactical
Allocation Fund.
BALANCED FUND
Balanced Fund's investment objective is high total return with low volatility.
Total return consists of long-term capital appreciation and current income. The
Fund pursues this objective by investing primarily in a combination of three
asset classes: stocks (equity securities), 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% at all times, which should result in lower volatility for the
Fund relative to a fund that invests solely in equity securities.
The Fund may invest in a broad range of:
o Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;
o 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 agency or, if unrated, are determined by Mitchell Hutchins to be of
comparable quality;
o U.S. government securities;
o Bonds and other securities (including convertible securities) rated at least B
by S&P or Moody's, comparably rated by another nationally recognized
statistical rating agency 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 exposure
to adverse conditions. The Fund will not invest more than 10% of its total
assets in bonds and other securities rated below investment grade; and
o 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 systematic 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 between an equity
portion, designed to track the performance of the S&P 500 Index (the Fund holds
approximately 465 of the 500 stocks in the S&P 500 Index), and a bond portion,
consisting of five-year U.S. Treasury notes, or a cash portion, consisting of
30-day U.S. Treasury bills. The allocation among these three segments is
determined by 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 taking a more defensive posture
when Mitchell Hutchins Tactical Allocation Model signals a potential bear
market, a prolonged or significant downturn in stock prices.
* * * *
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 Balanced Fund Tactical Allocation 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 are fundamentally related to key
economic variables, such as interest rates, profit growth and inflation. Based
on these fundamental relationships, values of the key economic variables and the
current market environment, Mitchell Hutchins determines the asset allocation it
believes to be optimal.
Once Balanced 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 key economic
variables and shifts the asset allocation mix when there are significant changes
in market outlooks.
Balanced Fund uses the following investment process to determine the individual
securities for each portion of the Fund:
o EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price momentum.
The Model screens a universe of small-to large-capitalization companies from
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 to the management of their competitors.
o BONDS. Mitchell Hutchins selects these securities based on its analysis of
their duration and risk structures (comparing yields on U.S. Treasury
securities to yields on riskier types of debt securities).
o 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.
Mitchell Hutchins may make changes to its investment models over time.
As of August 31, 1998, the Fund's net assets were allocated as follows: equity
securities, 50%; bonds, 44%; and cash and cash equivalents (including other
assets net of liabilities), 6%. At February 28, 1998, the net asset allocations
were: equity securities, 68%; bonds, 25%; and cash and cash equivalents
(including other assets net of liabilities), 7%.
TACTICAL ALLOCATION FUND
Mitchell Hutchins allocates Tactical Allocation Fund's assets between stocks and
either bonds or cash, determined by the Tactical Allocation Model's quantitative
assessment of the projected rates of return of each asset class. The 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 systematic approach to investing in
stocks attempts to shift the asset mix in anticipation of, not in response to,
changing market trends. The emphasis of the 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 or a prolonged or significant downturn in stock
prices.
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 ("ERP"). The Model projects the stock market's expected ERP
based on several factors including:
o current prices of stocks and their expected future dividends; and
o 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
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Prospectus Page 8
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PaineWebber Balanced Fund Tactical Allocation Fund
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,
other 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.
Mitchell Hutchins may make changes to the Model over time.
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.
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, 1998 and February 28, 1998, 100% of the Fund's assets were
allocated to stocks.
SIGNIFICANT DIFFERENCES BETWEEN BALANCED FUND AND TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
BALANCED FUND TACTICAL ALLOCATION FUND
<S> <C> <C>
Investment Objective High total return with low volatility. Total return, consisting of long-term
capital appreciation and current income.
Asset Allocation Decision Assets may be reallocated at any time, Assets may be reallocated only on the first
based on Mitchell Hutchins' fundamental business day of each month based on the
valuations for each asset class using its Mitchell Hutchins' Tactical Allocation
consensus forecast for certain economic Model.
variables.
Asset Mix Fixed income allocation (bonds and cash): Tactical Allocation Model signals a stock
at least 25% at all times, which should segment of 100%, 75%, 50%, 25% or 0% and
result in lower volatility for the Fund selects bonds or cash for the balance, if
relative to a fund that invests solely in any.
equity securities.
Stock Selection Discretionary, based on the Mitchell When there is a stock allocation, invests
Hutchins Factor Valuation Model, which in about 465 of the 500 common stocks that
evaluates companies' potential for rapid make up the S&P 500 Index.
earnings growth.
Fixed Income Selection Discretionary, may select from broad range When there is a bond allocation, five- year
of debt securities with government or U.S. Treasury notes. When there is a cash
private issuers. allocation, 30-day U.S. Treasury bills.
</TABLE>
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Prospectus Page 9
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PaineWebber Balanced Fund Tactical Allocation Fund
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the calendar year total returns for the Funds. Sales charges
have not been deducted from total returns for Class A, B and C shares. Returns
would be lower if sales charges were deducted. Average annual returns, both
before and after deducting the maximum sales charges, are shown below in the
tables that follow the performance charts. Past results are not a guarantee of
future results. Balanced Fund had no Class Y shares outstanding during the
calendar years shown.
BALANCED FUND
Balanced
<TABLE>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 11.53% 5.18% 15.63% -9.88% 23.13% 14.74% 24.57%
Class B 11.34% 10.84% 1.95% 18.52% 4.46% 14.66% -10.51% 22.23% 13.81% 23.63%
Class C 5.08% 14.79% -10.48% 22.15% 13.86% 23.61%
</TABLE>
The 1991 return for Class A shares represents the period from inception on
July 1, 1991 through December 31, 1991.
