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THE BRINSON FUNDS
[LOGO OF BRINSON FUNDS]
GLOBAL FUND U.S. EQUITY FUND
GLOBAL EQUITY FUND
GLOBAL BOND FUND U.S. LARGE CAPITALIZATION EQUITY FUND
U.S. BALANCED FUND U.S. BOND FUND
NON-U.S. EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
February 11, 1998
The Brinson Funds (the "Trust") currently offers eight separate series, each
with its own investment objective and policies. The Trust also offers three
classes of shares for each series - the Brinson Fund-Class I, the Brinson Fund-
Class N and the SwissKey Fund class. Information concerning the Brinson Fund-
Class I of each series is included in a separate Prospectus dated February 11,
1998. Information concerning the Brinson Fund-Class N of each series is included
in a separate Prospectus dated February 11, 1998. Information concerning the
SwissKey Fund class of each series is included in a separate Prospectus for the
SwissKey Funds dated February 11, 1998. This Statement of Additional
Information is not a Prospectus, but should be read in conjunction with the
current Prospectuses of the Trust. Much of the information contained herein
expands upon subjects discussed in the Prospectuses. No investment in shares
should be made without first reading the applicable Prospectus. A copy of each
Prospectus may be obtained without charge from the Trust at the addresses and
telephone numbers below.
UNDERWRITER: ADVISOR:
Funds Distributor, Inc. Brinson Partners, Inc.
60 State Street 209 South LaSalle Street
Suite 1300 Chicago, IL 60604-1295
Boston, MA 02109 1-800-448-2430 (Brinson Fund-Class I and
1-800-448-2430 (Brinson Fund-Class I Brinson Fund-Class N)
and Brinson Fund-Class N) 1-800-SWISSKEY (SwissKey Fund class)
1-800-SWISSKEY (SwissKey Fund class)
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TABLE OF CONTENTS
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THE BRINSON FUNDS.................................................................................. 4
INVESTMENT STRATEGIES.............................................................................. 4
INVESTMENTS RELATING TO ALL FUNDS.................................................................. 4
Repurchase Agreements.......................................................................... 4
Reverse Repurchase Agreements.................................................................. 5
Borrowing...................................................................................... 5
Loans of Portfolio Securities.................................................................. 5
Swaps.......................................................................................... 5
Futures........................................................................................ 6
Options........................................................................................ 7
Index Options.................................................................................. 9
Special Risks of Options on Indices............................................................ 9
Rule 144A Securities........................................................................... 10
Other Investments.............................................................................. 10
INVESTMENTS RELATING TO THE GLOBAL FUNDS AND THE NON-U.S. EQUITY FUND.............................. 10
Foreign Securities............................................................................. 10
Forward Foreign Currency Contracts............................................................. 11
Options on Foreign Currencies.................................................................. 11
INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL BOND FUND, U.S. BALANCED FUND AND U.S. BOND FUND... 12
Lower Rated Debt Securities................................................................... 12
Convertible Securities........................................................................ 13
When-Issued Securities........................................................................ 13
Mortgage-Backed Securities and Mortgage Pass-Through Securities............................... 13
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs")........................................................... 15
Other Mortgage-Backed Securities.............................................................. 16
Asset-Backed Securities....................................................................... 16
Zero Coupon and Delayed Interest Securities................................................... 17
INVESTMENTS RELATING TO THE GLOBAL FUND............................................................ 18
Emerging Markets Investments.................................................................. 18
Risks of Investing in Emerging Markets........................................................ 19
Investments in Affiliated Investment Companies................................................ 20
INVESTMENT RESTRICTIONS............................................................................ 21
MANAGEMENT OF THE TRUST............................................................................ 23
Trustees and Officers......................................................................... 23
Compensation Table............................................................................ 24
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................................................ 25
INVESTMENT ADVISORY AND OTHER SERVICES............................................................. 28
Advisor........................................................................................ 28
Administrator.................................................................................. 30
Underwriter.................................................................................... 32
Distribution Plan.............................................................................. 33
Code of Ethics................................................................................. 33
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS................................................... 34
Portfolio Turnover............................................................................. 35
SHARES OF BENEFICIAL INTEREST...................................................................... 35
PURCHASES.......................................................................................... 36
Exchanges of Shares............................................................................ 36
Net Asset Value................................................................................ 36
REDEMPTIONS........................................................................................ 37
Taxation....................................................................................... 38
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PERFORMANCE CALCULATIONS..................................................................... 41
Total Return.............................................................................. 43
Yield..................................................................................... 43
FINANCIAL STATEMENTS......................................................................... 43
CORPORATE DEBT RATINGS --- APPENDIX A........................................................ 44
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THE BRINSON FUNDS
The Brinson Funds (the "Trust"), 209 South LaSalle Street, Chicago, Illinois
60604-1295, is an open-end management investment company which currently offers
shares of eight series representing separate portfolios of investments: Global
Fund, Global Equity Fund, Global Bond Fund, U.S. Balanced Fund, U.S. Equity
Fund, U.S. Large Capitalization Equity Fund, U.S. Bond Fund and Non-U.S. Equity
Fund (collectively referred to as the "Series," or individually as a "Series").
The Global Fund, Global Equity Fund and Global Bond Fund are referred to herein
collectively as the "Global Funds" or individually as the "Global Fund" and the
U.S. Balanced Fund, U.S. Equity Fund, U.S. Large Capitalization Fund and U.S.
Bond Fund are referred to herein as the "U.S. Funds." The Trust currently offers
three classes of shares for each Series: the Brinson Fund-Class I, Brinson Fund-
Class N and SwissKey Fund class. The Brinson Fund-Class I shares of each Series,
which are designed primarily for institutional investors, have no sales charges
and are not subject to annual 12b-1 plan expenses. The Brinson Fund-Class N
shares, which are available exclusively to 401(k) participants, have no sales
charges, but are subject to annual 12b-1 plan expenses of 0.25% of average daily
net assets of the respective Series. The SwissKey Fund class shares of each
Series have no sales charges, but are subject to annual 12b-1 expenses of up to
a maximum of 0.90% of average daily net assets of the respective Series.
INVESTMENT STRATEGIES
The following discussion of investment techniques and instruments supplements
and should be read in conjunction with the investment objectives and policies
set forth in the Prospectuses of the Funds. The investment practices described
below, except for the discussion of percentage limitations with respect to
portfolio loan transactions and borrowing, are not fundamental and may be
changed by the Board of Trustees without the approval of the shareholders.
INVESTMENTS RELATING TO ALL FUNDS
The following discussion applies to all Series.
REPURCHASE AGREEMENTS
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When a Series enters into a repurchase agreement, it purchases securities from a
bank or broker-dealer which simultaneously agrees to repurchase the securities
at a mutually agreed upon time and price, thereby determining the yield during
the term of the agreement. As a result, a repurchase agreement provides a fixed
rate of return insulated from market fluctuations during the term of the
agreement. The term of a repurchase agreement generally is short, possibly
overnight or for a few days, although it may extend over a number of months (up
to one year) from the date of delivery. Repurchase agreements will be fully
collateralized and the collateral will be marked-to-market daily. A Series may
not enter into a repurchase agreement having more than seven days remaining to
maturity if, as a result, such agreement, together with any other illiquid
securities held by the Series, would exceed 15% of the value of the net assets
of the Series.
In the event of bankruptcy or other default by the seller of the security under
a repurchase agreement, a Series may suffer time delays and incur costs or
possible losses in connection with the disposition of the collateral. In such
event, instead of the contractual fixed rate of return, the rate of return to a
Series would be dependent upon intervening fluctuations of the market value of
the underlying security and the accrued interest on the security. Although a
Series would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform, the ability of a Series to recover damages from a seller in
bankruptcy or otherwise in default would be reduced.
Repurchase agreements are securities for purposes of the tax diversification
requirements that must be met for pass-through treatment under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, each
Series will limit the value of its repurchase agreements on each of the
quarterly testing dates to ensure compliance with Subchapter M of the Code.
