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P R O S P E C T U S
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TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and nondiversified investment portfolios ("portfolios").
The Fund currently consists of twenty-nine portfolios representing a broad range
of investment choices. The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. This prospectus (the
"Prospectus") pertains to the Class A and Class B shares of the Technology
Portfolio (the "Portfolio"). The Class A and Class B shares currently offered by
the Portfolio have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge (with the exception of
International Small Cap Portfolio), exchange or redemption fee.
The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their involvement
in technology and technology-related industries (as defined in "Investment
Objective and Policies" below).
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 15% OF ITS NET
ASSETS IN ILLIQUID SECURITIES. THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND UP TO 25% OF ITS TOTAL ASSETS IN RESTRICTED
SECURITIES THAT ARE RULE 144A SECURITIES. INVESTMENTS IN RESTRICTED SECURITIES
IN EXCESS OF 5% OF THE PORTFOLIO'S ASSETS MAY BE CONSIDERED A SPECULATIVE
ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
THE PORTFOLIO MAY INVEST IN EMERGING MARKETS SECURITIES, WHICH ARE SUBJECT
TO SPECIAL RISKS. SEE "ADDITIONAL INVESTMENT INFORMATION -- FOREIGN INVESTMENT."
FOR A DESCRIPTION OF OTHER SPECIAL RISK FACTORS SEE "PROSPECTUS SUMMARY -- RISK
FACTORS."
NOTICE TO OHIO INVESTORS: DUE TO ITS RESTRICTION WHICH PROHIBITS ITS
PURCHASE, WITH RESPECT TO 50% OF ITS TOTAL ASSETS, OF MORE THAN TEN PER CENT OF
THE OUTSTANDING VOTING SECURITIES OF ANY ISSUER, THE PORTFOLIO MAY EXCEED
LIMITATIONS IMPOSED BY OHIO ADMINISTRATIVE CODE 1301:6-3-09(E)(8) WHICH
PROHIBITS A MUTUAL FUND'S PURCHASE OF SECURITIES OF ANY ISSUER IF, AS TO 75% OF
THE ASSETS OF THE MUTUAL FUND AT THE TIME OF PURCHASE, MORE THAN TEN PER CENT OF
THE VOTING SECURITIES OF ANY ISSUER WOULD BE HELD BY THE MUTUAL FUND.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY
AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets
Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities
and Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and
Municipal Money Market Portfolios. Additional information about the Fund is
contained in a "Statement of Additional Information," dated August 22, 1996,
which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 22, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Technology Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.74%
Class B................................................................................... 0.74%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 0.51%
Class B................................................................................... 0.51%
---------
Total Operating Expenses (Net of Fee Waivers or Expense Reimbursements)*
Class A................................................................................... 1.25%
Class B................................................................................... 1.50%
---------
---------
</TABLE>
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*The Adviser has agreed to waive its advisory fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the Management
Fee would be 1.00%. Absent the fee waivers and/or expense reimbursements, the
Portfolio's total operating expenses are expected to be 1.51% of the average
daily net assets of the Class A shares and 1.76% of the average daily net
assets of the Class B shares. As a result of this reduction, the Management Fee
stated above is lower than the contractual fee stated under "Management of the
Fund." The Adviser reserves the right to terminate any of its fee waivers
and/or expense reimbursements at any time in its sole discretion. For further
information on Portfolio expenses, see "Management of the Fund."
2
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The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A and Class B expenses and fees for the Portfolio are
based on estimates, assuming that the average daily net assets of the Class A
shares and Class B shares will each be $50,000,000. "Other Expenses" include
Board of Directors' fees and expenses, amortization of organizational costs,
filing fees, professional fees and costs for shareholder reports. Due to the
continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay
more than the equivalent of the maximum front-end sales charges otherwise
permitted by the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Technology Portfolio
Class A........................................................ $ 13 $ 40 $ * $ *
Class B........................................................ $ 15 $ 47 $ * $ *
</TABLE>
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*Because the Portfolio is new, the Fund has not projected expenses for the
Portfolio beyond the 3-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. THE PORTFOLIO IS NEW AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN. INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE
PORTFOLIO WILL BE CONTAINED IN THE FUND'S FUTURE ANNUAL REPORTS TO SHAREHOLDERS,
WHICH MAY BE OBTAINED WITHOUT CHARGE WHEN THEY BECOME AVAILABLE.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company. The
Adviser has agreed to a reduction in the amounts payable to it, and to reimburse
the Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's
expenses exceeds the limit set by applicable state law.
3
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PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. This Prospectus pertains to the
Class A and Class B shares of the Technology Portfolio, the investment objective
of which is as follows:
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries (as defined in
"Investment Objective and Policies" below).
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The objectives of these other portfolios are listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country weightings determined by the Adviser.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
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-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current
income and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
5
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly-owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at June 30, 1996 had approximately $103.5 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%, on an
annualized basis, of the Class B shares' average daily net assets. Share
purchases may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment for shares in a Portfolio account is
$250,000 for Class A shares and $50,000 for Class B shares. Certain exceptions
to the foregoing minimums apply to (1) Portfolio accounts held by officers of
the Adviser and its affiliates and (2) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. The minimum
investment levels may be waived at the discretion of the Adviser for (i) certain
employees and customers of Morgan Stanley or its affiliates and certain trust
departments, brokers, dealers, agents, financial planners, financial services
firms, or investment advisers that have entered into an agreement with Morgan
Stanley or its affiliates; and (ii) retirement and deferred compensation plans
and trusts used to fund such plans, including, but not limited to, those defined
in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as
amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and
Account Sizes; Conversion from Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
6
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in a Portfolio account are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$50,000 for a continuous 60-day period. Involuntary redemption does not apply to
Managed Accounts, regardless of the value of such accounts. Class A shares in a
Portfolio account will convert to Class B shares if shareholder redemption(s) of
such shares reduces the value of such account to less than $250,000 for a
continuous 60-day period. Class B shares in a Portfolio account will convert to
Class A shares if shareholder purchases of additional Class B shares or market
activity cause the value of the Class B shares in the Portfolio account to
increase to $250,000 or more. See "Purchase of Shares -- Minimum Account Sizes
and Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. In particular, the
Portfolio's concentration in technology securities presents special risk
considerations. For example, the value of the Portfolio's shares may be
susceptible to factors affecting technology and technology-related industries
and to greater risk and market fluctuation than an investment in a portfolio
that invests in a broader range of portfolio securities. In certain instances,
technology companies may experience dramatic price movements precipitated by
investors' excessive optimism or pessimism with little or no basis in
fundamental economic conditions. Technology and technology-related industries
may produce or use products or services that prove commercially unsuccessful,
become obsolete quickly or become adversely affected by U.S. or foreign
government regulation. Additionally, these companies may be subject to risks of
developing technologies, competitive pressure and other factors and may be
dependent upon consumer and business acceptance as new technologies evolve. See
"Investment Objective and Policies" and "Additional Investment Information." The
Portfolio will invest in securities of foreign issuers, including issuers in
emerging countries, which are subject to certain risks not typically associated
with domestic securities, including (1) restrictions on foreign investment and
on repatriation of capital invested in foreign countries, (2) currency
fluctuations, (3) the cost of converting foreign currency into U.S. dollars, (4)
potential price volatility and lesser liquidity of shares traded on foreign
country securities markets or lack of a secondary trading market for such
securities and (5) political and economic risks, including the risk of
nationalization of expropriation of assets and the risk of war. In addition,
accounting, auditing, financial and other reporting standards in foreign
countries are not equivalent to U.S. standards and therefore, disclosure of
certain material information may not be made and less information may be
available to investors investing in foreign countries than in the United States.
There is also generally less governmental regulation of the securities industry
in foreign countries than the United States. Moreover, it may be more difficult
to obtain a judgment in a court outside the United States. See "Investment
Objective and Policies" and "Additional Investment Information." In addition,
the Portfolio may engage in short sales, invest in repurchase agreements, lend
its portfolio securities, purchase securities on a when-issued basis and invest
in forward foreign currency exchange contracts to hedge currency risk associated
with investment in non-U.S. dollar denominated securities. Each of these
investment strategies involves specific risks which are described under
"Investment Objective and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
7
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is described below, together with
the policies the Portfolio employs in its efforts to achieve this objective. The
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objective.
The investment policies described below are not fundamental policies and may be
changed without shareholder approval.
The investment objective of the Portfolio is to provide long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in equity securities of companies that, in the opinion of the Adviser, are
expected to benefit from their investment in technology and technology related
industries. At least 65% of the total assets of the Portfolio will be invested
in the equity securities of such "technology" companies under normal
circumstances. The Portfolio expects to invest in companies in a broad range of
technology and technology related industries including, but not limited to:
computers, software and peripheral products; electronics; communications
equipment and services; entertainment; multimedia; and information services.
With respect to the Portfolio, equity securities include common and preferred
stocks, convertible securities, rights and warrants to purchase common stocks,
and any similar equity interests, such as trust or partnership interests. Such
equity securities may or may not pay dividends or distributions and may or may
not carry voting rights.
The Portfolio may invest up to 35% of its total assets in the equity or debt
securities of foreign issuers to permit the Portfolio to participate
sufficiently in the global technology market. The Portfolio may invest in
Depositary Receipts, including American Depositary Receipts, Global Depositary
Receipts or similar securities that are convertible into securities of foreign
issuers and that evidence ownership of the underlying foreign security.
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In the event that
Depositary Receipts are not available for a particular security, the Portfolio
may invest directly in that security, which may or may not be listed on a
foreign exchange. The securities in which the Portfolio may invest may be
denominated in any currency. The Portfolio may enter into forward foreign
currency exchange contracts in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Portfolio will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations that are not typically
associated with investing in U.S. companies. See "Additional Investment
Information" below.
The Portfolio may invest in the equity securities of both large and small
companies. While the Adviser believes that smaller companies can provide greater
growth potential than larger, more established firms, investing in the
securities of smaller companies also involves greater risk and portfolio price
volatility. Among the reasons for this greater price volatility are the lower
degree of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions.
The Portfolio may from time to time and consistent with applicable legal
requirements sell securities short that it owns (i.e., "against the box") or
borrows. See "Additional Investment Information."
Any remaining assets of the Portfolio may be invested in certain securities
and obligations, including derivative securities, as set forth in "Additional
Investment Information" below.
8
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES. The
Portfolio may invest in securities such as convertible securities, preferred
stock, warrants or other securities exchangeable under certain circumstances for
shares of common stock. Warrants are instruments giving holders the right, but
not the obligation, to buy shares of a company at a given price during a
specified period.