The 1992 return for Class C shares represents the period from inception on
July 2, 1992 through December 31, 1992.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of August 31, 1998
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
------ -------- ------ --------
<S> <C> <C> <C> <C>
Inception Date..................... 7/1/91 12/12/86 7/2/92 3/26/98
ONE YEAR
Before deducting maximum sales
charges....................... 4.69% 3.87% 3.89% N/A
After deducting maximum sales
charges....................... (0.03)% (0.64)% 2.99% N/A
FIVE YEARS
Before deducting maximum sales
charges....................... 10.93% 10.12% 10.11% N/A
After deducting maximum sales
charges....................... 9.92% 9.86% 10.11% N/A
TEN YEARS OR LIFE OF CLASS
Before deducting maximum sales
charges....................... 11.23% 10.22% 10.42% (9.41)%
After deducting maximum sales
charges....................... 10.52% 10.22% 10.42% (9.41)%
</TABLE>
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PaineWebber Balanced Fund Tactical Allocation Fund
TACTICAL ALLOCATION FUND
Tactical
7/22/92-12/31/92 1993 1994 1995 1996 1997
Class A 6.48% -0.59% 35.12% 21.53% 32.00%
Class B 18.06% 31.05%
Class C 6.67% 7.64% -1.28% 34.09% 20.66% 31.01%
Class Y 6.65% -0.28% 35.48% 21.79% 32.39%
The 1993 returns for Class A shares and Class Y shares represent the period from
inception on May 10, 1993 through December 31, 1993. The 1996 return for
Class B shares represents the period from inception on January 30, 1996 through
December 31, 1996. The 1992 return for Class C shares represents the period from
inception on July 22, 1992 through December 31, 1992. Investment advisory
functions for the Fund were transferred from Kidder Peabody Asset Management,
Inc. to Mitchell Hutchins on February 13, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of August 31, 1998
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Inception Date..................... 5/10/93 1/30/96 7/22/92 5/10/93
ONE YEAR
Before deducting maximum sales
charges....................... 7.31% 6.49% 6.49% 7.62%
After deducting maximum sales
charges....................... 2.47% 1.49% 5.49% 7.62%
FIVE YEARS
Before deducting maximum sales
charges....................... 16.70% N/A 15.84% 17.00%
After deducting maximum sales
charges....................... 15.62% N/A 15.84% 17.00%
LIFE
Before deducting maximum sales
charges....................... 16.75% 17.76% 15.17% 17.06%
After deducting maximum sales
charges....................... 15.74% 16.86% 15.17% 17.06%
</TABLE>
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PaineWebber Balanced Fund Tactical Allocation Fund
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized
returns show the change in value of an investment in a Fund as a steady compound
annual rate of return. Actual year-to-year returns fluctuate and may be higher
or lower than standardized return. Standardized returns for Class A shares
reflect deduction of the Funds' maximum initial sales charge of 4.5% at the time
of purchase, and standardized returns for Class B and Class C shares of the
Funds reflect deduction of the applicable contingent deferred sales charge
imposed on the sale of shares held for the period. 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,
known as "Life". 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-to-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
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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PaineWebber Balanced Fund Tactical Allocation Fund
THE FUNDS' INVESTMENTS
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BALANCED FUND
EQUITY SECURITIES include common stocks, most 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, similar to 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, of the same or a different issuer, within a particular period
of time at a specified price or formula.
BONDS are fixed or variable rate debt obligations, including notes, debentures
and similar instruments and securities. Mortgage and asset-backed and income
producing, non-convertible preferred stocks may be treated as bonds for
investment purposes. Corporations, governments and other issuers utilize bonds
as a way to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and normally must repay the amount borrowed at or
before maturity. Bonds have varying degrees of investment risk and varying
levels of sensitivity to changes in interest rates.
U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such as
U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer,
such as the Resolution Funding Corporation, the Student Loan Marketing
Association ("Sallie Mae"), the Federal Home Loan Banks and the Tennessee Valley
Authority.
CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts or
other non-governmental entities.
MORTGAGE AND ASSET-BACKED SECURITIES are bonds backed by specific types of
assets. Mortgage-backed securities represent a direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by Ginnie Mae (also known as the
Government National Mortgage Association), Freddie Mac (also known as the
Federal Home Loan Mortgage Corporation), Fannie Mae (also known as the Federal
National Mortgage Association) or other government sponsored enterprises. Other
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators. Foreign
mortgage-backed securities may be issued by mortgage banks and other private or
governmental entities outside the United States and are supported by interests
in foreign real estate. Mortgage-backed securities may be composed of one or
more classes and may be structured as either pass-through securities or
collateralized debt obligations. Multiple-class mortgage-backed securities are
referred to in this Prospectus as "CMOs." Some CMOs are directly supported by
other CMOs, which in turn are supported by mortgage pools. Investors typically
receive payments out of the interest and principal on the underlying mortgages.
The portions of these payments that investors receive, as well as the priority
of their rights to receive payments, are determined by the specific terms of the
CMO class. CMOs involve special risks; and evaluating them requires special
knowledge.
When interest rates go down and property owners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Asset-backed securities are similar to mortgage-backed securities, except that
the underlying assets are different. These underlying assets may be nearly any
type of financial asset or receivable, such as motor vehicle installment sales
contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.
ZERO COUPON BONDS are securities that make no periodic interest payments but
instead are sold at a deep discount from their face value. The buyer of these
bonds receives a rate of return by the gradual appreciation of the security,
which results from the
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PaineWebber Balanced Fund Tactical Allocation Fund
fact that it will be paid at face value on a specified maturity date. There are
many kinds of zero coupon bonds. Some are issued in zero-coupon form, including
stripped U.S. government securities issued through the U.S. Treasury. Others are
created by brokerage firms that strip (separate) the coupons (unmatured interest
payments) from interest-paying bonds and sell the principal and the coupons
separately. Balanced Fund may invest in other securities with original issue
discount ("OID"), a term that means the securities are issued at a price lower
than their value at maturity even though the securities also may make periodic
cash payments. OID securities are more sensitive to changes in interest rates
than securities that pay interest in cash.
MONEY MARKET SECURITIES in which Balanced Fund may invest include:
o U.S. Treasury bills and other obligations issued or guaranteed as to interest
and principal by the U.S. government, its agencies and instrumentalities;
o 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;
o Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts that 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);
o Commercial paper and other short-term corporate obligations; and
o Variable and floating-rate securities and repurchase agreements.
In addition, Balanced 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, Tactical Allocation Fund attempts to
duplicate, before the deduction of operating expenses, the investment results of
the S&P 500 Index by investing in approximately 465 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, Tactical Allocation 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, Tactical Allocation 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
Following is a discussion of risks that are common to both Funds:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally 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.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bonds prices will fall,
lowering the value of the Funds' bond investments. Long-term bonds are generally
more sensitive to interest rate changes than short-term bonds. See "Duration."
Credit risk is the risk that the issuer or guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial condition or in economic
conditions.
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
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PaineWebber Balanced Fund Tactical Allocation Fund
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, swaps and similar instruments. 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 a counterparty. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of the board of each Fund, monitors and evaluates the
creditworthiness of the counterparties with which each Fund does business.
YEAR 2000 RISKS. Like other mutual funds, and other financial and business
organizations around the world, each of the Funds could be adversely affected if
the computer systems used by Mitchell Hutchins, other service providers and
entities with computer systems that are linked to Fund records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Issue." Mitchell Hutchins is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Fund's other, major service providers. However, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
Similarly, the companies in which the Funds invest and trading systems used by
the Funds could be adversely affected by the Year 2000 Issue. The ability of a
company or trading system to respond successfully to the Year 2000 Issue
requires both technological sophistication and diligence, and there can be no
assurance that any steps taken will be sufficient to avoid an adverse impact.
BALANCED FUND--ADDITIONAL RISKS
In addition to the general risks, investments in Balanced Fund are subject to
the following risks:
BOND RATINGS. Balanced 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 a rating agency such as S&P or Moody's. Moody's considers
bonds rated Baa (its lowest investment grade rating) to have speculative
characteristics. This means that changes are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for
higher-rated bonds.