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REVERSE REPURCHASE AGREEMENTS
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Reverse repurchase agreements involve sales of portfolio securities of a Series
to member banks of the Federal Reserve System or securities dealers believed
creditworthy, concurrently with an agreement by the Series to repurchase the
same securities at a later date at a fixed price which is generally equal to the
original sales price plus interest. A Series retains record ownership and the
right to receive interest and principal payments on the portfolio securities
involved. In connection with each reverse repurchase transaction, a Series will
direct its custodian bank to place cash, U.S. government securities, equity
securities and/or investment and non-investment grade debt securities in a
segregated account of the Series in an amount equal to the repurchase price.
Any assets held in any segregated accounts maintained by a Series with respect
to any reverse repurchase agreements, when-issued securities, options, futures,
forward contracts or other derivative transactions shall be liquid, unencumbered
and marked-to-market daily (any such assets held in a segregated account are
referred to in this Statement of Additional Information as "Segregated Assets").
A reverse repurchase agreement involves the risk that the market value of the
securities retained by a Series may decline below the price of the securities
the Series has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Series' use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Series' obligation to repurchase the
securities. Reverse repurchase agreements are considered borrowings by the
Series and as such, are subject to the same investment limitations.
BORROWING
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The Series may borrow money as a temporary measure for extraordinary purposes or
to facilitate redemptions. A Series will not borrow money in excess of 33 1/3%
of the value of its total assets. A Series has no intention of increasing its
net income through borrowing. Any borrowing will be done from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
shall at any time fall below 300%, a Series shall, within three days thereafter
(not including Sundays or holidays), or such longer period as the U.S.
Securities and Exchange Commission (the "SEC") may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. A Series will not
pledge more than 10% of its net assets, or issue senior securities as defined in
the Investment Company Act of 1940, as amended (the "Act"), except for notes to
banks and reverse repurchase agreements. Investment securities will not be
purchased while a Series has an outstanding borrowing that exceeds 5% of a
Series' net assets.
LOANS OF PORTFOLIO SECURITIES
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The Series may lend portfolio securities to qualified broker-dealers and
financial institutions provided: (1) the loan is secured continuously by
collateral marked-to-market daily and maintained in an amount at least equal to
the current market value of the securities loaned; (2) a Series may call the
loan at any time and receive the securities loaned; (3) a Series will receive
any interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 33 1/3% of the
total assets of the Global Fund, Global Equity Fund, Global Bond Fund, U.S.
Balanced Fund, U.S. Equity Fund, U.S. Large Capitalization Equity Fund, U.S.
Bond Fund and Non-U.S. Equity Fund, respectively.
Collateral will consist of U.S. and non-U.S. securities, cash equivalents or
irrevocable letters of credit. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to maintain the proper
amount of collateral. Therefore, a Series will only enter into portfolio loans
after a review of all pertinent factors by Brinson Partners, Inc. ("Brinson
Partners" or the "Advisor") under the supervision of the Board of Trustees,
including the creditworthiness of the borrower. Creditworthiness will be
monitored on an ongoing basis by the Advisor.
SWAPS
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The Series (except for the Global Equity Fund, U.S. Equity Fund, U.S. Large
Capitalization Equity Fund and Non-U.S. Equity Fund) may engage in swaps,
including but not limited to interest rate, currency and index swaps and the
purchase or sale of related caps, floors, collars and other derivative
instruments. The Series expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of the
portfolio's duration, to protect against any increase in the price of securities
the Series anticipates purchasing at a later date, or to gain exposure to
certain markets in the most economical way possible.
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The use of swaps involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. If Brinson Partners
is incorrect in its forecast of market values, interest rates and other
applicable factors, the investment performance of the Series will be less
favorable than it would have been if this investment technique was never used.
Thus, if the other party to a swap defaults, a Series' risk of loss consists of
the net amount of interest payments that the Series is contractually entitled to
receive. Under Internal Revenue Service rules, any lump sum payment received or
due under the notional principal contract must be amortized over the life of the
contract.
FUTURES
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The Series may enter into contracts for the purchase or sale for future delivery
of securities. The Global Funds and the Non-U.S. Equity Fund may also enter
into contracts for the purchase or sale for future delivery of foreign
currencies.
A purchase of a futures contract means the acquisition of a contractual right to
obtain delivery to a Series of the securities or foreign currency called for by
the contract at a specified price during a specified future month. When a
futures contract is sold, a Series incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified date during a specified future month. A Series may enter into
futures contracts and engage in options transactions related thereto to the
extent that not more than 5% of the Series' assets are required as futures
contract margin deposits and premiums on options, and may engage in such
transactions to the extent that obligations relating to such futures and related
options on futures transactions represent not more than 25% of a Series' assets.
When a Series enters into a futures transaction, it must deliver to the futures
commission merchant selected by a Series an amount referred to as "initial
margin." This amount is maintained by the futures commission merchant in a
segregated account at the custodian bank. Thereafter, a "variation margin" may
be paid by the Series to, or drawn by the Series from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
The Series will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the Commodity Futures Trading
Commission for sale to customers in the United States, on foreign exchanges. In
addition, all of the Series except the Global Bond Fund and U.S. Bond Fund may
sell stock index futures in anticipation of or during a market decline to
attempt to offset the decrease in market value of their common stocks that might
otherwise result; and they may purchase such contracts in order to offset
increases in the cost of common stocks that they intend to purchase. Unlike
other futures contracts, a stock index futures contract specifies that no
delivery of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract.
While futures contracts provide for the delivery of securities, deliveries
usually do not occur. Contracts are generally terminated by entering into
offsetting transactions.
The Series may enter into futures contracts to protect against the adverse
affects of fluctuations in security prices, interest or foreign exchange rates
without actually buying or selling the securities or foreign currency. For
example, if interest rates are expected to increase, a Series might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the debt securities owned by
the Series. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of the futures contracts to the
Series would increase at approximately the same rate, thereby keeping the net
asset value of the Series from declining as much as it otherwise would have.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Series could take
advantage of the anticipated rise in value of debt securities without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Series could then buy debt securities on
the cash market.
To the extent that market prices move in an unexpected direction, a Series may
not achieve the anticipated benefits of futures contracts or may realize a
loss. For example, if a Series is hedged against the possibility of an
increase in interest rates which would adversely affect the price of securities
held in its portfolio and interest rates decrease instead, the Series would lose
part or all of the benefit of the increased value which it has because it would
have offsetting losses
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in its futures position. In addition, in such situations, if the Series had
insufficient cash, it may be required to sell securities from its portfolio to
meet daily variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the rising market. A
Series may be required to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS
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The Series may purchase and write call or put options on securities but will
only engage in option strategies for non-speculative purposes.
The U.S. Funds may invest in options that are listed on U.S. exchanges or traded
over-the-counter and the Global Funds and the Non-U.S. Equity Fund may invest in
options that are either listed on U.S. or recognized foreign exchanges or traded
over-the-counter. Certain over-the-counter options may be illiquid. Thus, it
may not be possible to close options positions and this may have an adverse
impact on a Series' ability to effectively hedge its securities. The Series
have been notified by the SEC that it considers over-the-counter options to be
illiquid. Accordingly, a Series will only invest in such options to the extent
consistent with its 15% limit on investments in illiquid securities.
PURCHASING CALL OPTIONS - The Series may purchase call options on securities to
the extent that premiums paid by a Series do not aggregate more than 20% of the
Series' total assets. When a Series purchases a call option, in return for a
premium paid by the Series to the writer of the option, the Series obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that a Series may
alter portfolio characteristics and modify portfolio maturities without
incurring the cost associated with transactions.
A Series may, following the purchase of a call option, liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an option
of the same series as the option previously purchased. The Series will realize
a profit from a closing sale transaction if the price received on the
transaction is more than the premium paid to purchase the original call option;
the Series will realize a loss from a closing sale transaction if the price
received on the transaction is less than the premium paid to purchase the
original call option.
Although the Series will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that a Series would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by a Series may expire without any value to the Series, in which event
the Series would realize a capital loss which will be short-term unless the
option was held for more than one year.
COVERED CALL WRITING - A Series may write covered call options from time to
time on such portions of its portfolio, without limit, as Brinson Partners
determines is appropriate in seeking to achieve the Series' investment
objective. The advantage to a Series of writing covered calls is that the
Series receives a premium which is additional income. However, if the security
rises in value, the Series may not fully participate in the market appreciation.