The Portfolio may invest in equity-linked securities including, among
others, PERCS, ELKS or LYONs, which are securities that are convertible into, or
the value of which is based upon the value of, equity securities upon certain
terms and conditions. The amount received by an investor at maturity of such
securities is not fixed but is based on the price of the underlying common
stock. It is impossible to predict whether the price of the underlying common
stock will rise or fall. Trading prices of the underlying common stock will be
influenced by the issuer's operational results, by complex, interrelated
political, economic, financial, or other factors affecting the capital markets,
the stock exchanges on which the underlying common stock is traded and the
market segment of which the issuer is a part. In addition, it is not possible to
predict how equity-linked securities will trade in the secondary market, which
is fairly developed and liquid. The market for such securities may be shallow,
however, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment bank or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolio
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
are preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, the Portfolio
may be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolio, that seek current
income, find PERCS attractive because a PERCS provides a higher dividend income
than that paid with respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At
9
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maturity, the holder of ELKS will be entitled to receive a principal amount
equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater
than the current price of the issuer's common stock, or the average closing
price per share of the issuer's common stock, subject to adjustment as a result
of certain dilution events, for the 10 trading days immediately prior to
maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to
maturity. ELKS usually bear interest during the three-year term at a
substantially higher rate than the dividend yield on the underlying common
stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Portfolio may be
compensated with the higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolio, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better, or, at the option of the holder, upon certain fixed dates. The
redemption price typically is the purchase price of the LYONs plus accrued
original issue discount to the date of redemption, which amounts to the
lower-than-market yield. The Portfolio will receive only the lower-than-market
yield unless the underlying common stock increases in value at a substantial
rate. LYONs are attractive to investors, like the Portfolio, when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored ADRs, GDRs and
other types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S.
financial institution which evidence ownership interests in a security or pool
of securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of the
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
DERIVATIVES. The Portfolio may invest in certain derivatives, which are
financial products or instruments that derive their value from the value of an
underlying asset, reference rate or index. The following are derivatives in
which the Portfolio may invest: convertible securities, warrants, equity-linked
securities; forward
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foreign currency exchange contracts, foreign currency futures contracts, options
on such contracts and options on foreign currencies; and securities options,
futures contracts and options on futures contracts. See elsewhere in this
"Additional Investment Information" section for descriptions of these various
instruments, and see "Investment Objectives and Policies" for more information
regarding any investment policies or limitations applicable to their use.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Portfolio may enter into forward foreign
currency exchange contracts ("forward contracts"), foreign currency futures
contracts and options on such contracts, and purchase put or call options on
foreign currencies. A forward contract involves an obligation to purchase or
sell an amount of a specified currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Forward contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks). Except when used for hedging, the Portfolio's custodian will
place cash, U.S. government securities, or high-grade debt securities into a
segregated account of the Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts. See "Investment
Objective and Policies -- Forward Foreign Currency Exchange Contracts" in the
Statement of Additional Information.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. Foreign currency futures contracts
traded in the U.S. are traded on regulated exchanges. Parties to a futures
contract must make initial "margin" deposits to secure performance of the
contract, which generally range from 2% to 5% of the contract price. There also
are requirements to make "variation" margin deposits as the value of the futures
contract fluctuates. The Portfolio may not enter into foreign currency futures
contracts if the aggregate amount of initial margin deposits on the Portfolio's
futures positions would exceed 5% of the value of the Portfolio's total assets.
The Portfolio also will be required to segregate assets to cover its futures
contracts obligations.
At the maturity of a forward or futures contract, the Portfolio may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. Closing purchase transactions with respect to
futures contracts are effected on an exchange. The Portfolio will only enter
into such a forward or futures contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward or
futures contract, in which case the Portfolio may suffer a loss.
Purposes for which such contracts may be used include protecting against a
decline in a foreign currency against the U.S. dollar between the trade date and
settlement date when the Portfolio purchases or sells securities, locking in the
U.S. dollar value of dividends declared on securities held by the Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuations. Such contracts will be used only as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such contracts may limit losses to the
Portfolio as a result of exchange rate fluctuation, they will also limit any
gains that may otherwise have been realized.
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The Portfolio may attempt to accomplish objectives similar to those
described above with respect to forward and futures contracts for currency by
means of purchasing put or call options on foreign currencies on exchanges. A
put option gives the Portfolio the right to sell a currency at the exercise
price until the expiration of the option. A call option gives the Portfolio the
right to purchase a currency at the exercise price until the expiration of the
option.
FOREIGN INVESTMENT. The Portfolio may invest in securities of foreign
issuers. Investment in obligations of foreign issuers, especially in securities
of issuers in emerging countries, and in foreign branches of domestic banks
involves somewhat different investment risks than those affecting obligations of
U.S. issuers. As used in this Prospectus, an emerging country is any country
that the International Bank for Reconstruction and Development (more commonly
known as the World Bank) has determined to have a low or middle income economy.
There may be limited publicly available information with respect to foreign
issuers, and foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. companies. There may also be less government supervision and regulation
of foreign securities exchanges, brokers and listed companies than in the U.S.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies. It is not expected that
the Portfolio or its shareholders would be able to claim a credit for U.S. tax
purposes with respect to any such foreign taxes. See "Taxes." Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls.
Emerging countries may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain judgment in a
court outside the U.S.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
INVESTMENT FUNDS. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment companies which have been
specifically authorized. The Portfolio may invest in these investment companies
subject to the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), and other applicable laws. If the Portfolio invests in such
investment companies, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment companies. Certain of the investment
companies referred to above are advised by the Adviser. The Portfolio may, to
the
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extent permitted under the 1940 Act and other applicable law, invest in these
investment companies. If the Portfolio does elect to make an investment in such
an investment company, it will only purchase the securities of such investment
company in the secondary market.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending, see
"Investment Objective and Policies" in the Statement of Additional Information.
LOWER RATED DEBT SECURITIES. The Portfolio may invest up to 15% of its net
assets in lower rated or unrated debt securities, commonly referred to as "junk
bonds." In addition, the emerging country debt securities in which the Portfolio
may invest are subject to risk and will not be required to meet a minimum rating
standard and may not be rated. Fixed income securities are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated securities are more likely to react to developments affecting
market and credit risk than are more highly rated securities, which react
primarily to movements in the general level of interest rates. The market values
of fixed-income securities tend to vary inversely with the level of interest
rates. Yields and market values of lower rated and unrated debt securities will
fluctuate over time, reflecting not only changing interest rates but the
market's perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Fluctuations in the value of the Portfolio's
investments will be reflected in the Portfolio's net asset value per share. The
Adviser considers both credit risk and market risk in making investment
decisions for the Portfolio. Investors should carefully consider the relative
risks of investing in lower rated and unrated debt securities and understand
that such securities are not generally meant for short-term investing.
The U.S. corporate lower rated and unrated debt securities market is
relatively new and its recent growth paralleled a long period of economic
expansion and an increase in merger, acquisition and leveraged buyout activity.
Adverse economic developments may disrupt the market for U.S. corporate lower
rated and unrated debt securities and for emerging country debt securities. Such
disruptions may severely affect the ability of issuers, especially highly
leveraged issuers, to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for lower rated and
unrated debt securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities.
As a result, the Adviser could find it more difficult to sell these securities
or may be able to sell the securities only at prices lower than if such
securities were widely traded. In addition there may be limited trading markets
for debt securities of issuers located in emerging countries. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the Portfolio's
net asset value.
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Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect the
Portfolio's net asset value and investment practices, the secondary market for
lower rated and unrated debt securities, the financial condition of issuers of
such securities and the value of outstanding lower rated and unrated debt
securities. For example, U.S. federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in lower
rated and unrated debt securities and limiting the deductibility of interest by
certain corporate issuers of lower rated and unrated debt securities adversely
affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower rated and
unrated debt securities.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the U.S.
Government and its agencies and instrumentalities, obligations of foreign
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over the counter. Such unlisted equity securities may
involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Portfolio or less than what may be considered the fair value of such
securities. Further, companies whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such securities
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Portfolio may be required to bear the
expenses of registration. As a general matter, the Portfolio may not invest more
than 15% of its net assets in illiquid securities, including securities for
which there is no readily available secondary market. Securities that are not
registered under the Securities Act of 1933, as amended, but that can be offered
and sold to qualified institutional buyers under Rule 144A under that Act will
not be included within the foregoing 15% restriction if the securities are
determined to be liquid. The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of Rule 144A
securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
In addition, the Portfolio may invest up to 10% of its total assets in
restricted securities, and up to 25% of its total assets in restricted
securities that are Rule 144A securities.
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REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
SMALL AND MEDIUM-SIZED COMPANIES. Because the Portfolio may invest a
substantial portion of its assets in small-to medium-sized companies, which
companies are more vulnerable to financial and other risks than larger more
established companies, investments in the Portfolio may involve a higher degree
of risk and price volatility than the general equity markets.
SHORT SALES. The Portfolio may from time to time sell securities short
consistent with applicable legal requirements. A short sale is a transaction in
which the Portfolio would sell securities it either owns or has the right to
acquire at no added cost (i.e., "against the box") or does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When the Portfolio makes a short sale of borrowed securities, the proceeds it
receives from the sale will be held on behalf of a broker until the Portfolio
replaces the borrowed securities. To deliver the securities to the buyer, the
Portfolio will need to arrange through a broker to borrow the securities and, in
so doing, the Portfolio will become obligated to replace the securities borrowed
at their market price at the time of the replacement, whatever that price may
be. The Portfolio may have to pay a premium to borrow the securities and must
pay any dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government securities or other liquid, high grade debt
obligations. In addition, if the short sale is not "against the box", the
Portfolio will place in a segregated account with the Custodian an amount of
cash, U.S. Government securities or other liquid, high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. Government
securities or other liquid, high grade debt obligations deposited as collateral
with the broker in connection with the short sale (not including the proceeds of
the short sale). Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
SECURITIES OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The
Portfolio may write (i.e., sell) covered call options on portfolio securities
and may write covered put options on portfolio securities. By selling a covered
call option, the Portfolio would become obligated during the term of the option
to deliver the securities underlying the option should the option holder choose
to exercise the option before the option's termination date. In return for the
call it has written, the Portfolio will receive from the purchaser (or option
holder) a premium which is the price of the option, less a commission charged by
a broker. The Portfolio will keep the premium regardless of whether the option
is exercised. By selling a covered put option, the Portfolio
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incurs an obligation to buy the security underlying the option from the
purchaser of the put at the option's exercise price at any time during the
option period, at the purchaser's election (certain options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A call
option is "covered" if the Portfolio owns the security underlying the option it
has written or has an absolute or immediate right to acquire the security by
holding a call option on such security, or maintains a sufficient amount of
cash, cash equivalents or liquid securities to purchase the underlying security.
Generally, a put option is "covered" if the Fund maintains cash, U.S.
Government securities or other high grade debt obligations equal to the exercise
price of the option, or if the Fund holds a put option on the same underlying
security with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio may write put options to receive the premiums paid by
purchasers (when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put options on their portfolio securities or
call options. When the Portfolio purchases a call option it acquires the right
to buy a designated security at a designated price (the "exercise price"), and
when the Portfolio purchases a put option it acquires the right to sell a
designated security at the exercise price, in each case on or before a specified
date (the "termination date"), which is usually not more than nine months from
the date the option is issued. The Portfolio may purchase call options to close
out a covered call position or to protect against an increase in the price of a
security it anticipates purchasing. The Portfolio may purchase put options on
securities which it holds in its portfolio to protect itself against decline in
the value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions. There are no other
limits on the Portfolio's ability to purchase call and put options.
The Portfolio may enter into futures contracts and options on futures
contracts to remain fully invested and to reduce transaction costs. The
Portfolio may also enter into futures transactions as a hedge against
fluctuations in the price of a security it holds or intends to acquire, but not
for speculation or for achieving leverage. The Portfolio may enter into futures
contracts and options on futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under such contracts and options, and
provided that not more than 20% of the Portfolio's total assets in the aggregate
is invested in futures contracts, options on futures contracts and in options.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over-the-counter
or which are synthetic options or futures or equity swaps, and
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may enter into closing transactions with respect to such options to terminate an
existing position. An option on a futures contract gives the purchaser the right
(in return for the premium paid) to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
The Portfolio will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in future contracts.