Balanced Fund may invest up to 10% of its total assets in bonds and other
securities (including convertible securities) rated below 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.
Bonds rated below investment grade generally offer a higher current yield than
that available for higher grade issues, but they involve higher risks. They are
especially subject to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. These securities, commonly referred to as "junk bonds," are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal and may involve major risk exposure 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.
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
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PaineWebber Balanced Fund Tactical Allocation Fund
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 Balanced Fund may invest differ
from those of traditional bonds. 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. 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, because of prepayments, may benefit less than other fixed
income securities from declining interest rates. Reinvestments of prepayments
may occur at lower interest rates than the original investment, thus adversely
affecting the Fund's yield. Actual prepayment experience may cause the yield of
a mortgage-backed security to differ from what was assumed when the Fund
purchased the security. Prepayments at a slower rate than expected may lengthen
the effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
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 some 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 guaranteed or is
considered to be of the highest credit quality. 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. Inverse floating rate CMO classes also may be extremely
volatile. These classes pay interest at a rate that decreases when a specified
index of market rates increases.
The value and liquidity of many mortgage-backed securities declined sharply in
the recent past 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.
RISKS OF ZERO COUPON AND OID BONDS. Zero coupon bonds pay no interest to holders
prior to maturity. Accordingly, they are generally more sensitive to changes in
interest rates than other bonds. This means that when interest rates fall, the
value of zero coupon bonds rises more rapidly than bonds paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. A portion of the OID on the zero coupon bonds must be included in
Balanced Fund's income each year. This also is true for other OID bonds.
Accordingly, to continue to qualify for tax treatment as a regulated investment
company and to avoid a federal excise tax (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
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PaineWebber Balanced Fund Tactical Allocation Fund
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 securities with cash used to make such distributions, and
its current income ultimately may be reduced as a result.
Zero coupon bonds and OID bonds usually trade at a discount from their face or
par value. These securities are subject to greater fluctuations of market value
in response to changing interest rates than bonds of comparable maturities that
make current distributions of interest in cash.
DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure and is one of the fundamental
tools used by Mitchell Hutchins in selecting bonds for Balanced Fund's
portfolio.
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 bonds, expected to be made, and weighs them by the present values of
the cash to be received at each future point in time. For any bond with interest
payments occurring prior to the payment of principal, duration is always less
than maturity.
Duration allows Mitchell Hutchins to make certain predictions as to the effect
that changes in the level of interest rates will have on the value of Balanced
Fund's portfolio. Various factors, such as changes in anticipated prepayment
rates, qualitative considerations and market supply and demand, can cause
particular securities to respond somewhat differently to changes in interest
rates than expected. Moreover, in the case of mortgage-backed and other complex
securities, duration calculations are estimates and are not precise. This is
particularly true during periods of market volatility.
LIMITS OF ASSET ALLOCATION STRATEGIES. Although each Fund seeks total return,
consisting of both long-term capital appreciation and current income, a Fund may
not achieve as high a level of either capital appreciation or current income as
a fund that has only one of these objectives as its primary objective.
TACTICAL ALLOCATION FUND--ADDITIONAL RISKS
In addition to the general risks, investments in Tactical Allocation Fund are
subject to the following risks:
ASSET ALLOCATION STRATEGY AND INDEX INVESTING. 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. Also, in the event the Tactical Allocation Model recommends frequent or
significant shifts in the Fund's asset allocation mix, at a time when there are
large amounts of unrealized capital gains, the Fund could potentially realize
substantial capital gains. Realization of any such capital gains by the Fund
would normally increase the amount of taxable distributions to shareholders in
that fiscal year.
While Tactical Allocation 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
STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may use derivative
instruments, including options (on securities, futures and indices) and futures
contracts (on stock indices and debt securities) in strategies intended to
reduce the overall risk of its investments ("hedge") or to enhance income or
return (including adjusting a Fund's exposure to different asset classes or to
maintain an exposure to stocks or bonds while maintaining a cash balance for
Fund management purposes, such as to provide liquidity to meet anticipated sales
by shareholders and for Fund operating expenses). Use of these derivative
instruments solely to enhance income or return may be considered a form of
speculation. New financial products and risk management techniques continue to
be developed and may be used if consistent with the Funds' investment objectives
and policies. Balanced Fund also may enter into interest rate swaps and similar
contracts 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 these
strategies may be limited by market conditions, regulatory limits and tax
considerations. The Statement of Additional Information contains further
information on these strategies.
The Funds might not use any derivative instruments or strategies, and there can
be no assurance that any strategy will succeed. If Mitchell Hutchins is
incorrect in its judgment on interest rates, market values or other economic
factors in using a derivative
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PaineWebber Balanced Fund Tactical Allocation Fund
instrument or strategy, a Fund might have lower net income and a net loss on the
investment. Each strategy involves certain risks, which include:
o the fact that the skills needed to use derivative instruments are different
from those needed to select securities for the Funds,
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and price
movements of the securities being hedged,
o possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
"cover" or to segregate securities, and
o 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. These include 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.
Investing in 144A securities could have the effect of increasing the level of
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. The lack of a liquid
secondary market for illiquid securities may make it more difficult for a Fund
to assign a value to those securities for purposes of calculating its net asset
value.
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 its
total assets. 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.
Repurchase agreements are transactions in which a Fund purchases obligations
from a bank or securities dealer (or its affiliate) and simultaneously commits
to resell the securities to the counterparty at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased obligations. Each Fund maintains
custody of the underlying obligations prior to their repurchase, either through
a regular custodian or through a special "tri-party" custodian or sub-custodian
that maintains separate accounts for both the Fund and its counterparty. Thus,
the obligation of the counterparty to pay the repurchase price on the date
agreed to or upon demand is, in effect, secured by such obligations.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including a possible decline in the market value of the
underlying obligations. Repurchase agreements involving obligations other than
U.S. government securities (such as commercial paper and corporate bonds), may
be subject to special risks and may not have the benefit of certain protections
in the event of the counterparty's insolvency. If the seller or guarantor
becomes insolvent, a Fund may suffer delays, costs and possible losses in
connection with the disposition of collateral.
OTHER INFORMATION. Each Fund may purchase securities on a "when-issued" or
delayed-delivery basis. In when-issued or delayed delivery transactions,
delivery of the securities occurs beyond normal settlement periods, but the Fund
would not pay for such securities or start earning interest on them until they
are delivered. However, it immediately assumes 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 up to an aggregate value of 5% of its net assets.