During the option period for a covered call option, the writer may be assigned
an exercise notice by the broker-dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
or upon entering a closing purchase transaction. A closing purchase
transaction, in which a Series, as writer of an option, terminates its
obligation by purchasing an option of the same series as the option previously
written, cannot be effected with respect to an option once the option writer has
received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable a Series to write
another
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call option on the underlying security with either a different exercise price or
expiration date or both. A Series may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss
may also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, the Series will realize a short-term
capital gain in the amount of the premium on the option less the commission
paid. Such a gain, however, may be offset by depreciation in the market value
of the underlying security during the option period. If a call option is
exercised, a Series will realize a gain or loss from the sale of the underlying
security equal to the difference between the cost of the underlying security and
the proceeds of the sale of the security plus the amount of the premium on the
option less the commission paid.
The Series will write call options only on a covered basis, which means that a
Series will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Series would be required to continue to hold a security which it might otherwise
wish to sell or deliver a security it would want to hold. The exercise price of
a call option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
PURCHASING PUT OPTIONS - The Series may only purchase put options to the extent
that the premiums on all outstanding put options do not exceed 20% of a Series'
total assets. A Series will, at all times during which it holds a put option,
own the security covered by such option. With regard to the writing of put
options, each Series will limit the aggregate value of the obligations
underlying such put options to 50% of its total net assets. The purchase of the
put on substantially identical securities held will constitute a short sale for
tax purposes, the effect of which is to create short-term capital gain on the
sale of the security and to suspend running of its holding period (and treat it
as commencing on the date of the closing of the short sale) or that of a
security acquired to cover the same if, at the time the put was acquired, the
security had not been held for more than one year.
A put option purchased by a Series gives it the right to sell one of its
securities for an agreed price up to an agreed date. The Series intend to
purchase put options in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
the Series to protect unrealized gains in an appreciated security in their
portfolios without actually selling the security. If the security does not drop
in value, a Series will lose the value of the premium paid. A Series may sell a
put option which it has previously purchased prior to the sale of the securities
underlying such option. Such sale will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio securities.
Additionally, the Series may enter into closing sale transactions. A closing
sale transaction is one in which a Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
WRITING PUT OPTIONS - The Series may also write put options on a secured basis
which means that a Series will maintain in a segregated account with its
custodian Segregated Assets in an amount not less than the exercise price of the
option at all times during the option period. The amount of Segregated Assets
held in the segregated account will be adjusted on a daily basis to reflect
changes in the market value of the securities covered by the put option written
by the Series. Secured put options will generally be written in circumstances
where Brinson Partners wishes to purchase the underlying security for a Series'
portfolio at a price lower than the current market price of the security. In
such event, a Series would write a secured put option at an exercise price
which, reduced by the premium received on the option, reflects the lower price
it is willing to pay.
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Following the writing of a put option, a Series may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Series may not, however, effect
such a closing transaction after it has been notified of the exercise of the
option.
INDEX OPTIONS
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The Series may purchase exchange-listed call options on stock and fixed income
indices depending upon whether a Series is an equity or bond series and sell
such options in closing sale transactions for hedging purposes. A Series may
purchase call options on broad market indices to temporarily achieve market
exposure when the Series is not fully invested. A Series may also purchase
exchange-listed call options on particular market segment indices to achieve
temporary exposure to a specific industry.
In addition, the Series may purchase put options on stock and fixed income
indices and sell such options in closing sale transactions for hedging purposes.
A Series may purchase put options on broad market indices in order to protect
its fully invested portfolio from a general market decline. Put options on
market segments may be bought to protect a Series from a decline in value of
heavily weighted industries in the Series' portfolio. Put options on stock and
fixed income indices may also be used to protect a Series' investments in the
case of a major redemption.
The Series may also write (sell) put and call options on stock and fixed income
indices. While the option is open, a Series will maintain a segregated account
with its custodian in an amount equal to the market value of the option.
Options on indices are similar to regular options except that an option on an
index gives the holder the right, upon exercise, to receive an amount of cash if
the closing level of the index upon which the option is based is greater than
(in the case of a call) or lesser than (in the case of a put) the exercise price
of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The indices on which
options are traded include both U.S. and non-U.S. markets.
SPECIAL RISKS OF OPTIONS ON INDICES
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The Series' purchases of options on indices will subject them to the risks
described below.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular security, whether a Series will
realize gain or loss on the purchase of an option on an index depends upon
movements in the level of prices in the market generally or in an industry or
market segment rather than movements in the price of a particular security.
Accordingly, successful use by a Series of options on indices is subject to
Brinson Partners' ability to predict correctly the direction of movements in the
market generally or in a particular industry. This requires different skills
and techniques than predicting changes in the prices of individual securities.
Index prices may be distorted if trading of a substantial number of securities
included in the index is interrupted causing the trading of options on that
index to be halted. If a trading halt occurred, a Series would not be able to
close out options which it had purchased and the Series may incur losses if the
underlying index moved adversely before trading resumed. If a trading halt
occurred and restrictions prohibiting the exercise of options were imposed
through the close of trading on the last day before expiration, exercises on
that day would be settled on the basis of a closing index value that may not
reflect current price information for securities representing a substantial
portion of the value of the index.
If a Series holds an index option and exercises it before final determination of
the closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercised option to fall "out-of-the-money," the Series will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although a
Series may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising the
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
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RULE 144A SECURITIES
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The Series may invest in securities that are exempt under Rule 144A from the
registration requirements of the Securities Act of 1933, as amended (the "1933
Act"). Those securities purchased under Rule 144A are traded among qualified
institutional investors.
The Board of Trustees of the Trust has instructed Brinson Partners to consider
the following factors in determining the liquidity of a security purchased under
Rule 144A: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although having delegated the day-to-day functions, the Board of Trustees will
continue to monitor and periodically review the Advisor's selection of Rule 144A
securities, as well as the Advisor's determinations as to their liquidity.
Investing in securities under Rule 144A could have the effect of increasing the
level of a Series' illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities. After the
purchase of a security under Rule 144A, however, the Board of Trustees and
Brinson Partners will continue to monitor the liquidity of that security to
ensure that each Series has no more than 15% of its total assets in illiquid
securities.
The Series will limit investments in securities of issuers which the Series are
restricted from selling to the public without registration under the 1933 Act to
no more than 15% of the Series' total assets, excluding restricted securities
eligible for resale pursuant to Rule 144A that have been determined to be liquid
pursuant a policy and procedures adopted by the Trust's Board of Trustees which
includes continuing oversight by the Board of Trustees.
If Brinson Partners determines that a security purchased in reliance on Rule
144A which was previously determined to be liquid, is no longer liquid and, as a
result, the Series' holdings of illiquid securities exceed the Series' 15% limit
on investment in such securities, Brinson Partners will determine what action
shall be taken to ensure that the Series continue to adhere to such limitation,
including disposing of illiquid assets which may include such Rule 144A
securities.
OTHER INVESTMENTS
- -----------------
The Board of Trustees may, in the future, authorize a Series to invest in
securities other than those listed in this Statement of Additional Information
and in the Prospectuses, provided such investment would be consistent with that
Series' investment objective and that it would not violate any fundamental
investment policies or restrictions applicable to that Series.
INVESTMENTS RELATING TO THE GLOBAL FUNDS AND THE NON-U.S. EQUITY FUND
The following discussion of strategies, techniques and policies applies only to
the Global Fund, Global Equity Fund, Global Bond Fund and the Non-U.S. Equity
Fund.
FOREIGN SECURITIES
- ------------------
Investors should recognize that investing in foreign issuers involves certain
considerations, including those set forth in the Series' Prospectuses, which are
not typically associated with investing in U.S. issuers. Since the stocks of
foreign companies are frequently denominated in foreign currencies, and since
the Series may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the Series will be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies. The investment policies
of the Series permit them to enter into forward foreign currency exchange
contracts, futures, options and interest rate swaps (in the case of the Global
Funds) in order to hedge portfolio holdings and commitments against changes in
the level of future currency rates.