Options, futures and options on futures are derivative securities, in which
the Portfolio may invest for hedging purposes, as well as to remain fully
invested and to reduce transaction costs. Investing for the latter two purposes
may be considered speculative. The primary risks associated with the use of
options, futures and options on futures are (i) imperfect correlation between
the change in market value of the securities held by the Portfolio and the
prices of futures and options relating to the securities purchased or sold by
the Portfolio; and (ii) possible lack of a liquid secondary market for an option
or a futures contract and the resulting inability to close a futures position
which could have an adverse impact on the Portfolio's ability to hedge. In the
opinion of the Board of Directors, the risk that the Portfolio will be unable to
close out a futures position or options contract will be minimized by only
entering into futures contracts or options transactions for which there appears
to be a liquid secondary market.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a separate account with a segregated portfolio of
high-grade debt securities or equity securities or cash in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Portfolio enters into the
commitment and no interest accrues to the Portfolio until settlement. Thus, it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if, among other factors, the general level of
interest rates has changed. It is a current policy of the Portfolio not to enter
into when-issued commitments exceeding in the aggregate 15% of the market value
of the Portfolio's total assets less liabilities, other than the obligations
created by these commitments.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable the Portfolio
may reduce its holdings in equity and other securities, for temporary defensive
purposes, and the Portfolio may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the U.S. or
foreign country governments, their respective agencies or instrumentalities; (b)
bank deposits and bank obligations (including certificates of deposit, time
deposits and bankers' acceptances) of U.S. or foreign country banks denominated
in any currency; (c) floating rate securities and other instruments denominated
in any currency issued by international development agencies; (d) finance
company and corporate commercial paper and other short-term corporate debt
obligations of U.S. and foreign country corporations meeting the Portfolio's
credit quality standards; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities.
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For temporary defensive purposes, the Portfolio intends to invest only in
short-term and medium-term debt securities that the Adviser believes to be of
high quality, i.e., subject to relatively low risk of loss of interest or
principal.
INVESTMENT LIMITATIONS
The Portfolio is a non-diversified portfolio under the 1940 Act, which means
that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Portfolio may invest a greater proportion of its assets in the securities of a
small number of issuers and as a result will be subject to greater risk with
respect to its portfolio securities. However, the Portfolio intends to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
See "Investment Limitations" in the Statement of Additional Information.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
net assets would be invested in such repurchase agreements and other investments
for which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing; or purchase securities
while borrowings exceed 5% of its total assets; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from the Technology Portfolio an annual management fee, payable quarterly, equal
to 1.00% of the average daily net assets of the Portfolio.
The Adviser has agreed to a reduction in the fees payable to it and to
reimburse the Portfolio, if necessary, if such fees would cause total annual
operating expenses of the Portfolio to exceed 1.25% of the average daily net
assets of the Class A shares of the Portfolio and 1.50% of the average daily net
assets of the Class B shares of the Portfolio.
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The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At June 30, 1996, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $103.5 billion, including approximately $87.0 billion under active
management and $16.5 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. CHRISTOPHER R. BLAIR AND DENNIS G. SHERVA. Christopher
Blair joined the Adviser in 1993 as the Technology and Telecommunications
Analyst for the emerging growth stock group. Previously, he had been a Financial
Analyst for two years in Morgan Stanley's Corporate Finance Department, where he
focused on the telecommunications and technology sectors. Mr. Blair graduated
with Distinction from McGill University, where he received a B.A. in Political
Science and Economics.
Dennis Sherva is a Managing Director of Morgan Stanley & Co., Incorporated
and head of emerging growth stock investments at the Adviser. Prior to joining
the Adviser in 1988, Mr. Sherva was Morgan Stanley's Director of Worldwide
Research activities for five years and maintained direct responsibilities for
emerging growth stock strategy and analysis. As an analyst following emerging
growth stocks for the past decade, he was rated number one in the small growth
company category six times by Institutional Investor magazine's All-America
Research Team poll. Before joining Morgan Stanley in 1977, Mr. Sherva had twelve
years of industrial and investment experience. He serves on the Board of
Directors of Morgan Stanley Venture Capital Inc. and Morgan Stanley R&D
Ventures, Inc. Mr. Sherva graduated from the University of Minnesota and
received an M.A. from Wayne State University. He is also a Chartered Financial
Analyst.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank N.A.
("Chase"), Chase provides certain administrative services to the Fund. In a
merger completed on September 1, 1995, Chase succeeded to all of the rights and
obligations under the U.S. Trust Administration Agreement between the Adviser
and the United States Trust Company of New York ("U.S. Trust"), pursuant to
which U.S. Trust had agreed to provide certain administrative services to the
Fund. Pursuant to a delegation clause in the U.S. Trust Administration
Agreement, U.S. Trust delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service
Company, which after the merger with Chase is a subsidiary of Chase and will
continue to provide certain administrative services to the Fund. The Adviser
supervises and monitors such administrative services provided by CGFSC. The
services provided under the Administration Agreement and the U.S. Trust
Administration Agreement are also subject to the supervision of the Board of
Directors of the Fund. The Board of Directors of the Fund has approved the
provision of services described above pursuant to the Administration Agreement
and the U.S. Trust Administration Agreement as
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being in the best interests of the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. For additional information regarding
the Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account, the minimum initial investment and minimum account
size are $250,000 for Class A shares and $50,000 for Class B shares. Managed
Accounts may purchase Class A shares without being subject to such minimum
initial investment or minimum account size requirements for a Portfolio account.
Officers of the Adviser and its affiliates are subject to the minimums for a
Portfolio account, except they may purchase Class B shares subject to a minimum
initial investment and minimum account size of $5,000 for a Portfolio account.
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If the value of a Portfolio account containing Class A shares falls below
$250,000 (but remains at or above $50,000) because of shareholder redemption(s),
the Fund will notify the shareholder, and if the account value remains below
$250,000 (but remains at or above $50,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder. Managed Accounts are not subject to conversion
from Class A shares to Class B shares.
Investors may also invest in the Portfolio by purchasing shares through a
trust department, broker, dealer, agent, financial planner, financial services
firm or investment adviser. An investor may be charged an additional service or
transaction fee by that institution. The minimum investment levels may be waived
at the discretion of the Adviser for (i) certain employees and customers of
Morgan Stanley or its affiliates and certain trust departments, brokers,
dealers, agents, financial planners, financial services firms, or investment
advisers that have entered into an agreement with Morgan Stanley or its
affiliates; and (ii) retirement and deferred compensation plans and trusts used
to fund such plans, including, but not limited to, those defined in Section
401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days'
notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a Portfolio account falls below $50,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $50,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to Portfolio accounts containing Class B shares held
by officers of the Adviser or its affiliates. However, if the value of such
account held by an officer of the Adviser or its affiliates falls below $5,000
because of shareholder redemption(s), the Fund will notify the shareholder, and
if the account value remains $5,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $250,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to Portfolio accounts containing Class A shares, as stated
above. The Fund reserves the right to modify or terminate this conversion
feature at any time upon 60-days' notice to shareholders.
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INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($250,000 minimum for
Class A shares of the Portfolio and $50,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. Technology
Portfolio," to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The Class(es) of shares of the
Portfolio to be purchased should be designated on the Account Registration Form.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Technology Portfolio, your account number, your account name)
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Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at
the price computed on the date of receipt as long as the Transfer Agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE on
such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- Technology Portfolio") at the above address or by wiring monies to
the Custodian Bank as outlined above. It is very important that your account
name, the portfolio name and the class selected be specified in the letter or
wire to assure proper crediting to your account. In order to ensure that your
wire orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll-free 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
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In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that if any portion of shares to be
redeemed represents an investment made by check, the Fund may delay the payment
of the redemption proceeds until payment of the purchase has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m.
Eastern Time). Shares of the Portfolio may be redeemed by mail or telephone. No
charge is made for redemption. Any redemption proceeds may be more or less than
the purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your
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request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box
2798, Boston, MA 02208-2798, except that deliveries by overnight courier should
be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, MA 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information." The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine. The Fund and the Transfer Agent may be responsible for any loss,
liability, cost or expense if they fail to employ reasonable procedures to
ensure that telephone instructions are genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase.
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The Fund may suspend the right of redemption or postpone the date upon which
redemptions are effected at times when the NYSE is closed, or under any
emergency circumstances as determined by the Securities and Exchange Commission
(the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Signature guarantees
enable the Fund to verify the identity of the person who has authorized a
redemption from your account. Signature guarantees are required in connection
with: (1) all redemptions, regardless of the amount involved, when the proceeds
are to be paid to someone other than the registered owner(s) and/or registered
address; and (2) share transfer requests. A guarantor must be a bank, a trust
company, a member firm of a domestic stock exchange, or a foreign branch of any
of the foregoing. Notaries public are not acceptable guarantors. Please contact
the Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of the Portfolio, the
name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
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BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the Portfolio, the names of the portfolio(s) and class(es)
of shares into which you intend to exchange shares, your Social Security number
or Tax I.D. number, and your account address. Requests for telephone exchanges
received prior to 4:00 p.m. (Eastern Time) are processed at the close of
business that same day based on the net asset value of the class of the
portfolios involved in the exchange of shares at the close of business. Requests
received after 4:00 p.m. are processed the next business day based on the net
asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798. As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring the
registration of shares may affect the eligibility of your account for a given
class of the Portfolio's shares and may result in involuntary conversion or
redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are not readily available are valued at a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the bid and asked
prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
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The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of annual dividends. Net realized gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually. Confirmations of the purchase of shares of the Portfolio
through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10 under the Securities
Exchange Act of 1934, as amended, on the next monthly client statement following
such purchase of shares. Consequently, confirmations of such purchases will not
be provided at the time of completion of such purchases as might otherwise be
required by Rule 10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
28
<PAGE>
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, the excess of net short-term capital gain over net
long-term capital loss) to shareholders. Dividends from the Portfolio's net
investment income are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. Such dividends paid by the
Portfolio will generally qualify for the 70% dividends-received deduction for
corporate shareholders to the extent of qualifying dividend income received by
the Portfolio from U.S. corporations. The Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gains (the excess of net long-term capital
gains over net short-term capital losses) are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio sends reports annually to shareholders of the
federal income tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, redemption or exchange of shares may result in taxable gain or
loss to the selling, redeeming or exchanging shareholder, depending upon whether
the fair market value of the sale, redemption or exchange proceeds exceeds or is
less than the shareholder's adjusted basis in the sold, redeemed or exchanged
shares. Any such taxable gain or loss generally will be treated as long-term
capital gain or loss if the shares have been held for
29
<PAGE>
more than one year and otherwise generally will be treated as short-term capital
gain or loss. If capital gain distributions have been made with respect to
shares that are sold, redeemed or exchanged at a loss after being held for six
months or less, then the loss is treated as a long-term capital loss to the
extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
clients in a manner deemed fair and reasonable by the Adviser. Although there is
no specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of each portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the
30
<PAGE>
commissions, fees or other remuneration received by Morgan Stanley or such
affiliates must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that, under normal circumstances,
the annual turnover rate of the Portfolio will not exceed 100%.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Persons or organizations owning 25%
or more of the outstanding shares of the Portfolio may be presumed to "control"
(as that term is defined in the 1940 Act) the Portfolio. Under Maryland law, the
Fund is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
31
<PAGE>
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
The Fund's domestic securities and cash are held by Chase. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
32
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<TABLE>
<CAPTION>
MORGAN STANLEY INSTITUTIONAL FUND, INC. -- TECHNOLOGY PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
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ACCOUNT REGISTRATION FORM
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<S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form
Fill in where applicable for the Morgan Stanley Institutional Fund, please
contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
- ---------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Initial Last Name
2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
(RIGHTS OF First Name Initial Last Name
SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
PRESUMED UNLESS First Name Initial Last Name
TENANCY IN COMMON
IS INDICATED)
- ---------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
TRUSTS AND OTHERS
Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Fund for additional
documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
be required to set
up account and to
authorize transactions.
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST __________________________________ / / OTHER (Specify) ______________________________
- ---------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Please fill in
completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / /
telephone number(s).