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Prospectus Page 18
<PAGE>
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PaineWebber Balanced Fund Tactical Allocation Fund
FLEXIBLE PRICING(Service Mark)
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An eligible investor can select the class
that is best suited to his or her investment needs, based upon the holding
period and the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price) next calculated after
PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer agent
("Transfer Agent") receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than those of Class B and Class C shares. Class A shares sales
charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED
---------------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- -------------------- -------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
- ------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw no more than 12% of the value of the Fund account
under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors purchasing Class A shares in more than one PaineWebber mutual fund may
combine those purchases to get a reduced sales charge. Investors who already own
Class A shares in one or more PaineWebber mutual funds may combine the amount
they are currently purchasing with the value of such previously owned shares to
qualify for a reduced sales charge. To determine the sales charge reduction in
either case, please refer to the chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
o their spouses, parents or children under age 21;
o their Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o any company controlled by the investor;
o trusts created by the investor;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or
o accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
o is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
o is the spouse, parent or child of any of the above;
o buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC; and
o was the investment executive's client at the competing brokerage firm;
o within 90 days of buying Class A shares in this Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a
-----------------
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Prospectus Page 19
<PAGE>
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PaineWebber Balanced Fund Tactical Allocation Fund
contingent deferred sales charge when selling them or held those shares
until the contingent deferred sales charge was waived; and
o the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;
o is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
o is an employer establishing an employee benefit plan qualified under
section 401, including a salary reduction plan qualified under section 401(k),
or section 403(b) of the Internal Revenue Code ("Code") (each a "qualified
plan"). (This waiver is subject to minimum requirements, with respect to the
number of employees and amount of plan assets, established by Mitchell
Hutchins. Currently, the plan must have 50 or more eligible employees and at
least $1 million in plan assets.) For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested;
o is a participant in the PaineWebber Members Only Program(Trademark). For
investments made pursuant to this waiver, Mitchell Hutchins may make payments
out of its own resources to PaineWebber and to participating membership
organizations in a total amount not to exceed 1% of the amount invested;
o is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;
o acquires Class A shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for program
services, provided that the program sponsor has entered into a written
agreement with PaineWebber permitting the sale of Class A shares at net asset
value to that program. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested. For subsequent investments or
exchanges made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also waived;
o acquires Class A shares in connection with a reorganization pursuant to which
a Fund acquires substantially all of the assets and liabilities of another
investment company in exchange solely for shares of the Fund; or
o acquires Class A shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that fund's initial public offering of shares and that meet certain
other conditions described in its prospectus.
For more information on how to get any reduced sales charge, investors should
contact a PaineWebber investment executive or a correspondent firm or call
1-800-647-1568. Investors must provide satisfactory information to PaineWebber
or the Fund if they seek any of these sales charge reductions or waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
"contingent deferred sales charge." The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
offering price (net asset value of the shares at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, by the percentage shown on the following table. Investors who own
shares for more than six years do not have to pay a sales charge when selling
those shares.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET ASSET
IF THE INVESTOR SELLS SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------------------------------ ---------------------
<S> <C>
1st year of purchase................. 5%
2nd year of purchase................. 4
3rd year of purchase................. 3
4th year of purchase................. 2
5th year of purchase................. 2
6th year of purchase................. 1
7th year of purchase................. None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other
-----------------
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Prospectus Page 20
<PAGE>
------------------------------
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
distributions paid to the investor by the Fund in the form of additional Class B
shares will also convert to Class A shares on a pro-rata basis. This benefits
shareholders because Class A shares have lower ongoing expenses than Class B
shares. If the investor has exchanged Class B shares between PaineWebber funds,
the Fund uses the purchase date at which the initial investment was made to
determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming they are selling:
o First, Class B shares owned through reinvested dividends and capital gain
distributions; and
o Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
o sales of shares under a Fund's "Systematic Withdrawal Plan" (investors may
withdraw annually no more than 12% of the value of the Fund account under the
Plan);
o a distribution from an IRA, a self-employed individual retirement plan (
"Keogh Plan ") or a custodial account under section 403(b) of the Code (after
the investor reaches age 59 1/2);
o a tax-free return of an excess IRA contribution;
o a tax-qualified retirement plan distribution following retirement; or
o Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
Investors must provide satisfactory information to PaineWebber or the Funds if
they seek any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class C shares, 100% of their purchase is immediately
invested. Class C shares never convert to any other class of shares.
A contingent deferred sales charge of 1% of the offering price (net asset value
of at the time of purchase) or net asset value of the shares at the time of sale
by the shareholder, whichever is less, is charged on sales of shares made within
one year of the purchase date. Other PaineWebber mutual funds may impose a
different contingent deferred sales charge on Class C shares sold within one
year of the purchase date. A sale of Class C shares acquired through an exchange
and held less than one year will be subject to the same contingent deferred
sales charge that would have been imposed on the Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains are not subject to the 1% charge.
Withdrawals under the Systematic Withdrawal Plan also are not subject to this
charge. However, investors may withdraw no more than 12% of the value of the
Fund account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Eligible investors may purchase Class Y shares at the
net asset value next calculated after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class Y
shares, and the ongoing expenses for Class Y shares are lower than for the other
classes because Class Y shares are not subject to 12b-1 distribution or service
fees.
LIMITED GROUP OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
o a participant in the PW Programs listed below when Class Y shares are
purchased through that PW Program;
o an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing(Service Mark) System;
o a qualified plan that has either
5,000 or more eligible employees or
$50 million or more in assets;
o an investment company advised by PaineWebber or an affiliate of PaineWebber;
and
o for Tactical Allocation Fund, the trustee of the PaineWebber 401(k) Plus Plan
("PW 401(k) Plan"), formerly known as PaineWebber Savings Investment Plan ("PW
SIP")
PACE MULTI-ADVISOR PROGRAM. An investor who participates in PACE Multi-Advisor
Program is eligible to purchase Class Y shares. The PACE Multi-Advisor Program
is an advisory program sponsored by
-----------------
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Prospectus Page 21
<PAGE>
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PaineWebber Balanced Fund Tactical Allocation Fund
PaineWebber that provides comprehensive investment services, including investor
profiling, a personalized asset allocation strategy using an appropriate
combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi-Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to the PACE Multi-Advisor Program.
PURCHASES BY THE TRUSTEE OF THE PW 401(K) PLAN
The Class Y shares of Tactical Allocation Fund also are offered for sale to the
trustee of the PW 401(k) Plan, a defined contribution plan sponsored by Paine
Webber Group Inc. ("PW Group"). The trustee of the PW 401(k) Plan purchases and
sells Class Y shares to implement the investment choices of individual plan
participants with respect to their PW 401(k) Plan contributions. Individual plan
participants should consult the Summary Plan Description and other plan material
of the PW 401(k) Plan (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
(1-999-793-2237).