There has been in the past, and there may be again in the future, an interest
equalization tax levied by the United States in connection with the purchase of
foreign securities such as those purchased by the Series. Payment of an
interest equalization tax, if imposed, would reduce the Series' rates of return
on investment. Dividends paid by foreign issuers may be subject to withholding
and other foreign taxes which may decrease the net return on such investments as
compared to dividends paid to the Series by U.S. corporations. The Series'
ability to "pass through" the foreign taxes paid for tax credit or deduction
purposes will be determined by the composition of the Series' portfolios. More
than 50%
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of a Series must be invested in stock or securities of foreign corporations for
"pass through" to be possible in the first instance. Special rules govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules generally include the following: (i) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in the Treasury Regulations, preferred
stock); (ii) the accruing of certain trade receivables and payables; and (iii)
the entering into or acquisition of any forward contract, futures contract and
similar financial instruments other than any "regulated futures contract" or
"non-equity option" which would be marked-to-market under the rules of Section
1256 of the Code if held at the end of the tax year. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign currency-
related regulated futures contracts and non-equity options are generally not
subject to these special currency rules. If subject, they are or would be
treated as sold for their fair market value at year-end under the marked-to-
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally a taxable gain or
loss. A taxpayer may elect to treat as capital gain or loss foreign currency
gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Code and the Treasury Regulations) will be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
The income tax effects of integrating and treating a transaction as a single
transaction are generally to create a synthetic debt instrument that is subject
to the original discount provisions. It is anticipated that some of the non-U.S.
dollar denominated investments and foreign currency contracts the Series may
make or enter into will be subject to the special currency rules described
above.
FORWARD FOREIGN CURRENCY CONTRACTS
- ----------------------------------
The Series may purchase or sell currencies and/or engage in forward foreign
currency transactions in order to expedite settlement of portfolio transactions
and to manage currency risk.
Forward foreign currency contracts are traded in the inter-bank 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 trades. The Series will account for
forward contracts by marking-to-market each day at current forward contract
values.
A Series will only enter into forward contracts to sell, for a fixed amount of
U.S. dollars or other appropriate currency, an amount of foreign currency, to
the extent that the value of the short forward contract is covered by the
underlying value of securities denominated in the currency being sold.
Alternatively, when a Series enters into a forward contract to sell an amount of
foreign currency, the Series' custodian or sub-custodian will place Segregated
Assets in a segregated account of the Series in an amount not less than the
value of the Series' total assets committed to the consummation of such forward
contracts. If the additional Segregated Assets placed in the segregated account
decline, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Series'
commitments with respect to such contracts.
OPTIONS ON FOREIGN CURRENCIES
- -----------------------------
The Series also may purchase and write put and call options on foreign
currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to
manage the Series' exposure to changes in currency exchange rates. The Series
may purchase and write options on foreign currencies for hedging purposes in a
manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Series may purchase put options on the foreign
currency. If the dollar price of the currency does decline, a Series will have
the right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the dollar price
of such securities, the Series may purchase call options on such currency.
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<PAGE>
The purchase of such options could offset, at least partially, the effects of
the adverse movement in exchange rates. As in the case of other types of
options, however, the benefit to the Series to be derived from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, a Series could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types of hedging
purposes. For example, where a Series anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates, it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in the value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Series could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Series to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Series
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, a Series also may be required to forego all or a portion
of the benefit which might otherwise have been obtained from favorable movements
in exchange rates.
The Series may write covered call options on foreign currencies. A call option
written on a foreign currency by a Series is "covered" if the Series owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by the custodian
bank) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if a Series has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written, or (b) is greater than the exercise price of the call
written if the difference is maintained by the Series in Segregated Assets in a
segregated account with its custodian bank.
With respect to writing put options, at the time the put is written, a Series
will establish a segregated account with its custodian bank consisting of
Segregated Assets in an amount equal in value to the amount the Series will be
required to pay upon exercise of the put. The account will be maintained until
the put is exercised, has expired, or the Series has purchased a closing put of
the same series as the one previously written.
INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL BOND FUND, U.S. BALANCED FUND
AND U.S. BOND FUND
The following discussion applies to the Global Fund, Global Bond Fund, U.S.
Balanced Fund and U.S. Bond Fund.
LOWER RATED DEBT SECURITIES
- ----------------------------
Fixed income securities rated lower than Baa by Moody's Investors Services, Inc.
or BBB by Standard & Poor's Ratings Group are considered to be of poor standing
and predominantly speculative. Such securities ("lower rated securities") are
commonly referred to as "junk bonds" and are subject to a substantial degree of
credit risk. Lower rated securities may be issued as a consequence of corporate
restructurings, such as leveraged buy-outs, mergers, acquisitions, debt
recapitalizations or similar events. Also, lower rated securities are often
issued by smaller, less creditworthy companies or by highly leveraged (indebted)
firms, which are generally less able than more financially stable firms to make
scheduled payments of interest and principal. The risks posed by securities
issued under such circumstances are substantial.
In the past, the high yields from lower rated securities have more than
compensated for the higher default rates on such securities. However, there can
be no assurance that diversification will protect the Series from widespread
bond defaults
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<PAGE>
brought about by a sustained economic downturn, or that yields will continue to
offset default rates on lower rated securities in the future. Issuers of these
securities are often highly leveraged, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. Further, an economic recession may
result in default levels with respect to such securities in excess of historic
averages.
The value of lower-rated securities will be influenced not only by changing
interest rates, but also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions appear to be
deteriorating, lower rated securities may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market for lower rated
securities may become thin and market liquidity may be significantly reduced.
Even under normal conditions, the market for lower rated securities may be less
liquid than the market for investment grade corporate bonds. There are fewer
securities dealers in the high yield market and purchasers of lower rated
securities are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced market liquidity, lower rated
securities prices may become more volatile.
Besides credit and liquidity concerns, prices for lower rated securities may be
affected by legislative and regulatory developments. For example, from time to
time, Congress has considered legislation to restrict or eliminate the corporate
tax deduction for interest payments or to regulate corporate restructurings such
as takeovers or mergers. Such legislation may significantly depress the prices
of outstanding lower rated securities. A description of various corporate debt
ratings appears in Appendix A to this Statement of Additional Information.
CONVERTIBLE SECURITIES
- ----------------------
The Series may invest in convertible securities which generally offer lower
interest or dividend yields than non-convertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to convert. The provisions of any convertible
security determine its ranking in a company's capital structure. In the case of
subordinated convertible debentures, the holder's claims on assets and earnings
are subordinated to the claims of other creditors and are senior to the claims
of preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claim on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
WHEN-ISSUED SECURITIES
- ----------------------
The Series may purchase securities offered on a "when-issued" or "forward
delivery" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued or forward delivery securities take
place at a later date. During the period between purchase and settlement, no
payment is made by the purchaser to the issuer and no interest on the when-
issued or forward delivery security accrues to the purchaser. While when-issued
or forward delivery securities may be sold prior to the settlement date, it is
intended that a Series will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Series makes the commitment to purchase a security on a when-
issued or forward delivery basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
when-issued or forward delivery securities may be more or less than the purchase
price. The Advisor does not believe that a Series' net asset value or income
will be adversely affected by its purchase of securities on a when-issued or
forward delivery basis. The Series will establish a segregated account in which
it will maintain Segregated Assets equal in value to commitments for when-
issued or forward delivery securities.
MORTGAGE-BACKED SECURITIES AND MORTGAGE PASS-THROUGH SECURITIES
- ---------------------------------------------------------------
The Series may also invest in mortgage-backed securities, which are interests in
pools of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of
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<PAGE>
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations as further described
below. The Series may also invest in debt securities which are secured with
collateral consisting of mortgage-backed securities (see "Collateralized
Mortgage Obligations") and in other types of mortgage-related securities.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. government. These
guarantees, however, do not apply to the market value of Series shares. Also,
securities issued by GNMA and other mortgage-backed securities may be purchased
at a premium over the maturity value of the underlying mortgages. This premium
is not guaranteed and would be lost if prepayment occurs. Mortgage-backed
securities issued by U.S. government agencies or instrumentalities other than
GNMA are not "full faith and credit" obligations. Certain obligations, such as
those issued by the Federal Home Loan Bank are supported by the issuer's right
to borrow from the U.S. Treasury, while others such as those issued by the
Federal National Mortgage Association ("FNMA"), are supported only by the credit
of the issuer. Unscheduled or early payments on the underlying mortgages may
shorten the securities' effective maturities and reduce returns. The Series may
agree to purchase or sell these securities with payment and delivery taking
place at a future date. A decline in interest rates may lead to a faster rate
of repayment of the underlying mortgages and expose the Series to a lower rate
of return upon reinvestment. To the extent that such mortgage-backed securities
are held by a Series, the prepayment right of mortgagors may limit the increase
in net asset value of the Series because the value of the mortgage-backed
securities held by the Series may not appreciate as rapidly as the price of
noncallable debt securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose a Series to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by a
Series, the prepayment right will tend to limit to some degree the increase in
net asset value of the Series because the value of the mortgage-backed
securities held by the Series may not appreciate as rapidly as the price of
noncallable debt securities.