Home Business
Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / /
/ / United States / / Resident / /Non-Resident Alien:
Citizen Alien Indicate Country of Residence _________
- ---------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For most You (as a payee) are required by
NUMBER individual taxpayers, this is your law to provide us (as payer) with
If the account is in Social Security Number. your correct Taxpayer Identification
more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing
CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification
PERSON WHOSE TAXPAYER OR Number will be subject to backup
IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends,
IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments.
A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with
is circled, the number / / Check this box if you are your correct taxpayer identification
will be considered to be NOT subject to Backup number, you may be subject to
that of the last name Withholding under the a $50 penalty imposed by the Internal
listed. For Custodian provisions of Section Revenue Service.
account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an
(Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of
to Minor Act), give the persons subject to backup withholding
Social Security Number will be reduced by the amount of tax
of the minor. withheld. If withholding results in
an overpayment of taxes, a refund
may be obtained. You may be notified
that you are subject to backup
withholding under Section 3406(a)(1)(C)
of the Internal Revenue Code because you
have underreported interest or dividends
or you were required to but failed to
file a return which would have included a
reportable interest or dividend payment. IF
YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE
BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND For Purchase of the following Portfolio:
CLASS SELECTION Technology Portfolio / / Class A Shares $____ / / Class B Shares $____
(Class A shares
minimum $500,000
for each Portfolio Total Initial Investment $_____________
and Class B shares
minimum $100,000 for
each Portfolio).
Please indicate
class and amount.
- ---------------------------------------------------------------------------------------------------------------
E) METHOD OF Payment by:
INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--TECHNOLOGY PORTFOLIO)
Please
indicate
manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ /
payment. Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ /
Date Account No. (Check
(Previously assigned by the Fund) Digit)
<PAGE>
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F) DISTRIBUTION Income dividends and capital gains distributions (if any) will
OPTION be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital
gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions
(if any) to be paid in cash.
- ---------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its ______________________ ________________
REDEMPTION OPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No.
Please select at time of to wire redemption proceeds to the (Not Savings Bank)
initial application if you commercial bank indicated at rightand/or
wish to redeem shares by mail redemption proceeds to the name and ________________
telephone. A SIGNATURE address in which my/our fund account is Bank ABA No.
GUARANTEE IS REQUIRED IF registered if such requests are believed
BANK ACCOUNT IS NOT to be authentic. _________________________________________________
REGISTERED IDENTICALLY TO THE FUND AND THE FUND'S TRANSFER AGENT WILL Name(s) in which your BANK Account is Established
YOUR FUND ACCOUNT. EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE _________________________________________________
TELEPHONE REQUESTS FOR GENUINE. THESE PROCEDURES INCLUDE REQUIRING Bank's Street Address
REDEMPTIONS WILL NOT BE THE INVESTOR TO PROVIDE CERTAIN PERSONAL
HONORED UNLESS THE BOX IS IDENTIFICATION INFORMATION AT THE TIME AN _________________________________________________
CHECKED. ACCOUNT IS OPENED AND PRIOR TO EFFECTING EACH City State Zip
TRANSACTION REQUESTED BY TELEPHONE. IN ADDITION,
ALL TELEPHONE TRANSACTION REQUESTS WIll BE RECORDED
AND INVESTORS MAY BE REQUIRED TO PROVIDE ADDITIONAL
TELECOPIED WRITTEN INSTRUCTIONS OF TRANSACTION
REQUESTS. NEITHER THE FUND NOR THE TRANSFER AGENT WILL
BE RESPONSIBLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE
FOR FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE THAT
IT REASONABLY BELIEVES TO BE GENUINE.
- ---------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION
In addition to the account _________________________________________________________________
statement sent to my/our Name
registered address, I/we _________________________________________________________________
hereby authorize the fund
to mail duplicate _________________________________________________________________
statements to the name and Address
address provided at right.
_________________________________________________________________
City State Zip Code
- ---------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION _______________________ _______________________________ ___________
Representative Name Representative No. Branch No.
- ---------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal
ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we
AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional
CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C)
ABOVE IS TRUE, CORRECT AND COMPLETE.
(X) (X)
__________________________________ ______________________________________
Signature Date Signature Date
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Prospectus Summary................................ 4
Investment Objective and Policies................. 8
Additional Investment Information................. 9
Investment Limitations............................ 18
Management of the Fund............................ 18
Purchase of Shares................................ 20
Redemption of Shares.............................. 24
Shareholder Services.............................. 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 29
Portfolio Transactions............................ 30
General Information............................... 31
Account Registration Form
</TABLE>
TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
INCORPORATED
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
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- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and nondiversified series
("Portfolios"). The Fund currently consists of twenty-nine Portfolios offering
a broad range of investment choices. The Fund is designed to provide clients
with attractive alternatives for meeting their investment needs. Shares of each
Portfolio are offered with no sales charge, exchange or (with the exception of
the International Small Cap Portfolio) redemption fee. The Class A shares and
Class B shares currently offered by the Portfolios have different minimum
investment requirements and fund expenses. This Statement of Additional
Information addresses information of the Fund applicable to Class A shares and
Class B shares of the Technology Portfolio (the "Portfolio"), one of the twenty-
nine portfolios.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the prospectus of the Portfolio (the "Prospectus"). To
obtain the Prospectus or the prospectus and/or Statement of Additional
Information relating to any of the other Portfolios, please call the Morgan
Stanley Institutional Fund, Inc. Services Group at 1-800-548-7786.
TABLE OF CONTENTS
Page
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . . 2
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Special Tax Considerations Relating to Foreign Investments . . . . . . . . .10
Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . .10
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Determining Maturities of Certain Instruments. . . . . . . . . . . . . . . .14
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .26
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Description of Securities and Ratings. . . . . . . . . . . . . . . . . . . .30
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 22, 1996, RELATING TO THE
PROSPECTUS OF THE TECHNOLOGY PORTFOLIO DATED AUGUST 22, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Portfolio's investment objective and
policies set forth in the Prospectus:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To the extent the Portfolio invests in securities denominated in foreign
currencies, the assets of the Portfolio may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations,
and the Portfolio may incur costs in connection with conversions between various
currencies. The Portfolio will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. A forward currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for such trades.
The Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. When the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract
for a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the Portfolio anticipates that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
the Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The Portfolio does not intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis. The Portfolio will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of its securities or other assets denominated in that
currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of the Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the 1940 Act or the rules adopted
thereunder, the Fund's Custodian will place cash, U.S. government securities, or
high-grade debt securities into a segregated account of the Portfolio in an
amount equal to the value of its total assets committed to the consummation of
forward currency exchange contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will be equal to
the amount of the Portfolio's commitments with respect to such contracts.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
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If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the Portfolio entering
into a forward contract for the sale of a foreign currency and the date it
enters into an offsetting contract for the purchase of the foreign currency, the
Portfolio will realize a gain to the extent that the price of the currency it
has agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Portfolio is not required to enter into such transactions with regard
to its foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
FUTURES CONTRACTS
The Portfolio may enter into futures contracts and options on futures
contracts for the purpose of remaining fully invested and reducing transactions
costs and may also enter into futures contracts for hedging purposes. The
Portfolio will not enter into futures contracts or options thereon for
speculative purposes. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and at a specified price. Futures contracts, which
are standardized as to maturity date and underlying financial instrument, are
traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolio
expects to earn interest income on its margin deposits. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract will always be covered by cash and cash equivalents set
aside plus accrued profits held at the futures commission merchant.
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a U.S. Exchange and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which
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the market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Portfolio will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolio intends to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolio require that all
futures transactions constitute bona fide hedging transactions except that the
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of the
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolio will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolio expects that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolio will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Portfolio will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. In addition, the Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under futures contracts and options on futures contracts and, under
options, futures contracts and options on futures contracts would exceed 20% of
its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolio engages in futures strategies only for hedging purposes, the Adviser
does not believe that the Portfolio is subject to the risks of loss frequently
associated with futures transactions. The Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that
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the Portfolio could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Portfolio of margin deposits in the event of bankruptcy of a broker with
whom the Portfolio has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
OPTIONS TRANSACTIONS
GENERAL INFORMATION. As stated in the Prospectus, the Portfolio may purchase
and sell options on equity securities. Additional information with respect to
option transactions is set forth below. Call and put options on portfolio
securities are listed on various U.S. and foreign securities exchanges ("listed
options") and are written in over-the-counter transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they
trade or by a clearing corporation, such as Options Clearing Corporation
("OCC") in the United States. Ownership of a listed call option gives the
fund the right to buy from the clearing corporation or exchange, the
underlying security covered by the option at the state exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of
the option would then have the obligation to sell to the clearing corporation
or exchange, the underlying security or currency at that exercise price prior
to the expiration date of the option, regardless of the current market price.
Ownership of a listed put option would give the Portfolio the right to sell
the underlying security or currency to the clearing corporation or exchange
at the state exercise price. Upon notice of exercise of the put option, the
writer of the option would have the obligation to purchase the underlying
security from the clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
COVERED CALL WRITING. The Portfolio may write (i.e., sell) covered call options
on portfolio securities. By doing so, the Portfolio would become obligated
during the terms of the option to deliver the securities underlying the option
should the option holder choose to exercise the option before the option's
termination date. In return for the call it has written, the Portfolio will
receive from the purchaser (or option holder) a premium which is the price of
the option, less a commission charged by a broker. The Portfolio will keep the
premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. The Portfolio may write covered put options on portfolio
securities. By doing so, the Portfolio incurs an obligation to buy the security
underlying the option from the purchaser of the put at the option's exercise
price at any time during the option period, at the purchaser's election (certain
listed and OTC options written by the Portfolio will be exercisable by the
purchaser only on a specific date). Generally, a put option is "covered" if the
Portfolio maintains cash, U.S. Government securities or other high grade debt
obligations equal to the exercise price of the option or if the Portfolio holds
a put option on the same underlying security with a similar or higher exercise
price.
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The Portfolio will write put options to receive the premiums paid by
purchasers; when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case it will
write the covered put at an exercise price reflecting the lower purchase price
sought; and to close out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. The Portfolio may purchase listed or OTC put
or call options on its portfolio securities in amounts exceeding no more than 5%
of its total assets. When the Portfolio purchases a call option it acquires the
right to purchase a designated security at a designated price (the "exercise
price"), and when the Portfolio purchases a put option it acquires the right to
sell a designated security at the exercise price, in each case on or before a
specified date (the "termination date"), usually not more than nine months from
the date the option is issued.
The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when the Portfolio deems it appropriate to
purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
SECURITIES LENDING
The Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. The Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the Investment Company Act of 1940, as amended
(the "1940 Act"), or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will only be made to borrowers
deemed by the Advisor to be of good standing and when, in the judgment of the
Advisor, the consideration which can be earned currently from such securities
loans justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's
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Board of Directors. Voting rights may pass with the loaned securities, provided
that if a material event occurs affecting a security on loan, the loan must be
called and the securities voted.
SHORT SALES
The Portfolio may from time to time sell securities short without
limitation but consistent with applicable legal requirements, although initially
the Portfolio does not intend to sell securities short. A short sale is a
transaction in which the Portfolio would sell securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. When the Portfolio makes a short sale of borrowed securities, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government Securities or other liquid, high grade debt
obligations. In addition, if the short sale is not "against the box," the
Portfolio will place in a segregated account with its custodian, or designated
sub-custodian, an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. Government Securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Portfolio will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (2) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES
Transactions in forward contracts, as well as futures and options on
foreign currencies, are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Portfolio permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which the Portfolio's trading systems will
be based may not be as complete as the comparable data on which the Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing the Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Commission. In an over-the-counter trading environment, many of
the protections associated with transactions on exchanges will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction
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costs, this entire amount could be lost. Moreover, an option writer could lose
amounts substantially in excess of its initial investment due to the margin and
collateral requirements associated with such option positions. Similarly, there
is no limit on the amount of potential losses on forward contracts to which the
Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and the Portfolio may be unable to close
out options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit the Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. The Portfolio will therefore be subject
to the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may decide
to discontinue its role as market-maker in a particular currency, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
The Portfolio will enter into over-the-counter transactions only with parties
whose creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectus is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
The Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
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securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; (b) derive
less than 30% of its gross income each taxable year from the sale or other
disposition of the following items if held less than three months (A) stock or
securities, (B) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), and (C) foreign currencies
(or options, futures, or forward contracts on foreign currencies) that are not
directly related to the Portfolio's principal business of investing in stocks or
securities (or options or futures with respect to stock or securities) (the
"short-short test") and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to the Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, the Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If the Portfolio meets all of the RIC requirements, it will not
be subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
If the Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
The Portfolio will decide whether to distribute or to retain all or part of
any net capital gains (the excess of net long-term capital gains over net short-
term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit against their federal income
tax liability.