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 sold by the
trustee of the PW 401(k) Plan 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 401(k) Plan.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Prices are calculated for each class of a Fund's shares once each Business Day,
normally at the close of regular trading on the New York Stock Exchange ("NYSE")
(usually 4:00 p.m., Eastern time). Prices will be calculated earlier when the
NYSE closes early because trading has been halted for the day. A "Business Day"
is any day, Monday through Friday, on which the NYSE is open for business.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent (PFPC Inc.) by completing an account
application, which can be obtained by calling 1-800-647-1568. The application
and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
New investors to PaineWebber may complete and sign an account application and
mail it along with a check. Investors also may open an account in person.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
o mail an application with a check; or
o open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Fund.
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Prospectus Page 22
<PAGE>
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PaineWebber Balanced Fund Tactical Allocation Fund
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account................. $1,000
To add to an account............... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
o employees of PaineWebber or its affiliates;
o participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan; or
o transactions in Class A and Class Y shares made in certain investment
programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of most other PaineWebber mutual fund shares. For
classes of shares where no initial sales charge is imposed, a contingent
deferred sales charge may apply if the investor sells the shares acquired
through the exchange. Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
o Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
o Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:
o the investor's name and address;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature. A signature guarantee may be
obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not a part
of these programs will not be accepted.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when Class A, B or C shares are
exchanged for the corresponding class of shares of other PaineWebber mutual
funds. A Fund will use the purchase date of the initial investment to determine
any contingent deferred sales charge due when the acquired shares are sold. Fund
shares may be exchanged only after the settlement date has passed and payment
for the shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the fund shares to be acquired is authorized.
This exchange privilege may be modified or terminated at any time and, when
required by SEC rules, upon 60 days' notice. See the back cover of this
Prospectus for a listing of other PaineWebber mutual funds.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular
trading on the NYSE (usually 4:00 p.m., Eastern time). Prices will be calculated
earlier when the NYSE closes early because trading has been halted for the day.
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Fund will assume they are first selling their
Class A shares, then Class C, then Class B and last, Class Y.
If a shareholder wants to sell shares which 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.
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
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Prospectus Page 23
<PAGE>
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------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
sell shares by writing a "letter of instruction," as detailed in "How to
Exchange Shares."
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all of its shares in any
shareholder account with a net asset value of less than $500. If a 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. A 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 401(K) PLAN
The trustee of the PW 401(k) Plan sells Class Y shares of Tactical Allocation
Fund to implement the investment choices of individual plan participants with
respect to their PW 401(k) Plan contributions, as described in the Plan
Documents referenced under "Flexible Pricing" above. The price at which Class Y
shares are sold by the trustee of the PW 401(k) Plan might be more or less than
the price per share at the time the participants made their investment choices.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
- --------------------------------------------------------------------------------
OTHER SERVICES
- --------------------------------------------------------------------------------
Investors should consult their investment executive at PaineWebber or one of its
correspondent firms to learn more about the following services available with
respect to the Funds' Class A, B and C shares.
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan Service with a minimum initial
investment of $1,000 through which the Funds will, on a monthly, quarterly,
semiannual or annual basis, deduct $50 or more from the investor's bank account
to invest directly in the Fund. In addition to providing a convenient and
disciplined manner of investing, participation in the Automatic Investment Plan
enables the investor to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December), semiannual (June and December), or annual
(December) withdrawals from their PaineWebber Mutual Fund accounts. Minimum
balances and withdrawals vary according to the class of shares:
o CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
o CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly, semiannual and annual withdrawals of $200, $400, $600 and $800,
respectively.
Withdrawals under the Systematic Withdrawal Plan are not subject to a contingent
deferred sales charge. Investors may withdraw no more than 12% of the value of
the Fund account when the investor signed up for the Plan (for Class B shares
annually; for Class A and Class C shares, during the first year under the Plan).
Shareholders who elect to receive dividends or other distributions in cash may
not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber funds and other investments may be made. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be moved
to an account with the Transfer Agent. However, if the other firm has entered
into a selected dealer agreement with Mitchell Hutchins relating to the Fund,
the shareholder may be able to hold Fund shares in an account with the other
firm.
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Prospectus Page 24
<PAGE>
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------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
MANAGEMENT
- --------------------------------------------------------------------------------
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
(each a "board") 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).
In accordance with procedures adopted by each board, brokerage transactions for
the Funds may be conducted through PaineWebber or its affiliates and the Funds
may pay fees to PaineWebber for its services as lending agent in their portfolio
securities lending programs.
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.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is a wholly owned asset management subsidiary of PaineWebber
Incorporated, which is wholly owned by Paine Webber Group Inc., a publicly owned
financial services holding company. On October 31, 1998, Mitchell Hutchins was
adviser or sub-adviser of investment companies with 75 separate portfolios and
aggregate assets of approximately $42.7 billion.
As investment adviser and administrator 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 senior
vice presidents of Mitchell Hutchins. Mr. Singh has been with Mitchell Hutchins
since September 1993. 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.
Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
input on market outlook, interest rate forecasts, investment research and other
considerations pertaining to each Fund's investments.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. Under advisory
contracts, Balanced Fund pays a monthly fee at an annual rate of 0.75% of
average daily net assets up to $500 million. This fee is reduced to 0.725% of
assets from $500 million to $1 billion, with further breakpoints as assets
increase. Tactical Allocation Fund pays a monthly fee at the annual rate of
0.50% of average daily net assets up to $250 million, and 0.45% of average daily
net assets over $250 million. For the fiscal year ended August 31, 1998,
Balanced Fund paid advisory fees to Mitchell Hutchins at the annual rate of
0.75% of its average daily net assets and Tactical Allocation Fund paid advisory
fees to Mitchell Hutchins at the effective annual rate of 0.46% of its average
daily net assets.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under distribution
plans for Class A, Class B and Class C shares ("Class A Plan," "Class B Plan"
and "Class C Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins:
o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
o Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B shares and Class C Shares.
Under the Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund's Class A, Class B and
Class C shares by PaineWebber clients. PaineWebber then compensates its
investment executives for shareholder servicing that they perform and offsets
its own expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
o Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
o Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are purchased by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from either Fund or investors at the time
Class B or C shares are purchased.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for Class A, Class B and
Class C shares ("Distribution Contracts") specify that each Fund must pay
service and distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the Funds. Annually, the board of
each Fund reviews each Plan and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
DETERMINING THE SHARES' NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Fund's shares fluctuates and is determined separately
for each class, normally as of the close of regular trading on the NYSE (usually
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.
If trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, and
trading on the NYSE will not resume again that day, the Funds' net asset value
per share will be calculated at the time trading was halted.
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.
It should be recognized that judgment plays a greater role in valuing
lower-rated corporate bonds because there is less reliable, objective data
available.