For federal tax purposes other than diversification under Subchapter M,
mortgage-backed securities are not considered to be separate securities but
rather "grantor trusts" conveying to the holder an individual interest in each
of the mortgages constituting the pool.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-backed securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payments dates regardless of whether or
not the mortgagor actually makes the payment.
Any discount enjoyed on the purchases of a pass-through type mortgage-backed
security will likely constitute market discount. As a Series receives
principal payments, it will be required to treat as ordinary income an amount
equal to the lesser of the amount of the payment or the "accrued market
discount." Market discount is to be accrued either under a constant rate method
or a proportional method. Pass-through type mortgage-backed securities
purchased at a premium to face will be subject to a similar rule requiring
recognition of an offset to ordinary interest income, an amount of premium
attributable to the receipt of principal. The amount of premium recovered is to
be determined using a method similar to that in place for market discount. A
Series may elect to accrue market discount or amortize premium notwithstanding
the amount of principal received but such election will apply to all bonds held
and thereafter acquired unless permission is granted by the Commissioner of the
Internal Revenue Service to change such method.
The principal governmental guarantor of mortgage-related securities is GNMA,
which is a wholly-owned U. S. government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers)
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<PAGE>
and backed by pools of mortgages which are insured by the Federal Housing
Authority or guaranteed by the Veterans Administration. These guarantees,
however, do not apply to the market value or yield of mortgage-backed securities
or to the value of Series shares. Also, GNMA securities often are purchased at
a premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and should be viewed as an economic offset to interest to be
earned. If prepayments occur, less interest will be earned and the value of the
premium paid will be lost.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. government) include FNMA and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation of the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) mortgages from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the U.S. government.
FHLMC is a corporate instrumentality of the U.S. government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional mortgage loans. Such issuers may, in addition, be
the originators and/or servicers of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
or agency guarantees of payments. However, timely payment of interest and
principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets a Series' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
or guarantees, even if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Advisor determines that
the securities meet the Series' quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE INVESTMENT
- --------------------------------------------------------------------------------
CONDUITS ("REMICS")
- -------------------
A CMO is a debt security on which interest and prepaid principal are paid, in
most cases, semi-annually. CMOs may be collateralized by whole mortgage loans
but are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams.
Privately-issued CMOs tend to be more sensitive to interest rates than
Government-issued CMOs.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payments of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series (e.g., A, B,
C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B and C Bonds all bear
current interest. Interest
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<PAGE>
on the Series Z Bond is accrued and added to principal and a like amount is paid
as principal on the Series A, B, or C Bond currently being paid off. When the
Series A, B and C Bonds are paid in full, interest and principal on the Series
Z Bond begins to be paid currently. With some CMOs, the issuer serves as a
conduit to allow loan originators (primarily builders or savings and loan
associations) to borrow against their loan portfolios. REMICs are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
Most if not all newly-issued debt securities backed by pools of real estate
mortgages will be issued as regular and residual interests in REMICs because, as
of January 1, 1992, new CMOs which do not make REMIC elections will be treated
as "taxable mortgage pools," a wholly undesirable tax result. Under certain
transition rules, CMOs in existence on December 31, 1991 are unaffected by this
change. The Series will purchase only regular interests in REMICs. REMIC
regular interests are treated as debt of the REMIC and income/discount thereon
must be accounted for on the "catch-up method," using a reasonable prepayment
assumption under the original issue discount rules of the Code.
CMOs and REMICs issued by private entities are not government securities and are
not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Yields on privately-issued CMOs,
as described above, have been historically higher than yields on CMOs issued or
guaranteed by U.S. government agencies. However, the risk of loss due to default
on such instruments is higher since they are not guaranteed by the U.S.
government. Such instruments also tend to be more sensitive to interest rates
than U.S. government-issued CMOs. The Series will not invest in subordinated
privately-issued CMOs. For federal income tax purposes, the Series will be
required to accrue income on CMOs and REMIC regular interests using the "catch-
up" method, with an aggregate prepayment assumption.
OTHER MORTGAGE-BACKED SECURITIES
- --------------------------------
The Advisor expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. The mortgages underlying these securities may include
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may differ from
customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Advisor will, consistent
with a Series' investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities. The
Advisor will not purchase any such other mortgage-backed securities until the
Series' Prospectuses and this Statement of Additional Information have been
supplemented.
ASSET-BACKED SECURITIES
- -----------------------
The Series may invest a portion of its assets in debt obligations known as
"asset-backed securities." Asset-backed securities are securities that represent
a participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool or pools of similar assets
(e.g., receivables on home equity and credit loans and receivables regarding
automobile, credit card, mobile home and recreational vehicle loans, wholesale
dealer floor plans and leases).
Such receivables are securitized in either a pass-through or a pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments in respect of the receivables
in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, which are collateralized
by the various receivables and in which the payments on the underlying
receivables provide that the Series pay the debt service on the debt obligations
issued. The Series may invest in these and other types of asset-backed
securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and/or enhancement provided.
Such asset-backed securities are subject to the same prepayment risks as
mortgage-backed securities. For federal income tax purposes, the Series will be
required to accrue income on pay-through asset-backed securities using the
"catch-up" method, with an aggregate prepayment assumption.
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The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or any
other affiliated entities, and the amount and quality of any credit support
provided to the securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-backed securities may be classified as
"pass-through certificates" or "collateralized obligations."
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payment, 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 refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments due on the underlying pool is
timely. Protection against losses resulting from ultimate default enhances the
likelihood of payments of the obligations on at least some 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, through
various means of structuring the transaction or through a combination of such
approaches. The Series will not pay any additional fees for such credit
support, although the existence of credit support may increase the price of a
security.
Due to the shorter maturity of the collateral backing such securities, there is
less of a risk of substantial prepayment than with mortgage-backed securities.
Such asset-backed securities do, however, involve certain risks not associated
with mortgage-backed securities, including the risk that security interests
cannot be adequately, or in many cases, ever, established. In addition, with
respect to credit card receivables, a number of state and federal consumer
credit laws give debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the outstanding balance. In the case of automobile
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing such receivables due
to the large number of vehicles involved in a typical issuance and technical
requirements under state laws. Therefore, recoveries on repossessed collateral
may not always be available to support payments on the securities.
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 the result that defaults on the underlying assets are
borne first by the holders of the 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 exceeds that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit information respecting the level of credit risk associated
with the underlying assets. Delinquencies or losses in excess of those
anticipated could adversely affect the return on an investment in such issue.
ZERO COUPON AND DELAYED INTEREST SECURITIES
- -------------------------------------------
The Series may invest in zero coupon or delayed interest securities which pay no
cash income until maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and are sold at substantial discounts
from their value at maturity. When held to maturity or cash payment date, the
entire income of such securities, which consists of accretion of discount, comes
from the difference between the purchase price and their value at maturity or
cash payment date. The discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon and delayed interest securities are generally more volatile and more
likely to respond to changes in interest rates than the market prices of
securities having similar maturities and credit qualities that pay interest
periodically. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on such security (other than tax-exempt original issue discount from a
zero coupon security) that accrues that year, even though the holder receives no
cash payments of interest during the year. The Series will be required to
distribute such income to shareholders to comply with Subchapter M of the Code
and avoid excise taxes, even though the Series have not received any cash from
the issue.
17
<PAGE>
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon convertible
securities offer the opportunity for capital appreciation as increases (or
decreases) in market value of such securities closely follow the movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks as they usually are issued with short maturities (15 years or less) and
are issued with options and/or redemption features exercisable by the holder of
the obligation entitling the holder to redeem the obligation and receive a
defined cash payment.
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries ("CATS").
The underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are owned ostensibly by the bearer or holder
thereof), in trust on behalf of the owners thereof. Counsel to the underwriters
of these certificates or other evidences of ownership of the U.S. Treasury
securities has stated that for federal tax and securities purposes, in its
opinion, purchasers of such certificates, such as the Series, most likely will
be deemed the beneficial holder of the underlying U.S. government securities.
The Series understand that the staff of the SEC no longer considers such
privately stripped obligations to be U.S. government securities, as defined in
the Act; therefore, the Series intends to adhere to this staff position and
will not treat such privately stripped obligations to be U.S. government
securities for the purpose of determining if the Series is "diversified," or for
any other purpose, under the Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the U.S. Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, a Series will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the U.S. Treasury
sells itself. These stripped securities are also treated as zero coupon
securities with original issue discount for tax purposes.
INVESTMENTS RELATING TO THE GLOBAL FUND
EMERGING MARKETS INVESTMENTS (Global Fund only).
- ----------------------------
The Series may invest up to 10% of its assets in equity and debt securities of
emerging market issuers, or securities with respect to which the return is
derived from the equity or debt securities of issuers in emerging markets. The
Series may invest in equity securities of issuers in emerging markets, or
securities with respect to which the return is derived from the equity
securities of issuers in emerging markets. The Series also may invest in fixed
income securities of emerging market issuers, including government and
government-related entities (including participation in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. The Series also may invest in
debt securities of corporate issuers in developing countries.
The Series' investments in emerging market government and government-related
securities may consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging countries (including participation in
loans between governments and financial
18
<PAGE>
institutions), (ii) debt securities or obligations issued by government owned,
controlled or sponsored entities located in emerging countries and (iii)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the entities
described above.
The Series' investments in the fixed income securities of emerging market
issuers may include investments in Brady Bonds, Structured Securities, Loan
Participation and Assignments (as such capitalized terms are defined below), and
certain non-publicly traded securities.
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar), and are actively traded
in over-the-counter secondary markets. Dollar-denominated, collateralized Brady
Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds.
Structured Securities are issued by entities organized and operated solely for
the purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with, or purchase
by, an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments.
The Series may invest in fixed rate and floating rate loans ("Loans") arranged
through private negotiations between an issuer of sovereign debt obligations and
one or more financial institutions ("Lenders"). The Series' investments in
Loans are expected in most instances to be in the form of a participation in
loans ("Participation") and assignments of all or a portion of Loans
("Assignments") from third parties. The Series will have the right to receive
payments of principal, interest and any fees to which they are entitled only
from the Lender selling the Participation and only upon receipt by the Lender of
the payments from the borrower. In the event of the insolvency of the Lender
selling a Participation, the Series may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the borrower.
When a Series purchases Assignments from Lenders, it will acquire direct rights
against the borrower on the Loan. However, because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Series as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
The Series also may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unlisted emerging market equity
securities, including investments in new and early stage companies, may involve
a high 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.
The Series' investments in emerging market securities will at all times be
limited by the Series' prohibition on investing more than 15% of its net assets
in illiquid securities.
RISKS OF INVESTING IN EMERGING MARKETS
- --------------------------------------
Compared to the United States and other developed countries, emerging countries
may have relatively unstable governments, economies based on only a few
industries, and securities markets that trade only a small number of securities
and employ settlement procedures different from those used in the United States.
Prices on these exchanges tend to be volatile and, in the past, securities in
these countries have offered greater potential for gain (as well as loss) than
securities of companies located in developed countries. Further, investments by
foreign investors are subject to a variety of restrictions in many emerging
countries. Countries such as those in which the Series may invest have
historically experienced and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations or currency
depreciation, large amounts of external debt, balance of payments and trade
difficulties and
19
<PAGE>
extreme poverty and unemployment. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, its government's policy towards the International
Monetary Fund, the World Bank and other international agencies and the political
constraints to which a government debtor may be subject.
The ability of a foreign government or government-related issuer to make timely
and ultimate payments on its external debt obligations will be strongly
influenced by the issuer's balance of payments, including export performance,
its access to international credits and investments, fluctuations in interest
rates and the extent of its foreign reserves. A country whose exports are
concentrated in a few commodities or whose economy depends on certain strategic
imports could be vulnerable to fluctuations in international prices of these
commodities or imports. To the extent that a country receives payment for its
exports in currencies other than dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign government or
government-related issuer cannot generate sufficient earnings from foreign trade
to service its external debt, it may need to depend on continuing loans and aid
from foreign governments, commercial banks, and multilateral organizations, and
inflows of foreign investment. The commitment on the part of these foreign
governments, multilateral organizations and others to make such disbursements
may be conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the issuer's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a governmental issuer to obtain sufficient foreign
exchange to service its external debt.
As a result of the foregoing, a governmental issuer may default on its
obligations. If such a default occurs, the Series may have limited effective
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting country itself, and the
ability of the holder of foreign government and government-related debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government and government-related debt obligations in the event of default under
their commercial bank loan agreements.
The issuers of the government and government-related debt securities in which
the Series expects to invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign government and government-related debt securities may be
requested to participate in the restructuring of such obligations and to extend
further loans to their issuers. There can be no assurance that the Brady Bonds
and other foreign government and government-related debt securities in which the
Series may invest will not be subject to similar defaults or restructuring
arrangements which may adversely affect the value of such investments.
Furthermore, certain participants in the secondary market for such debt may be
directly involved in negotiating the terms of these arrangements and may
therefore have access to information not available to other market participants.
Payments to holders of the high yield, high risk, foreign debt securities in
which the Series may invest may be subject to foreign withholding and other
taxes. Although the holders of foreign government and government-related debt
securities may be entitled to tax gross-up payments from the issuers of such
instruments, there is no assurance that such payments will be made.
INVESTMENTS IN AFFILIATED INVESTMENT COMPANIES
- ----------------------------------------------
The Series may invest in securities issued by other registered investment
companies advised by Brinson Partners
20
<PAGE>
pursuant to exemptive relief granted by the SEC. Currently, the Global Fund is
the only Series of the Trust that intends to invest in portfolios of Brinson
Relationship Funds, another investment company which is advised by Brinson
Partners, and only to the extent consistent with the Advisor's investment
process of allocating assets to specific asset classes. The Global Fund will
invest in corresponding portfolios of Brinson Relationship Funds only to the
extent that the Advisor determines that such investments are a more efficient
means for the Global Fund to gain exposure to the asset classes referred to
below than by investing directly in individual securities.
To gain exposure to equity and fixed income securities of issuers located in
emerging market countries, the Global Fund may invest that portion of its
assets allocated to emerging markets investments in the Brinson Emerging Markets
Equity Fund portfolio and the Brinson Emerging Markets Debt Fund portfolio of
Brinson Relationship Funds. The investment objective of the Brinson Emerging
Markets Equity Fund and the Brinson Emerging Markets Debt Fund is to maximize
total U.S. dollar return, consisting of capital appreciation and current income,
while controlling risk. Under normal circumstances, at least 65% of the total
assets of the Brinson Emerging Markets Equity Fund is invested in the equity
securities of issuers in emerging markets or securities with respect to which
the return is derived from the equity securities of issuers in emerging markets.
At least 65% of the total assets of the Brinson Emerging Markets Debt Fund is
invested in the debt securities issued by governments, government-related
entities (including participations in loans between governments and financial
institutions), corporations and entities organized to restructure outstanding
debt of issuers in emerging markets, or debt securities the return on which is
derived primarily from other emerging markets instruments. The Brinson Emerging
Markets Equity Fund and Brinson Emerging Markets Debt Fund are permitted to
invest in the same types of securities as the Global Fund may invest in
directly.
In lieu of investing directly in certain high yield, higher risk securities, the
Global Fund may invest a portion of its assets in the Brinson High Yield Fund
portfolio (the "High Yield Fund") of Brinson Relationship Funds. The investment
objective of the High Yield Fund is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The High Yield Fund maintains a high yield portfolio and as such, at least 65%
of its assets are invested in high yield securities. The Global Fund currently
intends to limit its investment in non-investment grade debt securities to no
more than 5% of its net assets. Any investment in the High Yield Fund will be
considered within this limitation.