A gain or loss realized by a shareholder on the sale, exchange or exemption
of shares of the Portfolio held as a capital asset will be capital gain or loss,
and such gain or loss will be long-term if the holding period for the shares
exceeds one year, and otherwise will be short-term. Any loss realized on a
sale, exchange, or redemption of shares of the Portfolio will be disallowed to
the extent the shares disposed of are replaced within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
Any loss realized by a shareholder on the disposition of shares held 6 months or
less is treated as a long-term capital loss to the extent of any distributions
of net long-term capital gains received by the shareholder with respect to such
shares or any inclusion of undistributed capital gain with respect to such
shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
The Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
The Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
For certain transactions, the Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered to
be 60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Realized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign
9
<PAGE>
currency futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
As discussed above, in order for the Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts
will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of the
Portfolio's gross income be derived from the sale or other disposition of stock,
securities, options, futures or forward contracts (including certain foreign
currencies not directly related to the Fund's business of investing in stock or
securities) held less than three months. In order to avoid realizing excessive
gains on futures contracts held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so.
Short sales engaged in by the Portfolio may reduce the holding property
held by the Portfolio which is substantially identical to the property sold
short. This rule may make it more difficult for the Portfolio to satisfy the
short-short test. This rule may also have the effect of converting capital
gains recognized by the Portfolio from long-term to short-term as well as
converting capital losses recognized by the Portfolio from short-term to long-
term.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time the Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of the
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that the Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and the Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of the Portfolio's total assets at
the close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for United States federal income tax purposes as paid directly by
its shareholders. The Portfolio will make such an election only if it deems it
to be in the best interest of its shareholders and will notify shareholders in
writing each year if it makes an election and of the amount of foreign income
taxes, if any, to be treated as paid by the shareholders. If the Portfolio
makes the election, shareholders will be required to include in income their
proportionate shares of the amount of foreign income taxes treated as imposed on
the Portfolio and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if they itemize deductions, a deduction, for
their shares of the foreign income taxes in computing their federal income tax
liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the
10
<PAGE>
sale of shares of the Portfolio, distributions of net long-term capital gains,
and amounts retained by the Fund which are designated as undistributed capital
gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Portfolio, including the potential application of the
provisions of the Foreign Investment in Real Estate Property Tax Act of 1980, as
amended.
PURCHASE OF SHARES
The following supplements the Purchase of Shares section in the Prospectus.
The purchase price of shares of the Portfolio is the net asset value next
determined after the order is received. An order received prior to the regular
close of the New York Stock Exchange (the "NYSE") will be executed at the price
computed on the date of receipt; and an order received after the regular close
of the NYSE will be executed at the price computed on the next day the NYSE is
open as long as the Fund's transfer agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day. Shares of the
Fund may be purchased on any day the NYSE is open. The NYSE will be closed on
the following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively.
The Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
The following supplements the Redemption of Shares section in the
Prospectus.
The Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Portfolio to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
No charge is made by the Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and
(2) share transfer requests.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public
are not acceptable guarantors.
11
<PAGE>
The signature guarantees must appear either: (1) on the written request
for redemption; (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed; or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
The following supplements the Shareholder Services section in the
Prospectus.
EXCHANGE FEATURES
Shares of the Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity Portfolio, which
is closed to new investors). In exchanging for shares of a Portfolio with more
than one class, the class of shares a shareholder receives in exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange, a shareholder should consider the investment objectives of
the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 4:00 p.m. (Eastern Time)
will be processed as of the close of business on the same day. Requests
received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60 days' notice to shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolio to another person by
making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made. Transferring shares may affect
the eligibility of an account for a given class of the Portfolio's shares and
may result in involuntary conversion or redemption of such shares.
INVESTMENT LIMITATIONS
The Portfolio has adopted the following restrictions which are fundamental
policies and may not be changed without the approval of the lesser of: (1) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Portfolio. The Portfolio will not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities);
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
12
<PAGE>
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) issue senior securities;
(5) borrow, except the Portfolio may: borrow from banks in amounts up to
33 1/3% of its total assets (including the amount borrowed) less liabilities
in accordance with its investment objective and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
The Portfolio will diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash (including cash items and
receivables), U.S. Government securities, and other securities, with such other
securities limited, in respect of any one issuer, for purposes of this
calculation to an amount not greater than 5% of the value of the Portfolio's
total assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities);
In addition, the Portfolio has adopted nonfundamental investment
limitations as stated below and in the Prospectus. Such limitations may be
changed without shareholder approval. The Portfolio will not:
(1) purchase on margin or sell short, except that the Portfolio may enter
into short sales in accordance with its investment objective and policies;
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(6) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
(7) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Portfolio's net assets (taken at market value) would be invested in
warrants, valued at the lower of cost or market. Included within this amount,
but not to exceed 2% of the value of the Portfolio's net assets, may be warrants
that are not listed on a recognized stock exchange;
(8) invest in real estate limited partnership interests;
(9) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the Prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to
13
<PAGE>
banks, brokers, dealers and other financial institutions so long as such loans
are not inconsistent with the 1940 Act or the Rules and Regulations or
interpretations of the Commission thereunder;
(10) invest in oil, gas or other mineral leases; and
(11) purchase puts, calls, straddles, spreads and any combination thereof
if for any reason thereof the value of its aggregate investment in such classes
of securities will exceed 5% of its total assets, except that the Portfolio may
enter into option transactions to the extent that not more than 5% of the
Portfolio's total assets are required as deposits to secure obligations under
options and not more than 20% of its total assets are invested in options,
futures contracts and options on futures contracts at any time.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a
Government Obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, may be deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand;
(d) an instrument with a floating rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Three Directors and all of the officers
of the Fund are directors, officers or employees of the Fund's adviser,
distributor or administrative services provider. Directors and officers of the
Fund are also directors and officers of some or all of the other investment
companies managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc. or its affiliates. The other Directors have no affiliation with
the Fund's adviser, distributor or administrative services provider. A list of
the Directors and officers of the Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth
below:
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<PAGE>
Principal Occupation During
Name, Address and Age Postion With Fund Past Five Years
--------------------- ----------------- -----------------------------
Barton M. Biggs* Chairman and Chairman, Director and Managing
1221 Avenue of the Director Director of Morgan Stanley Asset
Americas Management Inc. and Morgan
New York, NY 10020 Stanley Asset Management
(63) Limited; Managing Director of
Morgan Stanley & Co., Inc.;
Director of Morgan Stanley Group
Inc.; Member of Investment
Advisory Counsel of the Thailand
Fund; Director of the Rand
McNally Company; Member of the
Yale Development Board; Chairman
and Director of 16 U.S.
registered investment companies
managed by Morgan Stanley Asset
Management Inc.
Warren J. Olsen* Director and Principal of Morgan Stanley &
1221 Avenue of the President Co., Inc. and of Morgan Stanley
Americas Asset Management Inc.; President
New York, NY 10020 and Director of 16 U.S.
(39) registered investment companies
managed by Morgan Stanley Asset
Management Inc.
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment
New York, NY 10135 counseling); Director of the
(60) Ashforth Company (real estate);
Director of the Morgan Stanley
Fund, Inc. and PCS Cash Fund,
Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP
43 Arch Street (law firm); Director of the
Greenwich, CT 06830 Morgan Stanley Fund, Inc. and
(59) PCS Cash Fund, Inc.
Andrew McNally IV Director Chairman and Chief Executive
8255 North Central Officer of Rand McNally
Park Avenue (publication); Director of
Skokie, IL 60076 Allendale Insurance Co., Mercury
(56) Finance (consumer finance);
Zenith Electronics, Hubbell,
Inc. (industrial electronics);
Director of the Morgan Stanley
Fund, Inc. and PCS Cash Fund,
Inc.
Samuel T. Reeves Director Chairman of the Board and CEO,
8211 North Pinacle L.L.C. (investment
Fresno Street firm); Director, Pacific Gas and
Fresno, CA 93720 Electric and PG&E Enterprises
(61) (utilities); Director of the
Morgan Stanley Fund, Inc. and
PCS Cash Fund, Inc.
Fergus Reid Director Chairman and Chief Executive
85 Charles Colman Blvd Officer of LumeLite Corporation
Pawling, NY 12564 (injection molding firm);
(63) Trustee and Director of Vista
Mutual Fund Group; Director of
the Morgan Stanley Fund, Inc.
and PCS Cash Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Bryan, Cave (law
2800 North Central Avenue firm); Previously associated
Phoenix, AZ 85004 with Copple, Chamberlin & Boehm,
(62) P.C. and Rake, Copple, Downey &
Black, P.C. (law firms);
Director of the Morgan Stanley
Fund, Inc. and PCS Cash Fund,
Inc.
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<PAGE>
Principal Occupation During
Name, Address and Age Postion with Fund Past Five Years
--------------------- ----------------- -----------------------------
Frederick B. Whittemore* Director Advisory Director of Morgan
1251 Avenue of the Stanley & Co., Inc.; Vice-
Americas, 30th Flr. Chairman and Director of 15 U.S.
New York, NY 10020 registered investment companies
(65) managed by Morgan Stanley Asset
Management Inc.
James W. Grisham* Vice President Principal of Morgan Stanley &
1221 Avenue of the Co., Inc. and of Morgan Stanley
Americas Asset Management Inc.; Vice
New York, NY 10020 President of 16 U.S. registered
(54) investment companies managed by
Morgan Stanley Asset Management
Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley &
1221 Avenue of the Co. and of Morgan Stanley Asset
Americas Management Inc.; General Counsel
New York, NY 10020 and Secretary of Morgan Stanley
(35) Asset Management Inc.; Vice
President of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley
1221 Avenue of the & Co. Inc. and Morgan Stanley
Americas Asset Management Inc.;
New York, NY 10020 Previously with Price Waterhouse
(41) LLP (accounting); Vice President
of 16 U.S. registered investment
companies managed by Morgan
Stanley Asset Management Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley
1221 Avenue of the & Co. Inc. and Morgan Stanely
Americas Asset Management Inc.;
New York, NY 10020 Previously with Citicorp
(40) (banking); Secretary of 16 U.S.
registered investment companies
managed by Morgan Stanley Asset
Management Inc.
Karl O. Hartmann Assistant Senior Vice President, Secretary
73 Tremont Street Secretary and General Counsel of Chase
Boston, MA 02108-3913 Global Funds Services Company;
(41) Previously, Leland, O'Brien,
Rubinstein Associates, Inc.
(investments).
James R. Rooney Treasurer Vice President, Chase Global
73 Tremont Street Funds Services Company; Director
Boston, MA 02108-3913 of Fund Administration; Officer
(37) of various investment companies
managed by Morgan Stanley Asset
Management Inc.; Previously with
Scudder, Stevens & Clark, Inc.
(investments) and Ernst & Young
LLP (accounting); Treasurer of
16 U.S. registered investment
companies managed by Morgan
Stanley Asset Management Inc.