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Balanced Fund pays dividends semiannually from its net investment income and
also may distribute net short-term capital gain, if any, with a periodic
dividend. While Balanced 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
the declaration of a distribution including net short-term capital gain could
convert a portion of such a distribution to a non-taxable return of capital.
Tactical Allocation Fund pays an annual dividend from its net investment income
and net 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.
Dividends and other distributions paid on each class of shares of a Fund are
calculated at the same time and in the same manner. Dividends on Class A, B and
C shares of a Fund are expected to be lower than those on its Class Y shares
because the other shares have higher expenses resulting from their service fees,
and, in the case of Class B and Class C shares, their distribution fees.
Dividends on Class B and Class C shares of a Fund are expected to be lower than
those on its Class A shares because Class B and Class C shares have higher
expenses resulting from their distribution fees. Dividends on each class also
might be affected differently by the allocation of other class-specific
expenses. See "General Information."
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 other distributions in
cash, either mailed to them by check or credited to their PaineWebber accounts,
should contact their investment executives at PaineWebber or one of its
correspondent firms or complete the appropriate section of the account
application. For PW 401(k) Plan 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.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under the 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.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
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. Under the
Taxpayer Relief Act of 1997, as modified by recent legislation, the maximum tax
rate applicable to a non-corporate taxpayer's net capital gain recognized on
capital assets held for more than one year is 20% (10% for taxpayers in the 15%
marginal tax bracket). In the case of regulated investment companies such as the
Funds, the relevant holding period is determined by how long the Fund has held
the portfolio securities on which the gain was realized, not by how long the
shareholders 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.
BACKUP WITHHOLDING
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.
TAX ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of Fund shares may result in a taxable gain or
loss. This depends upon whether the shareholder receives more or less than the
adjusted basis for the shares (which normally includes any initial sales charge
paid on Class A shares). An exchange of a Fund's shares for shares of another
PaineWebber mutual fund generally will have similar tax consequences. 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.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase and subsequently purchases Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss thereon would be decreased, by the amount of the sales charge paid when
those shares were bought, and that amount would increase the basis of the
PaineWebber mutual fund shares subsequently acquired.
No gain or loss will be recognized to a shareholder as a result of conversion of
Class B shares into Class A 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 advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
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
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 affect 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 and liquidation proceeds on
each Fund's Class A, B, C and Y shares will differ.
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 of the Corporation and the Trust 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, such as the terms
of a Plan as it relates to that class. The shares of each series of the
Corporation or the Trust will be voted separately, except when an aggregate vote
of all the securities is required by law.
SHAREHOLDER MEETING
The Funds do not 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, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND DISBURSING 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.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BALANCED FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements, accompanying notes and
the report of PricewaterhouseCoopers LLP, independent accountants, which appear
in the Fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1998, and are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
information in the table below relating to the fiscal years ended August 31,
1998 and 1997, the period March 1, 1996 through August 31, 1996 and to each of
the three years in the period ended February 29, 1996, have been audited by
PricewaterhouseCoopers LLP. 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. Prior to August 14, 1995, the Fund
pursued certain different investment policies; thus, the information shown below
for periods prior to that date may not necessarily be indicative of current or
future operations.
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------
FOR THE
FOR THE FOR THE PERIOD
FOR THE YEARS ENDED SIX MONTHS YEAR FOR THE YEARS ENDED JULY 1,
AUGUST 31, ENDED ENDED FEBRUARY 28, 1991+ TO
----------------------- AUGUST 31, FEBRUARY 29, ------------------------------ FEBRUARY 29,
1998 1997 1996(2) 1996 1995 1994 1993 1992
---------- ---------- ---------- ------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01 $10.09
-------- -------- -------- -------- -------- -------- -------- ------
Net investment income.......... 0.23++ 0.23++ 0.12++ 0.27++ 0.26 0.22 0.33 0.19
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 0.31++ 2.79++ (0.12)++ 1.84++ (1.07) 1.31 0.54 0.96
-------- -------- -------- -------- -------- -------- -------- ------
Net increase (decrease) from
investment operations......... 0.54 3.02 0.00 2.11 (0.81) 1.53 0.87 1.15
-------- -------- -------- -------- -------- -------- -------- ------
Dividends from net investment
income........................ (0.22) (0.24) (0.10) (0.31) (0.23) (0.25) (0.34) (0.23)
Distributions from net realized
gains from investment
transactions.................. (1.55) (0.55) (0.48) (0.75) (1.20) (0.78) -- --
-------- -------- -------- -------- -------- -------- -------- ------
Total dividends and other
distributions to
shareholders.................. (1.77) (0.79) (0.58) (1.06) (1.43) (1.03) (0.34) (0.23)
-------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period........................ $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $11.01
-------- -------- -------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- -------- -------- ------
Total investment return (1) ... 4.69% 30.67% 0.03% 22.08% (6.02)% 13.57% 8.09% 11.43%
-------- -------- -------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- -------- -------- ------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $182,362 $176,403 $157,525 $171,609 $174,761 $216,492 $154,594 $ 916
Expenses to average net
assets........................ 1.26% 1.46% 1.34%* 1.29% 1.26% 1.21% 1.18% 1.30%*
Net investment income to
average
net assets.................... 1.88% 2.02% 2.19%* 2.55% 2.41% 1.74% 2.52% 3.43%*
Portfolio turnover rate........ 190% 188% 103% 188% 107% 69% 33% 84%
<CAPTION>
BALANCED FUND
------------------------------------
CLASS B
------------------------------------
FOR THE
FOR THE YEARS ENDED SIX MONTHS
AUGUST 31, ENDED
----------------------- AUGUST 31,
1998 1997 1996(2)
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.70 $ 10.42 $ 11.00
-------- -------- --------
Net investment income.......... 0.14++ 0.14++ 0.08++
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 0.31++ 2.84++ (0.11)++
-------- -------- --------
Net increase (decrease) from
investment operations......... 0.45 2.98 (0.03)
-------- -------- --------
Dividends from net investment
income........................ (0.12) (0.15) (0.07)
Distributions from net realized
gains from investment
transactions.................. (1.55) (0.55) (0.48)
-------- -------- --------
Total dividends and other
distributions to
shareholders.................. (1.67) (0.70) (0.55)
-------- -------- --------
Net asset value, end of
period........................ $ 11.48 $ 12.70 $ 10.42
-------- -------- --------
-------- -------- --------
Total investment return (1) ... 3.87% 29.70% (0.30)%
-------- -------- --------
-------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $ 26,425 $ 22,768 $ 22,307
Expenses to average net
assets........................ 2.03% 2.22% 2.09%*
Net investment income to
average
net assets.................... 1.13% 1.27% 1.43%*
Portfolio turnover rate........ 190% 188% 103%
</TABLE>
- ------------------
* Annualized
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the year.