In lieu of investing directly in equity securities issued by companies with
relatively small overall market capitalizations, the Global Fund may invest a
portion of its assets in the Brinson Post-Venture Fund portfolio (the "Post-
Venture Fund") of Brinson Relationship Funds. The investment objective of the
Post-Venture Fund is to maximize total U.S. dollar return, consisting of capital
appreciation and current income, while controlling risk. The Post-Venture Fund
invests primarily in publicly- traded companies representing the lower 5% of the
Wilshire 5000 Index, and, as such, at least 65% of its assets are invested in
small capitalization equity securities.
Each portfolio of Brinson Relationship Funds in which the Global Fund may invest
is permitted to invest in the same securities of a particular asset class in
which the Global Fund is permitted to invest directly, and with similar risks.
Pursuant to undertakings with the SEC, the Global Fund will not be subject to
the imposition of double management or administration fees with respect to its
investments in Brinson Relationship Funds.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies and may not
be changed as to a Series, without the approval of a majority of the outstanding
voting securities (as defined in the Act) of the Series. Unless otherwise
indicated, all percentage limitations listed below apply to the Series only at
the time of the transaction. Accordingly, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in the
percentage which results from a relative change in values or from a change in a
Series' total assets will not be considered a violation.
Except as set forth under "Investment Objectives and Policies" and "Investment
Considerations and Risks" in each Prospectus, or "Investment Strategies" in
this Statement of Additional Information, each Series may not:
(i) As to 75% of the total assets of each Series, purchase the
securities of any one issuer, other than securities issued by the
U.S. government or its agencies or instrumentalities, if
21
<PAGE>
immediately after such purchase more than 5% of the value of the
total assets of a Series would be invested in securities of such
issuer (this does not apply to the Global Bond Fund);
(ii) Invest in real estate or interests in real estate (this will not
prevent a Series from investing in publicly-held real estate
investment trusts or marketable securities of companies which may
represent indirect interests in real estate), interests in oil, gas
and/or mineral exploration or development programs or leases;
(iii) Purchase or sell commodities or commodity contracts, but may enter
into futures contracts and options thereon in accordance with its
Prospectus. Additionally, each Series may engage in forward foreign
currency contracts for hedging and non-hedging purposes;
(iv) Make investments in securities for the purpose of exercising
control over or management of the issuer;
(v) Purchase the securities of any one issuer if, immediately after such
purchase, a Series would own more than 10% of the outstanding voting
securities of such issuer;
(vi) Sell securities short or purchase securities on margin, except such
short-term credits as are necessary for the clearance of
transactions. For this purpose, the deposit or payment by a Series
for initial or maintenance margin in connection with futures
contracts is not considered to be the purchase or sale of a security
on margin;
(vii) Make loans, except that this restriction shall not prohibit (a) the
purchase and holding of a portion of an issue of publicly
distributed or privately placed debt securities, (b) the lending of
portfolio securities, or (c) entry into repurchase agreements with
banks or broker-dealers;
(viii) Borrow money in excess of 33 1/3% of the value of its assets except
as a temporary measure for extraordinary or emergency purposes to
facilitate redemptions or issue senior securities. All borrowings
will be done from a bank and to the extent that such borrowing
exceeds 5% of the value of a Series' assets, asset coverage of at
least 300% is required. A Series will not purchase securities when
borrowings exceed 5% of that Series' total assets;
(ix) Purchase the securities of issuers conducting their principal
business activities in the same industry, other than obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, if immediately after such purchase, the value of
a Series' investments in such industry would exceed 25% of the value
of the total assets of the Series across several countries;
(x) Act as an underwriter of securities, except that, in connection with
the disposition of a security, a Series may be deemed to be an
"underwriter" as that term is defined in the 1933 Act;
(xi) Invest in securities of any open-end investment company, except that
(i) a Series may purchase securities of money market mutual funds,
(ii) the Global Fund and Global Equity Fund may each invest in the
securities of closed-end investment companies at customary brokerage
commission rates in accordance with the limitations imposed by the
Act and the rules thereunder, and (iii) in accordance with any
exemptive order obtained from the SEC which permits investment by a
Series in other Series or other investment companies or series
thereof advised by the Advisor. In addition, each Series may acquire
securities of other investment companies if the securities are
acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a SEC approved offer of exchange;
(xii) Invest in puts, calls, straddles or combinations thereof except to
the extent disclosed in a Series' Prospectus; and
22
<PAGE>
(xiii) Invest more than 5% of its total assets in securities of companies
less than three years old. Such three year periods shall include the
operation of any predecessor company or companies.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION
WITH
NAME AND ADDRESS AGE THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ---------------- --- --------- -------------------------------------------
<S> <C> <C> <C>
Walter E. Auch 76 Trustee Retired; formerly Chairman and CEO of Chicago Board of
6001 N. 62nd Place Options Exchange (1979-1986); Trustee of the Trust since
Paradise Valley, AZ May, 1994; Trustee, Brinson Relationship Funds since
85253 December, 1994; Director, Thomsen Asset Management
Corp. since 1987; Director, Fort Dearborn Income
Securities, Inc. 1987 to 1995; Director, Geotek Industries,
Inc. since 1989; Director, Smith Barney VIP Fund since
1991; Director, SB Advisers since 1992; Director, SB
Trak since 1992; Director, Banyan Realty Trust since 1987;
Director, Banyan Land Fund II since 1988; Director,
Banyan Mortgage Investment Fund since 1989; and
Director, Express America Holdings Corp. since 1992, and
Nicholas/Applegate, Legend Properties, Inc.
Frank K. Reilly 61 Chairman and Professor, University of Notre Dame since 1982; Trustee
College of Business Trustee of the Trust since December, 1993; Trustee, Brinson
Administration Relationship Funds since September, 1994; Director of The
University of Brinson Funds, Inc. 1992-1993; Trustee, Brinson Trust
Notre Dame Company, 1992-July, 1993; Director, Fort Dearborn
208 Hurley Building Income Securities, Inc. since 1993; Director, First Interstate
Notre Dame, IN 46556 Bank of Wisconsin from January, 1989 through March,
1990; Director, Greenwood Trust Company since 1993; and
Director, Dean Witter Trust, FSB, since 1996.
Edward M. Roob 62 Trustee Retired; prior thereto, Senior Vice President, Daiwa
841 Woodbine Lane Securities America Inc. (1986-1993); Trustee of the Trust
Northbrook, IL 60002 since January, 1995; Trustee, Brinson Relationship Funds
since January 1995; Director, Fort Dearborn Income
Securities, Inc. since 1993; Director, Brinson Trust
Company since 1993; Committee Member, Chicago Stock
Exchange since 1993; Member of Board of Governors,
Midwest Stock Exchange (1987-1991).
</TABLE>
23
<PAGE>
OTHER OFFICERS
<TABLE>
<CAPTION>
POSITION
WITH THE OFFICER
NAME AGE TRUST SINCE PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ---- --- -------- ------- -----------------------------------------------------
<S> <C> <C> <C> <C>
E. Thomas McFarlan 53 President 1992 Managing Partner, Brinson Partners, Inc. since 1991; Treasurer and Principal
Accounting Officer, The Brinson Funds 1995-1997; President and Director of The
Brinson Funds, Inc. 1992-1993; Trustee, Brinson Trust Company since 1991; prior
thereto, Executive Vice President of Washington Mutual Savings Bank.
Thomas J. Digenan 33 Vice 1993 Partner, Brinson Partners, Inc. since 1993; Assistant Treasurer, The Brinson Funds
President 1995-1997; Assistant Secretary, The Brinson Funds, 1993-1995; Assistant Secretary,
The Brinson Funds, Inc. 1993; prior thereto, Senior Manager, KPMG Peat Marwick.
Debra L. Nichols 31 Vice 1992 Partner, Brinson Partners, Inc. since 1995; Associate, Brinson Partners, Inc. from
President 1991 to 1995; Vice President, the Brinson Funds since 1997; Secretary, The Brinson
Funds 1997; Assistant Secretary, The Brinson Funds 1993-1997; Assistant Secretary,
The Brinson Funds, Inc. 1992-1993; prior thereto, private investor.
Carolyn M. Burke 30 Secretary, 1995 Partner, Brinson Partners, Inc., since January 1997; Associate, Brinson Partners,
Treasurer Inc. from 1995 to 1997; Secretary, Treasurer and Principal Accounting Officer,
and Principal The Brinson Funds since 1997; Assistant Secretary, The Brinson Funds 1995-1997;
Accounting prior thereto, Financial Analyst, Van Kampen American Capital Investment Advisory
Officer Corp. 1992-1995; Senior Accountant, KPMG Peat Marwick 1989-1992.