Joanna Haigney Assistant Supervisor of Fund
73 Tremont Street Treasurer Administration and Compliance,
Boston, MA 02108-3913 Chase Global Funds Services
(29) Company; Previously with Coopers
& Lybrand LLP; Assistant
Treasurer of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
_______
* "Interested Person" within the meaning of the 1940 Act.
16
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Open-end Fund Complex will pay each of the
nine Directors who is not an "interested person" an annual aggregate fee of
$55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay each
of the members of the Fund's Audit Committee, which consists of the Fund's
Directors who are not "interested persons," an additional annual aggregate fee
of $10,000 for serving on such a committee. The allocation of such fees will be
among the three funds in the Open-end Fund Complex in direct proportion to their
respective average net assets. For the fiscal year December 31, 1995, the Fund
paid approximately $244,000 in Directors' fees and expenses. Directors who are
also officers or affiliated persons receive no remuneration for their services
as Directors. The Fund's officers and employees are paid by the Adviser or its
agents. As of May 6, 1996, to Fund management's knowledge, the Directors and
officers of the Fund, as a group, owned more than 1% of the outstanding common
stock of the following Portfolios of the Fund: 2.5% Active Country Allocation
Portfolio - Class B shares; 1.5% Aggressive Equity Portfolio - Class B shares;
1.6% Asian Equity Portfolio - Class A shares; 1.6% Emerging Markets Portfolio -
Class B shares; 1.5% Emerging Markets Debt Portfolio - Class A shares; 2.0%
Equity Growth Portfolio - Class B shares; 6.4% Fixed Income Portfolio - Class B
shares; 2.5% Global Fixed Income Portfolio - Class B shares; 8.6% Gold Portfolio
- - Class A shares; 3.4% Gold Portfolio - Class B shares; 1.2% International
Equity Portfolio - Class B shares; 1.0% Japanese Equity Portfolio - Class A
shares; 4.3% Latin American Portfolio - Class A shares and 9.4% Municipal Bond
Portfolio - Class B shares. The following table shows aggregate compensation
paid to each of the Fund's Directors by the Fund and the Fund Complex,
respectively, in the fiscal year ended December 31, 1995.
17
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT
REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX
EXPENSES RETIREMENT PAID TO DIRECTORS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton M. Biggs, $ N/A $ N/A
Director and Chairman
of the Board
Warren J. Olsen, N/A N/A
Director and President
John D. Barrett, II 14,085 26,405
Director
Gerard E. Jones, 25,335 79,655
Director
Andrew McNally, IV 11,916 32,834
Director
Samuel T. Reeves 11,916 14,303
Director
Fergus Reid 14,085 48,517
Director
Frederick O. Robertshaw 11,916 36,055
Director
Frederick B. Whittemore 12,150 41,429
Director
John P. Britton* 11,250 11,250
Director
George R. Bunn* 12,900 12,900
Director
Peter E. deSvastich* 11,250 25,225
Director
</TABLE>
___________
* As of June 30, 1995, Messrs. Britton, Bunn and deSvastich resigned from the
Board of Directors.
18
<PAGE>
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a
wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices of
Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New York,
NY 10020. As compensation for advisory services for the fiscal years ended
December 31, 1993, December 31, 1994 and December 31, 1995, the Adviser earned
fees of approximately $17,539,000, $34,338,000 and $40,534,000, respectively,
and from such fees voluntarily waived fees of $3,037,000, $2,640,000 and
$3,526,000, respectively. For the fiscal years ended December 31, 1993,
December 31, 1994 and December 31, 1995, the Fund paid brokerage commissions of
approximately $5,827,000, $7,287,293 and $10,317,515, respectively. For the
fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995,
the Fund paid in the aggregate $797,000, $796,000 and $377,000, respectively, as
brokerage commissions to Morgan Stanley & Co. Incorporated, an affiliated
broker-dealer, which represented 13%, 11% and 4% of the total amount of
brokerage commissions paid in each respective period. For the fiscal years
ended December 31, 1993 , December 31, 1994 and December 31, 1995, the Fund paid
administrative fees to MSAM of approximately $4,662,000, $4,458,000 and
$5,238,000, respectively.
Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of the Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank, N.A.
("Chase," successor in interest to United States Trust Company of New York),
Chase Global Funds Services Company ("CGFSC," formerly Mutual Funds Service
Company and now a Chase subsidiary) provides certain administrative services to
the Fund. CGFSC provides operational and administrative services to investment
companies with approximately $62 billion in assets and having approximately
187,286 shareholder accounts as of March 31, 1996. CGFSC's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned
subsidiary of Morgan Stanley Group Inc., serves as the Distributor of the Fund's
shares pursuant to a Distribution Agreement for the Fund and a Plan of
Distribution for the Class B shares of the Portfolio pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan the Distributor is entitled to
receive from the Portfolio a distribution fee, which is accrued daily and paid
quarterly, at an annual rate of up to 0.25% of the average daily net assets of
the Class B shares of the Portfolio. The Distributor expects to allocate most
of its fee to its investment representatives and investment dealers, banks or
financial service firms that provide distribution services ("Participating
Dealer"). The actual amount of such compensation is agreed upon by the Fund's
Board of Directors and by the Distributor. The Distributor may, in its
discretion, voluntarily waive from time to time all or any portion of its
distribution fee and the Distributor is free to make additional payments out of
its own assets to promote the sale of Fund shares.
The Plan obligates the Portfolio to accrue and pay to the Distributor the
fee agreed to under its Distribution Agreement. The Plan does not obligate the
Portfolio to reimburse the Distributor for the actual expenses the Distributor
may incur in fulfilling its obligations under the Plan. Thus, under the Plan,
even if the Distributor's actual expenses exceed the fee payable to it
thereunder at any given time, the Portfolio will not be obligated to pay more
than that fee. If the Distributor's actual expenses are less than the fee it
receives, the Distributor will retain the full amount of the fee. The Plan for
the Class B shares were most recently approved by the Fund's Board of Directors,
including those directors who are not "interested persons" of the Fund as that
term is defined in the 1940 Act and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related thereto, on
September 20, 1995.
The Technology Portfolio was not in operation in the fiscal year ended
December 31, 1995.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Adviser and, as described below,
impose additional, more onerous, restrictions on the Fund's investment
personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in
19
<PAGE>
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of May 6, 1996 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in the
City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned 17%
of such Portfolio's total outstanding Class A shares.
City of New York Deferred Compensation Plan, 40 Rector Street, 3rd Floor, New
York, NY 10006, owned 20% of such Portfolio's total outstanding Class A shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned
12% of such Portfolio's total outstanding Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Dept., P.O. Box 92984,
Chicago, IL 60675, owned 8% of such Portfolio's total outstanding Class A
shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL 60602-
4260, owned 7% of such Portfolio's total outstanding Class A shares.
The Chase Manhattan Bank, N.A., Trustee Chubb Capital Accumulation Plan, 770
Broadway, New York, NY 10003, owned 5% of such Portfolio's total outstanding
Class A shares.
Jeffrey R. Holzschuh, 66 Sawmill Lane, Greenwich, CT 06830-4046, owned 15% of
such Portfolio's total outstanding Class B shares.
Benefit Administrators of America Inc., Attn: John Stephens, 636 Grand Avenue,
Des Moines, IA 50309, owned 15% of such Portfolio's total outstanding Class B
shares.
David Johnson and Audrey E. Johnson, 405 East Winchester, Libertyville, IL
60048-1677, owned 11% of such Portfolio's total outstanding Class B shares.
John P. and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned 7% of
such Portfolio's total outstanding Class B shares.
Michael and Maureen Cassedy, 1221 Jones Street, Apt. D1, San Francisco, CA
94109-4228, owned 7% of such Portfolio's total outstanding Class B shares.
Guarantee & Trust Company, IRA R/O, 101 S. Spring Street, La Grange, IL 60525,
owned 6% of such Portfolio's total outstanding Class B shares.
AGGRESSIVE EQUITY PORTFOLIO: Valassis Enterprises - Equity C/O Franklin
Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 15% of
such Portfolio's total outstanding Class A shares.
Kinghugh S.A., C/O Morgan Stanley Asset Management, 1221 Avenue of the Americas,
New York, NY 10020, owned 10% of such Portfolio's total outstanding Class A
shares.
Hullbridge Investment Limited, The Tropic Isle Building, Wickahams Cay Tortola,
British Virgin Islands, owned 8% of such Portfolio's total outstanding Class A
shares.
Guy L. DeChazal, Morgan Stanley & Company, 1221 Avenue of the Americas - 33rd
floor, New York, NY 10020, owned 8% of such Portfolio's total outstanding Class
B shares.
20
<PAGE>
John S. Richardson, 100 Peachtree Way, Atlanta, GA 30305-3738, owned 6% of such
Portfolio's total outstanding Class B shares.
Caroline B. Case, 54 Tanglewylde Avenue, Bronxville, NY 10708, owned 6% of such
Portfolio's total outstanding Class B shares.
Peter Boer, 47 Country Road, Village of Golf, FL 33436-5604, owned 6% of such
Portfolio's total outstanding Class B shares.
Mr. James Fuld, Jr., 114 East 72nd Street, New York, NY 10021, owned 5% of such
Portfolio's total outstanding Class B shares.
ASIAN EQUITY PORTFOLIO: Association De Bienfaisance Et De Retraite Des
Policiers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 7% of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 5% of such Portfolio's total
outstanding Class A shares.
BALANCED PORTFOLIO: The American Roentgen Ray Society, 1891 Preston White
Drive, Reston, VA 22091-5431, owned 30% of such Portfolio's total outstanding
Class A shares.
Kinney Printing Co-Employees, 4801 S. Lawndale, Chicago, IL 60532-3018, owned 5%
of such Portfolio's total outstanding Class A shares.
William Guthrie, IRA Rollover, 435 Sheridan Road, Winnetka, IL 60093-2626,
owned 15% of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 135 S. LaSalle Street, Chicago, IL 60602-4274, owned
5% of such Portfolio's total outstanding Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 28% of such
Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned
10% of such Portfolio's total outstanding Class A shares.
Mac & Co. A/C Benf 0741602, P.O. Box 3198, Pittsburgh, PA 15230, owned 8% of
such Portfolio's total outstanding Class A shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 13% of such Portfolio's total outstanding Class A
shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of
such Portfolio's total outstanding Class A shares.
Bartlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64132, owned 9% of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 9% of
such Portfolio's total outstanding Class A shares.
Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112, owned
8% of such Portfolio's total outstanding Class A shares.
EQUITY GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 34% of such
Portfolio's total outstanding Class A shares.
St. Raymonds Cemetery Reserve Fund, 1201 Balcom Avenue, Bronx, NY 10465, owned
9% of such Portfolio's total outstanding Class A shares.
Donald A. Moore Jr., 160 E. 72 Street, New York, NY 10021, owned 8% of such
Portfolio's total outstanding Class B shares.
21
<PAGE>
EUROPEAN EQUITY PORTFOLIO: Alan Gerry, C/O Granite Associates LP, 1 Cablevision
Center, Liberty, NY 12754, owned 8% of such Portfolio's total outstanding Class
A shares.
KPMG - Harvey Armstrong, FAO Volker Dolch Family Trust, 50 W. San Fernando
Street, San Jose, CA 95113-2413, owned 17% of such Portfolio's total outstanding
Class B shares.
Marc Andreessen Trustees, FBO Marc Andreessen, 16615 Lark Avenue, Los Gatos, CA
95030, owned 7% of such Portfolio's total outstanding Class B shares.
Frank E. Hunt Trust, 8627 Madison Drive, Niles, IL 60648-2321, owned 6% of such
Portfolio's total outstanding Class B shares.