(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. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Fiscal year changed to August 31.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
---------------------------------------------------------------------------------------------- -----------------
FOR THE YEARS
ENDED
FOR THE YEARS ENDED FEBRUARY 28 OR 29, AUGUST 31,
---------------------------------------------------------------------------------------------- ------------------
1996 1995 1994 1993 1992 1991 1990 1989 1998 1997
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 12.52 $10.29
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
0.19++ 0.44 0.26 0.30 0.35 0.59 0.65 0.54 0.14++ 0.14++
1.86++ (1.32) 1.18 0.48 0.78 0.38 0.10 (0.28) 0.31++ 2.80++
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
2.05 (0.88) 1.44 0.78 1.13 0.97 0.75 0.26 0.45 2.94
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
(0.20) (0.12) (0.12) (0.21) (0.35) (0.62) (0.70) (0.52) (0.14) (0.16)
(0.75) (1.20) (0.78) -- -- -- (0.11) -- (1.55) (0.55)
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
(0.95) (1.32) (0.90) (0.21) (0.35) (0.62) (0.81) (0.52) (1.69) (0.71)
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
$ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 11.28 $12.52
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
21.20% (6.68)% 12.62% 7.25% 11.24% 10.29% 7.53% 2.73% 3.89% 29.70%
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
------- ------- ------- -------- -------- -------- -------- -------- ------- ------
$26,627 $37,104 $83,178 $160,115 $346,290 $403,557 $557,646 $651,003 $14,581 $8,736
2.05% 1.98% 2.05% 1.98% 2.02% 1.83% 1.84% 1.94% 2.00% 2.21%
1.81% 1.60% 1.00% 2.02% 3.25% 5.46% 6.04% 5.37% 1.18% 1.27%
188% 107% 69% 33% 84% 169% 327% 159% 190% 188%
<CAPTION>
CLASS C
- --------------------------------------------------------------------------------
FOR THE FOR THE
SIX MONTHS FOR THE YEARS ENDED FOR THE PERIOD
ENDED YEAR ENDED FEBRUARY 28, JULY 2, 1992+ TO
AUGUST 31, FEBRUARY 29, --------------- FEBRUARY 28,
1996(2) 1996 1995 1994 1993
---------- ------------ ------ ------- -----------------
<S> <C> <C> <C> <C> <C>
$10.88 $ 9.82 $12.03 $ 11.54 $10.86
------ ------ ------ ------- ------
0.08++ 0.19++ 0.19 0.14 0.13
(0.12)++ 1.84++ (1.07) 1.30 0.71
------ ------ ------ ------- ------
(0.04) 2.03 (0.88) 1.44 0.84
------ ------ ------ ------- ------
(0.07) (0.22) (0.13) (0.17) (0.16)
(0.48) (0.75) (1.20) (0.78) --
------ ------ ------ ------- ------
(0.55) (0.97) (1.33) (0.95) (0.16)
------ ------ ------ ------- ------
$10.29 $10.88 $ 9.82 $ 12.03 $11.54
------ ------ ------ ------- ------
------ ------ ------ ------- ------
(0.38)% 21.12% (6.69)% 12.75% 7.78%
------ ------ ------ ------- ------
------ ------ ------ ------- ------
$6,979 $7,469 $8,525 $12,916 $7,058
2.09%* 2.08% 2.01% 1.96% 1.95%*
1.44%* 1.77% 1.62% 0.97% 1.91%*
103% 188% 107% 69% 33%
</TABLE>
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 31
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND
---------------------
CLASS Y
---------------------
FOR THE PERIOD
MARCH 26, 1998+
THROUGH
AUGUST 31, 1998
---------------------
<S> <C>
Net asset value, beginning of period.................................................................... $ 12.55
-------
Net investment income................................................................................... 0.11++
Net realized and unrealized gains (losses) from investments, futures and options........................ (1.28)++
-------
Net increase (decrease) from investment operations...................................................... (1.17)
-------
Dividends from net investment income.................................................................... (0.11)
Distributions from net realized gains from investment transactions...................................... --
-------
Total dividends and other distributions to shareholders................................................. (0.11)
-------
Net asset value, end of period.......................................................................... $ 11.27
-------
-------
Total investment return (1)............................................................................. (9.41)%
-------
-------
Ratios/supplemental data:
Net assets, end of period (000's)....................................................................... $ 175
Expenses to average net assets.......................................................................... 0.89%*
Net investment income to average net assets............................................................. 2.48%*
Portfolio turnover rate................................................................................. 190%
</TABLE>
- ------------------
* Annualized
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include program fees; results would be lower if program fees were included.
Total investment return for periods of less than one year has not been
annualized.
-----------------
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Prospectus Page 32
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
[This page intentionally left blank]
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 33
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
TACTICAL ALLOCATION FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and 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, 1998,
and are incorporated by reference into the Statement of Additional Information.
The financial statements and notes, as well as the financial information in the
tables below relating to each of the four fiscal years in the period ended
August 31, 1998 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.
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
-----------------------------------------------------------------------------------
CLASS A CLASS B
----------------------------------------------------------------------- --------
FOR THE
FOR THE YEARS FOR THE PERIOD YEARS
ENDED MAY 10, 1993+ ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31,
---------------------------------------------------- --------------- --------
1998 1997 1996 1995** 1994 1993 1998
-------- -------- ------- ------- ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 22.23 $ 16.15 $ 14.86 $ 13.78 $13.50 $ 12.90 $ 22.08
-------- -------- ------- ------- ------ ------- --------
Net investment income (loss)............. 0.15 0.18@ 0.18 0.22 0.24 0.08 0.00
Net realized and unrealized gains from
investments............................. 1.47 6.12@ 2.31 2.05 0.32 0.59 1.43
-------- -------- ------- ------- ------ ------- --------
Net increase from investment
operations.............................. 1.62 6.30 2.49 2.27 0.56 0.67 1.43
-------- -------- ------- ------- ------ ------- --------
Dividends from net investment income..... (0.12) (0.14) (0.14) (0.22) (0.24) (0.07) (0.01)
Distributions from net realized gains
from investment transactions............ (0.18) (0.08) (1.06) (0.97) (0.04) -- (0.18)
-------- -------- ------- ------- ------ ------- --------
Total dividends and other distributions
to
shareholders............................ (0.30) (0.22) (1.20) (1.19) (0.28) (0.07) (0.19)
-------- -------- ------- ------- ------ ------- --------
Net asset value, end of period........... $ 23.55 $ 22.23 $ 16.15 $ 14.86 $13.78 $ 13.50 $ 23.32
-------- -------- ------- ------- ------ ------- --------
-------- -------- ------- ------- ------ ------- --------
Total investment return(1)............... 7.31% 39.26% 17.35% 18.43% 4.21% 5.17% 6.49%
-------- -------- ------- ------- ------ ------- --------
-------- -------- ------- ------- ------ ------- --------
Ratios/Supplemental data:
Net assets, end of period (000's)........ $340,245 $170,759 $23,551 $ 1,944 $1,801 $ 3,007 $483,068
Expenses to average net assets........... 0.95% 0.99% 1.17% 1.46% 1.13% 1.06%* 1.71%
Net investment income (loss) to average
net assets.............................. 0.74% 0.88% 1.12% 1.60% 1.64% 1.71%* (0.02)%
Portfolio turnover rate.................. 33% 6% 6% 53% 4% 0% 33%
<CAPTION>
TACTICAL ALLOCATION FUND
----------------------------
CLASS B
----------------------------
FOR THE PERIOD
JANUARY 30,
1996+
TO AUGUST 31,
--------------
1997 1996
---------- --------------
<S> <C> <C>
Net asset value, beginning of period..... $ 16.13 $ 15.54
-------- --------
Net investment income (loss)............. 0.03@ 0.02
Net realized and unrealized gains from
investments............................. 6.09@ 0.57
-------- --------
Net increase from investment
operations.............................. 6.12 0.59
-------- --------
Dividends from net investment income..... (0.09) --
Distributions from net realized gains
from investment transactions............ (0.08) --
-------- --------
Total dividends and other distributions
to
shareholders............................ (0.17) --
-------- --------
Net asset value, end of period........... $ 22.08 $ 16.13
-------- --------
-------- --------
Total investment return(1)............... 38.14% 3.80%
-------- --------
-------- --------
Ratios/Supplemental data:
Net assets, end of period (000's)........ $239,836 $ 28,495
Expenses to average net assets........... 1.74% 1.84%*
Net investment income (loss) to average
net assets.............................. 0.13% 0.47%*
Portfolio turnover rate.................. 6% 6%
</TABLE>
- ------------------
+ 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.