Christopher E. O'Donnell Trust, 1147 W. George Street, Chicago, IL 60657-4313,
owned 6% of such Portfolio's total outstanding Class B shares.
James P. Smith Jr., 552 Ponte Vedra Boulevard, Ponte Vedra, FL 32082-2316,
owned 6% of such Portfolio's total outstanding Class B shares.
Beatrice Synder, Trustee FBO Jay Synder 21484, 300 Winston Drive, Apt. 1711,
Cliffside Park, NJ 07010-3222, owned 6% of such Portfolio's total outstanding
Class B shares.
Deborah Meredith, 1386 Pritchett Court, Los Altos, CA 94024-5713, owned 6% of
such Portfolio's total outstanding Class B shares.
Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 6% of
such Portfolio's total outstanding Class B shares.
Benedikt von Schroder & Kristin von Schroder, Burnitz Str. 67, 6000 Frankfurt
70, Germany, owned 5% of such Portfolio's total outstanding Class B shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 23% of such
Portfolio's total outstanding Class A shares.
Brooks School, C/O Mr. Frank Marino, North Andover, MA 01845, owned 6% of such
Portfolio's total outstanding Class A shares.
Morgan Stanley Foundation, 1221 Avenue of the Americas, New York, NY 10020,
owned 6% of such Portfolio's total outstanding Class A shares.
William M. Manger, Jr., 8 E. 81 Street, New York, NY 10028-0201, owned 6% of
such Portfolio's total outstanding Class B shares.
Harold J. Schaaff, IRA, 49 Old Orchard Lane, Ocean Twp, NJ 07712, owned 6% of
such Portfolio's total outstanding Class B shares.
Delaware Charter & Guarantee & Trust, IRA Rollover, 5813 West North Avenue,
Kalamazoo, MI 49009, owned 6% of such Portfolio's total outstanding Class B
shares.
Michael J. and Patricia L. Berchtold Trust, C/O Morgan Stanley Asia, Three
Exchange Square, Hong Kong, owned 6% of such Portfolio's total outstanding Class
B shares.
Richard B. Lonoff and Jacqueline M. Carr, 43 Mamanasco Road, Ridgefield, CT
06877-2402, owned 5% of such Portfolio's total outstanding Class B shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley
Asset Management, 25 Cabot Square, London, England E144QA, owned 48% of such
Portfolio's total outstanding Class A shares.
Gaz Metropolitan and Company Limited Partnership, 1717 Du Havre, Montreal,
Canada H2K-2X3, owned 15% of such Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue, 3rd floor, New York, NY 10022, owned
12% of such Portfolio's total outstanding Class A shares.
22
<PAGE>
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O.
Box 951405, Dallas, TX 75395, owned 8% of such Portfolio's total outstanding
Class A shares.
Kaplan Choate Value Partners, L.P., 880 Third Avenue, New York, NY 10022-4730,
owned 7% of such Portfolio's total outstanding Class A shares.
North American Trust Company, FBO Heller/Robert S. Venning, P.O. Box 84419, San
Diego, CA 92138, owned 12% of such Portfolio's total outstanding Class B
shares.
Janet Synder, IRA, Custodian MSTC, 3677 Sunsey Way, Sanford, MI 48657, owned 8%
of such Portfolio's total outstanding Class B shares.
Douglas E. Ebert Trust, Douglas E. Ebert, Trustee and Successor in Trust, 3470
Twin Oaks Court, W. Bloomfield, MI 48324-3249, owned 7% of such Portfolio's
total outstanding Class B shares.
John F. Raynolds III, 386 Park Avenue South, New York, NY 10016, owned 6% of
such Portfolio's total outstanding Class B shares.
Wells Fargo Bank, Custodian for the Rice Family Trust, 201 3rd Street, San
Francisco, CA 94163, owned 5% of such Portfolio's total outstanding Class B
shares.
GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia
District American Industries Trust Company Trustee, 5700 NW Central Drive, 4th
Floor, Houston, TX 77092, owned 14% of such Portfolio's total outstanding Class
A shares.
Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 11% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Customer FBO Resort Condominiums International, P.O. Box
92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total outstanding
Class A shares.
Divtex and Co., FBO Pritchard Hubble and Herr, c/o Texas Commerce Bank, P.O. Box
951405, Dallas, TX 75395-1405, owned 6% of such Portfolio's total outstanding
Class A shares.
David Brooks Gendron, C/O CS First Boston - London, 55 East 52nd Street, New
York, NY 10055, owned 12% of such Portfolio's total outstanding Class B shares.
Marjorie S. Burggraf, FBO The Robert V. Burgraff Family Trust UTA DTD 11-5-86,
2378 E. Oakmont Drive, Idaho Falls, ID 83404-7720, owned 8% of such Portfolio's
total outstanding Class B shares.
Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 6% of
such Portfolio's total outstanding Class B shares.
Thomas E. Congden, 1776 Lincoln Street, Suite 1100, Denver, CO 80203-1080,
owned 6% of such Portfolio's total outstanding Class B shares.
GOLD PORTFOLIO: Stockton Trust Partnership, 7373 North Scottsdale Road,
Scottsdale, AZ 85253, owned 31% of such Portfolio's total outstanding Class A
shares.
Judith L. Biggs, 390 Riversville Road, Greenwich, CT 06831-3200, owned 10% of
such Portfolio's total outstanding Class A shares.
Wallace Genetic Foundation, C/O Stanley Rosenberg, 7 Charles Lane, Rye Brook, NY
10573, owned 9% of such Portfolio's total outstanding Class A shares.
Barton M. Biggs, 390 Riversville Road, Greenwich, CT 06830, owned 9% of such
Portfolio's total outstanding Class A shares.
Trust U/A Sixth Will of Howard Ross, C/O James H. Ross, Rossrock Company, Inc.,
150 East 52nd Street, New York, NY 10020, owned 6% of such Portfolio's total
outstanding Class A shares.
23
<PAGE>
Kinghugh S.A., C/O Morgan Stanley Asset Management, 1221 Avenue of the Americas,
New York, NY 10020, owned 5% of such Portfolio's total outstanding Class A
shares.
Steven C. Olson, 505 Knollwood Road, Ridgewood, NJ 07450, owned 46% of such
Portfolio's total outstanding Class B shares.
Gregory W. Neumann, 5 Mt. Austin Road, House B, The Peak, Hong Kong, owned 21%
of such Portfolio's total outstanding Class B shares.
Michael J. and Patricia L. Berchtold, Trust, C/O Morgan Stanley Asia, Three
Exchange Square, Hong Kong, owned 10% of such Portfolio's total outstanding
Class B shares.
Matthew and Deborah Carrara, 443 W. Eugnie Street, Apt. 3E, Chicago, IL 60614,
owned 8% of such Portfolio's total outstanding Class B shares.
Christian B. Malone, 750 Columbus Avenue, Apt. 8N, New York, NY 10025-6479,
owned 7% of such Portfolio's total outstanding Class B shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit
Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 21% of such
Portfolio's total outstanding Class A shares.
Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 14% of such Portfolio's total outstanding
Class A shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 11% of such Portfolio's total outstanding Class B
shares.
Austin Koenen, 360 Sunset Road, Pompton Pines, NJ 07444-1513, owned 8% of such
Portfolio's total outstanding Class B shares.
John B. and Judy D. Morel, 28 Twelve Pines, The Woodlands, TX 77381, owned 6% of
such Portfolio's total outstanding Class B shares.
INTERNATIONAL MAGNUM PORTFOLIO: Infirmary Health Systems, Inc., P.O. Box 2226,
Mobile, AL 36652-2226, owned 49% of such Portfolio's total outstanding Class A
shares.
Ameritas Life Insurance Corporation, P.O. Box 81889, Lincoln, NE 68501, owned
34% of such Portfolio's total outstanding Class A shares.
Luanne C. Wells and Paul C. Heeschen Trustees, FBO Palm Trust, 450 Newport
Center Drive, Newport Beach, CA 92660-7614, owned 17% of such Portfolio's total
outstanding Class A shares.
Warren R. Appleton, SEP IRA, P.O. Box 3415, Redmond, WA 98073, owned 27% of such
Portfolio's total outstanding Class B shares.
Mike and Rose Crowe, 8840 SE 74th Place, Mercer Island, WA 98040-5700, owned 16%
of such Portfolio's total outstanding Class B shares.
Steve E. Trautman III and Sonja K. Gustafson, 4232 Meridian Avenue, Seattle, WA
98103, owned 14% of such Portfolio's total outstanding Class B shares.
William W. McCaughey, 15519 SE 27th Street, Bellevue, WA 98007, owned 12% of
such Portfolio's total outstanding Class B shares.
Meridian Real Estate L.P., P.O. Box 1202, Bellevue, WA 98009, owned 9% of such
Portfolio's total outstanding Class B shares.
Warren R. and Nancy J. Appleton, P.O. Box 3415, Redmond, WA 98073, owned 9% of
such Portfolio's total outstanding Class B shares.
24
<PAGE>
Julie A. Solomon, 1602 DeFoor Mill Court, Atlanta, GA 30318, owned 9% of such
Portfolio's total outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box
241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total
outstanding Class A shares.
The Casey Family Program, 1300 Dexter Avenue, Suite 400, Seattle, WA 98109-3547,
owned 8% of such Portfolio's total outstanding Class A shares.
Trustees of Boston College Attn: Paul Haran Associates Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General Mills
Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding
Class A shares.
JAPANESE EQUITY PORTFOLIO: Alan Gerry, C/O Granite Associates L.P., 1
Cablevision Center, Liberty, NY 12754, owned 5% of such Portfolio's total
outstanding Class A shares.
Marc Andreessen Trustees, FBO Marc Andreessen, 16615 Lark Avenue, Los Gatos, CA
95030, owned 7% of such Portfolio's total outstanding Class B shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 7% of such Portfolio's total outstanding Class B shares.
LATIN AMERICAN PORTFOLIO: Chicago Methodist Episcopal Church Aid Society, C/O
Gordon Worley, 1407 Clinton Place, River Forest, IL 60305, owned 23% of such
Portfolio's total outstanding Class B shares.
Henri Dyner, 232 Truman Drive, Cresskill, NJ 07626, owned 23% of such
Portfolio's total outstanding Class B shares.
Marc Andreessen Trustees, FBO Marc Andreessen, 16615 Lark Avenue, Los Gatos, CA
95030, owned 15% of such Portfolio's total outstanding Class B shares.
John P. Hanlon and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned
8% of such Portfolio's total outstanding Class B shares.
Lawrence B. Sorrel, 58 Taunton Road, Scarsdale, NY 10583, owned 6% of such
Portfolio's total outstanding Class B shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. McDonald and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 10% of such Portfolio's total
outstanding Class A shares.
Cushman Trust, C/O Cambrian Services, 1114 Avenue of the Americas, Suite 2702,
New York, NY 10036, owned 6% of such Portfolio's total outstanding Class A
shares.
Arnold E. and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA 93108-
1421, owned 5% of such Portfolio's total outstanding Class A shares.
James A. Rutherford, C/O Wingset Inc., 15 South High Street, P.O. Box 166, New
Albany, OH 43054-0166, owned 6% of such Portfolio's total outstanding Class A
shares.
Robert and Ellen Lieberman, 1136 5th Avenue, New York, NY 10128-0122, owned 60%
of such Portfolio's total outstanding Class B shares.
Alok and Maya Sama, C/O Morgan Stanley Hong Kong Pouch, Avenue of the
Americas, New York, NY 10020-1104, owned 30% of such Portfolio's total
outstanding Class B shares.
James W. and Diana E. Grisham, 454 South Pleasant Avenue, Ridgewood, NJ 07450-
5446, owned 9% of such Portfolio's total outstanding Class B shares.