@ Calculated using the average shares outstanding for the period.
(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. The figures do not
include sales charges or program fees; would be lower if sales charges or
program fees were included. Total investment returns for periods of less
than one year have not been annualized.
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 34
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
-----------------------------------------------------------------------------------------------------------------
CLASS C CLASS Y
-------------------------------------------------------------------------------------------------- ----------
FOR THE
FOR THE YEARS FOR THE PERIOD YEARS
ENDED JULY 22, 1992+ TO ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
---------------------------------------------------------------------- ----------------------- ----------
1998 1997 1996 1995** 1994 1993 1992 1998
-------- -------- ------- ------- ------- -------- ----------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22.18 $ 16.12 $ 14.87 $ 13.78 $ 13.49 $ 12.12 $ 12.00 $ 22.33
-------- -------- ------- ------- ------- -------- ------- --------
(0.01) 0.03@ 0.06 0.12 0.13 0.18 0.03 0.21
1.45 6.11@ 2.32 2.06 0.33 1.34 0.09 1.49
-------- -------- ------- ------- ------- -------- ------- --------
1.44 6.14 2.38 2.18 0.46 1.52 0.12 1.70
-------- -------- ------- ------- ------- -------- ------- --------
-- -- (0.07) (0.12) (0.13) (0.15) -- (0.17)
(0.17) (0.08) (1.06) (0.97) (0.04) -- -- (0.18)
-------- -------- ------- ------- ------- -------- ------- --------
(0.17) (0.08) (1.13) (1.09) (0.17) (0.15) -- (0.35)
-------- -------- ------- ------- ------- -------- ------- --------
$ 23.45 $ 22.18 $ 16.12 $ 14.87 $ 13.78 $ 13.49 $ 12.12 $ 23.68
-------- -------- ------- ------- ------- -------- ------- --------
-------- -------- ------- ------- ------- -------- ------- --------
6.49% 38.20% 16.52% 17.57% 3.46% 12.61% 0.98% 7.62%
-------- -------- ------- ------- ------- -------- ------- --------
-------- -------- ------- ------- ------- -------- ------- --------
$397,767 $233,044 $73,630 $48,105 $62,970 $107,761 $50,222 $ 74,872
1.70% 1.75% 1.95% 2.22% 1.88% 1.73% 1.75%* 0.67%
(0.01)% 0.14% 0.35% 0.86% 0.89% 1.04% 2.42%* 1.03%
33% 6% 6% 53% 4% 0% 0% 33%
<CAPTION>
TACTICAL ALLOCATION FUND
- ----------------------------------------------------------------------------------------
CLASS Y
- ----------------------------------------------------------------------------------------
FOR THE PERIOD
MAY 10, 1993+
TO AUGUST 31,
----------------------
1997 1996 1995** 1994 1993
---------- ------------ ------ ------- ----------------------
<S> <C> <C> <C> <C> <C>
$ 16.20 $ 14.88 $13.79 $ 13.52 $12.90
-------- -------- ------ ------- ------
0.23@ 0.30 0.23 0.25 0.09
6.13@ 2.24 2.09 0.33 0.60
-------- -------- ------ ------- ------
6.36 2.54 2.32 0.58 0.69
-------- -------- ------ ------- ------
(0.15) (0.16) (0.26) (0.27) (0.07)
(0.08) (1.06) (0.97) (0.04) --
-------- -------- ------ ------- ------
(0.23) (1.22) (1.23) (0.31) (0.07)
-------- -------- ------ ------- ------
$ 22.33 $ 16.20 $14.88 $ 13.79 $13.52
-------- -------- ------ ------- ------
-------- -------- ------ ------- ------
39.55% 17.70% 18.79% 4.41% 5.30%
-------- -------- ------ ------- ------
-------- -------- ------ ------- ------
$ 36,467 $ 12,803 $2,506 $ 3,880 $3,379
0.74% 0.95% 1.23% 0.88% 0.81%*
1.16% 1.38% 1.86% 1.90% 1.96%*
6% 6% 53% 4% 0%
</TABLE>
-----------------
- --------------------------------------------------------------------------------
Prospectus Page 35
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
PROSPECTUS -- NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
o PAINEWEBBER BOND FUNDS
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government
Income Fund
Strategic Income Fund
U.S. Government Income Fund
o PAINEWEBBER TAX-FREE BOND FUNDS
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
o PAINEWEBBER ASSET ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund
o PAINEWEBBER STOCK FUNDS
Financial Services Growth Fund
Growth Fund
Growth and Income Fund
Mid Cap Fund
Small Cap Fund
S&P 500 Index Fund
Tax-Managed Equity Fund
Utility Income Fund
o PAINEWEBBER GLOBAL FUNDS
Asia Pacific Growth Fund
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund
o PAINEWEBBER MONEY MARKET FUND
o PAINEWEBBER FUNDS OF FUNDS
Mitchell Hutchins Conservative Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Aggressive Portfolio
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.
-----------------
- --------------------------------------------------------------------------------