25
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO: Morgan Stanley & Co. Pension Fund, C/O
Northern Trust Company Cust, 770 Broadway, New York, NY 10003, owned 14% of such
Portfolio's total outstanding Class A shares.
Wendel and Company, C/O The Bank of New York, P.O. Box 1066, New York, NY 10286,
owned 6% of such Portfolio's total outstanding Class A shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 20% of such Portfolio's total outstanding Class B
shares.
Kinney Printing Co-Employees, Attn: Dolores M. Miklos, 4801 South Lawndale,
Chicago, IL 60632-3018, owned 6% of such Portfolio's total outstanding Class B
shares.
George W. Gardner, Self Declaration of Trust, 70 E. Cedar, Chicago, IL 60611,
owned 5% of such Portfolio's total outstanding Class B shares.
U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund,
Erhardtstrasse 27, Munich, Germany 80331, owned 7% of such Portfolio's total
outstanding Class A shares.
Morgan, Stanley & Co. Pension Fund, C/O Northern Trust Company Cust, 770
Broadway, New York, NY 10003, owned 9% of such Portfolio's total outstanding
Class A shares.
Charles Schwab & Company, Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 8% of such Portfolio's total outstanding Class A shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 8% of such Portfolio's total outstanding Class B shares.
Eleanor S. Herkert Trustee of The Eleanor S. Herkert Trust, 2000 Diana Drive,
Lakeview West, Hallandale, FL 33009-4709, owned 7% of such Portfolio's total
outstanding Class B shares.
Kansas Children's Service League, P.O. Box 517, Wichita, KS 67201, owned 6% of
such Portfolio's total outstanding Class B shares.
Donald A. Moore, Jr., 160 E. 72 Street, New York, NY 10021, owned 5% of such
Portfolio's total outstanding Class B shares.
Plastic Surgery Affiliates P.C., Money Purchase Plan & Trust, 300 W. Clarendon,
Phoenix, AZ 85013-3422, owned 5% of such Portfolio's total outstanding Class B
shares.
VALUE EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 19% of such
Portfolio's total outstanding Class A shares.
Victoria B. McLaughlin, Upper Dogwood Lane, Rye, NY 10580, owned 7% of such
Portfolio's total outstanding Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolio's past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
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From time to time the Portfolio may advertise total return. Total return
figures are based on historical earnings and are not intended to indicate future
performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Portfolio) that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes the
amount was completely redeemed at the end of each 1-, 5-, and 10-year period (or
over the life of the Portfolio) and the deduction of all applicable Fund
expenses on an annual basis.
Total return figures are calculated according to the following formula:
P(1 + T) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-,
or 10-year periods (or fractional portion thereof).
COMPARISONS
To help investors better evaluate how an investment in the Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. -- analyzes price, current yield, risk, total
return and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Investor's Daily, Lipper
Analytical Services, Inc., Morningstar, Inc., New York Times,
Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed
Income Fund Performance Analysis -- measures total return and
average current yield for the mutual fund industry. Ranks
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. --
analyzes price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the
U.S. Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates -- historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
The following indices and averages may also be used:
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(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and
30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock
Index and 65% Salomon Brothers High Grade Bond Index; and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(b) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
(c) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(d) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the
EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds
and the U.S. Dollar local markets instruments. A more
comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from 14 countries. At $96 billion, its market cap is
nearly 50% higher than the EMBI's. The EMBI+ is not, however,
intended to replace the EMBI but rather to complement it. The
EMBI continues to represent the most liquid, most easily traded
segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these
indices are published daily.
(e) IFC Global Total Return Composite Index -- an unmanaged index of
common stocks and includes 18 developing countries in Latin
America, East and South Asia, Europe, the Middle East and Africa
(net of dividends reinvested).
(e) Indata Equity-Median Stock Index -- an unmanaged index which
includes an average asset allocation of 5% cash and 95% equity
based on $30.6 billion in assets among 562 portfolios for the
year ended December 31, 1995.
(f) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(g) Morgan Stanley Capital International Combined Far East Free ex-
Japan Index -- a market-capitalization weighted index comprising
stocks in Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand. Korea is included in the MSCI
Combined Far East Free ex Japan Index at 20% of its market
capitalization.
(h) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(i) Morgan Stanley Capital International Emerging Markets Global
Latin American Index -- an unmanaged, arithmetic market value
weighted average of the performance of over 196 securities on the
stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela (assumes reinvestment of dividends).
(j) Morgan Stanley Capital International Europe Index -- an unmanaged
index of common stocks and includes 14 countries throughout
Europe.
(k) Morgan Stanley Capital International Japan Index -- an unmanaged
index of common stocks.
(l) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index
covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
(m) Morgan Stanley Capital International World Index -- an
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(n) NASDAQ Composite Index -- an unmanaged index of common stocks.
(o) NASDAQ Industrial Index -- a capitalization-weighted index
composed of more than 3,000 domestic stocks taken from the
following industry sectors: agriculture, mining, construction,
manufacturing, electronic components, services and public
administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
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(p) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation
and finance company stocks listed on the New York Stock Exchange.
(q) Russell 2500 Index -- comprised of the bottom 500 stocks in the
Russell 1000 Index which represents the universe of stocks from
which most active money managers typically select; and all the
stocks in the Russell 2000 Index. The largest security in the
index has a market capitalization of approximately 1.3 billion.
(r) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(s) Standard & Poor's Small Cap 600 Index -- a capitalization-
weighted index of 600 domestic stocks having market
capitalizations which reside within the 50th and the 83rd
percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for
industry representation.
(t) Wilshire 5000 Equity Index or its component indices -- represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
(u) Lipper Science and Technology Fund Index -- a composite index of
the mutual funds which invest at least 65% of their assets in
science and technology stocks.
(v) Hambrecht and Quist Technology Index is an index of computer and
chip makers, biotechnology concerns and other high-tech
companies.
(w) SoundView Technology Index is an unweighted index consisting of
more than 100 technology companies.
(x) Morgan Stanley High Tech 35 Index -- an index comprised of
thirty-five technology stocks chosen by Morgan Stanley.
(y) Pacific Stock Exchange Index -- an index consisting of
approximately 100 technology and healthcare technology concerns.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Portfolio,
that the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its futures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit the
Directors to issue 34 billion shares of common stock, par value $.001 per share,
from an unlimited number of classes ("Portfolios") of shares. Currently the
Fund consists of shares of twenty-nine Portfolios (the China Growth and
Mortgage-Backed Securities Portfolios are not currently offering shares).
The shares of each Portfolio of the Fund are fully paid and nonassessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Portfolio of the Fund have no pre-emptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books of
the Fund.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of
the Portfolio by an investor may have the effect of reducing the per share net
asset value of the Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect
a return of capital, are subject to income taxes for shareholders subject to tax
as set forth herein and in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares are
automatically received in additional shares of such class of the Portfolio at
net asset value (as of the business day following the record date). This
automatic reinvestment of dividends and distributions will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gains distributions in cash) has
been elected.
CUSTODY ARRANGEMENTS
Chase serves as the Fund's domestic custodian. Chase is not affiliated
with Morgan Stanley & Co. Incorporated. Morgan Stanley Trust Company, Brooklyn,
NY, acts as the Fund's custodian for foreign assets held outside the United
States and employs subcustodians who were approved by the Directors of the Fund
in accordance with Rule 17f-5 adopted by the Commission under the 1940 Act.
Morgan Stanley Trust Company is an affiliate of Morgan Stanley & Co.
Incorporated. In the selection of foreign subcustodians, the Directors consider
a number of factors, including, but not limited to, the reliability and
financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa -
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A - Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa - Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba - Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B - Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small. Caa - Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect
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to principal or interest. Ca - Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
EXCERPTS FROM STANDARD & POOR'S RATINGS GROUP ("S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. C - The rating C is reserved for income bonds
on which no interest is being paid. D - Debt rated D is in default, and payment
of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1 -- best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established broad-based access to the market
for refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
II. DESCRIPTION OF U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities,
such as the Government National Mortgage Associates, are, in effect, backed by
the full faith and credit of the United States through provisions in their
charters that they may make "indefinite and unlimited" drawings on the Treasury,
if needed to service debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institution in
meeting its debt obligations. However, the U.S. Treasury has no lawful
obligation to assume the financial liabilities of these agencies or others.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.
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Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the Federal National Mortgage Association.
III. DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Municipal Money Market Portfolio will invest are payable on not more than one
year's notice.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies.
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Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
IV. DESCRIPTION OF MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Mortgage-backed securities include collateralized mortgage
obligations ("CMOs"), pass-through securities issued or guaranteed by agencies
or instrumentalities of the U.S. government or by private sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S. government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
In a CMO, a series of bonds or certificates are issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the underlying Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Interest is paid or accrues
on CMOs on a monthly, quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
CMO in many ways. The general goal in allocating cash flows on Mortgage Assets
to the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the underlying
Mortgage Assets. As a general matter, the more predictable the cash flow is on
a particular CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on Assets.
As part of the process of creating more predictable cash flows on certain
tranches of a CMO, one or more tranches generally must be created that absorb
most of the changes in the cash flows on the underlying Mortgage Assets. The
yields on these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and yields
on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type
of CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in
which the Mortgage-Backed Securities Portfolio may invest include pass-through
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government or by private sector entities. Mortgage pass-through securities
issued or guaranteed by private sector originators of or investors in mortgage
loans and are structured similarly to governmental pass-through securities.
Because private pass-throughs typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. FNMA
and FHLMC obligations are not backed by the full faith and credit of the U.S.
government as GNMA certificates are, but FNMA and FHLMC securities are supported
by the instrumentalities' right to borrow from the United States Treasury. Each
of GNMA, GNMA and FHLMC guarantees timely distributions of interest to
certificate holders.
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Each of GNMA and FNMA also guarantees timely distributions of scheduled
principal. FHLMC has in the past guaranteed only the ultimate collection of
principal of the underlying mortgage loan; however, FHLMC now issued Mortgage-
Backed Securities (FHLMC Gold Pcs) which also guarantee timely payment of
monthly principal reductions. REFCORP obligations are backed, as to principal
payments, by zero coupon U.S. Treasury bonds, and as to interest payment,
ultimately by the U.S. Treasury. Obligations issued by such U.S. governmental
agencies and instrumentalities are described more fully below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the United States government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support), through various means of structuring
the transaction or through a combination of such approaches. The Mortgage-
Backed Securities Portfolio will not pay any additional fees for such credit
support, although the existence of credit support may increase the price the
Portfolio pays for a security.
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The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with defaults on the underlying assets being borne first
by the holders of the most subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
V. FOREIGN INVESTMENTS
The Portfolio may invest, in securities of foreign issuers. Investors
should recognize that investing in such foreign securities involves certain
special considerations which are not typically associated with investing in U.S.
issuers. For a description of the effect on the Portfolio of currency exchange
rate fluctuation, see "Investment Objective and Policies -- Forward Foreign
Currency Exchange Contracts" above. As foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards and
may have policies that are not comparable to those of domestic issuers, there
may be less information available about certain foreign companies than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed issuers than in the U.S. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries. Foreign securities not listed
on a recognized domestic or foreign exchange are regarded as not readily
marketable and therefore such investments will be limited to 15% of the
Portfolio's net asset value at the time of purchase.
Although the Portfolio will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. It is not expected that
the Portfolio or its shareholders would be able to claim a credit for U.S. tax
purposes with respect to any such foreign taxes. However, these foreign
withholding taxes may not have a significant impact on the Portfolio, because
the Portfolio's investment objective is to seek long-term capital appreciation
and any dividend or interest income should be considered incidental.
FINANCIAL STATEMENTS
There are no financial statements for the Technology Portfolio because the
Portfolio has just become operational as of the date of this Statement of
Additional Information.
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