Catherine E. Macrae 40 Assistant 1995 Partner, Brinson Partners, Inc. since January 1996; Associate, Brinson Partners,
Secretary Inc., from 1992 to 1996; prior thereto, Economic Analyst, Chicago Mercantile
Exchange.
</TABLE>
COMPENSATION TABLE
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM TRUST FOR FISCAL YEAR TRUST AND FUND COMPLEX
NAME AND POSITION HELD ENDED JUNE 30, 1997 PAID TO TRUSTEES/1/
- ---------------------- -------------------------- -----------------------
<S> <C> <C>
Walter E. Auch, Trustee $14,400 $40,350
6001 N. 62nd Place
Paradise Valley, AZ 85253
Frank K. Reilly, Trustee $14,400 $40,350
College of Business Administration
University of Notre Dame
208 Hurley Building
Notre Dame, IN 46556
Edward M. Roob, Trustee $14,400 $27,600
841 Woodbine Lane
Northbrook, IL 60002
</TABLE>
/1/ This amount represents the aggregate amount of compensation paid to the
Trustees for (a) service on the Board of Trustees for the Trust's most
recently completed fiscal year; and (b) service on the Board of Directors
of two other investment companies managed by Brinson Partners for the
calendar year ending June 30, 1997.
24
<PAGE>
No officer or Trustee of the Trust who is also an officer or employee of Brinson
Partners receives any compensation from the Trust for services to the Trust. The
Trust pays each Trustee who is not affiliated with Brinson Partners a fee of
$6,000 per year, plus $300 per Series per meeting, and reimburses each Trustee
and officer for out-of-pocket expenses in connection with travel and attendance
at Board meetings.
The Board of Trustees has an Audit Committee which has the responsibility, among
other things, to (i) recommend the selection of the Trust's independent
auditors, (ii) review and approve the scope of the independent auditors' audit
activity, (iii) review the financial statements which are the subject of the
independent auditors' certification, and (iv) review with such independent
auditors the adequacy of the Series' basic accounting system and the
effectiveness of the Series' internal accounting controls. The Audit Committee
met once during the fiscal year ended June 30, 1997. There is no separate
nominating or investment committee. Items pertaining to these committees are
submitted to the full Board of Trustees.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1997, the officers and Trustees as a group owned less than 1%
of the outstanding equity securities of the Trust and of each class of equity
securities of the Trust.
As of October 31, 1997, the following persons owned of record or beneficially
more than 5% of the outstanding voting shares of the Brinson Fund-Class I,
Brinson Fund-Class N, SwissKey Fund class or the Series, as applicable:
GLOBAL FUND
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial Owners Class Series
- ----------------------------------- ------------- -------------
BRINSON FUND-CLASS I
- --------------------
<S> <C> <C>
First Alabama Bank 10.45% 10.01%
Mobile, AL
Suntrust Bank 7.13% 6.82%
Atlanta, GA
Polk Bros. Foundation 7.05% 6.75%
Chicago, IL
American Express 6.81% 6.52%
Minneapolis, MN
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
- -------------------
*Swiss Bank Corporation 73.44% -----
New York, NY
Schweizerischer Bankverein 5.79% -----
Zurich, Switzerland
</TABLE>
25
<PAGE>
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
Name & Address of Beneficial Owners Class Series
- ----------------------------------- ------------- -------------
BRINSON FUND-CLASS I
- ---------------------
<S> <C> <C>
*Wachovia Bank NA
Winston Salem, NC 37.02% 6.76%
Charles Schwab & Co. Inc. 20.85% -----
San Francisco, CA
National Financial Services Corp.
New York, NY 9.82% -----
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
- -------------------
*+Swiss Bank Corporation 34.41% 28.13%
New York, NY
*+Schweizerischer Bankverein 32.45% 26.53%
Zurich, Switzerland
Schweizerischer Bankverein 8.84% 7.23%
Zurich, Switzerland
GLOBAL BOND FUND
BRINSON FUND-CLASS I
- ---------------------
*+Baptist Health Systems, Inc. 26.78% 24.96%
Birmingham, AL
Wilmington Trust Co. 22.88% 21.32%
Wilmington, DE
Munson Williams Proctor Institute 20.26% 18.88%
Utica, NY
Charles Schwab & Co. 8.85% 8.25%
San Francisco, CA
Ripon College 8.08% 7.53%
Ripon, WI
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
- -------------------
*Swiss Bank Corporation 64.03% -----
New York, NY
U.S. BALANCED FUND
BRINSON FUND-CLASS I
- --------------------
*+Bankers Trust Co. 72.99% 69.36%
Jersey City, NJ
MAC & Co. 12.82% 12.18%
Pittsburgh, PA
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
- -------------------
*Swiss Bank Corp. 60.58% -----
New York, NY
Schweizerischer Bankverein 18.21% -----
Zurich, Switzerland
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial Owners Class Series
- ----------------------------------- ------------- -------------
SWISSKEY FUND CLASS (CON'T)
- -------------------
<S> <C> <C>
Schweizerischer Bankverein 17.95% -----
Zurich, Switzerland
U.S. EQUITY FUND
BRINSON FUND-CLASS I
- --------------------
Wachovia Bank Trust-Swiss Bank Corp. 16.37% 14.87%
Winston Salem, NC
Charles Schwab & Co. 9.14% 8.30%
San Francisco, CA
Wachovia Bank Trust 7.14% 6.49%
Winston Salem, NC
State Street Bank 5.00% -----
& Trust Company
MacDonald Charities
Boston, MA
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
- -------------------
*Schweizerischer Bankverein 53.21% -----
Zurich, Switzerland
*Schweizerischer Bankverein 33.47% -----
Zurich, Switzerland
Swiss Bank Corporation 11.87% -----
New York, NY
U.S. BOND FUND
BRINSON FUND-CLASS I
- --------------------
*+Wachovia Bank NA 37.75% 34.57%
Winston Salem, NC
*+Lafayette College Endowment 29.92% 27.40%
F M Kirby
Easton, PA
Lafayette College Endowment 11.88% 10.88%
FBO FM Kirby
Easton, PA
Lafayette College Endowment 7.76% 7.11%
A P Kirby
Easton, PA
BRINSON FUND-CLASS N
- --------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial Owners Class Series
- ----------------------------------- ------------- -------------
<S> <C> <C>
SWISSKEY FUND CLASS
-------------------
*Schweizerischer Bankverein 46.94% ------
Zurich, Switzerland
*Schweizerischer Bankverein 33.64% ------
Zurich, Switzerland
Swiss Bank Corp. 13.68% ------
New York, NY
NON U.S. EQUITY FUND
BRINSON FUND-CLASS I
--------------------
*+Northern Trust 28.96% 28.31%
Chicago, IL
BRINSON FUND-CLASS N
--------------------
Brinson Partners, Inc. 100% -----
Chicago, IL
SWISSKEY FUND CLASS
-------------------
*Schweizerischer Bankverein 61.48% ------
Zurich, Switzerland
Swiss Bank Corporation 28.94% ------
New York, NY
</TABLE>
* Person deemed to control the class within the meaning of the Act. Note that
such persons possess the ability to control the outcome of matters submitted
for the vote of shareholders of that class.
+ Person deemed to control the Series within the meaning of the Act. Note that
such persons possess the ability to control the outcome of matters submitted
for the vote of shareholders of that Series.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISOR
- -------
Brinson Partners, a Delaware corporation, is an investment management firm,
managing as of September 30, 1997, over $143.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First
28
<PAGE>
Chicago Investment Advisors, N.A. Brinson Partners and its predecessor entities
have managed domestic and international investment assets since 1974 and global
investment assets since 1982. Brinson Partners has offices in Basel, Frankfurt,
Geneva, London, Melbourne, New York, Paris, Singapore, Sydney, Tokyo, and
Zurich, in addition to its principal office at 209 South LaSalle Street,
Chicago, IL 60604-1295. Brinson Partners is an indirect wholly-owned subsidiary
of Swiss Bank Corporation ("Swiss Bank"). Swiss Bank, with headquarters in
Basel, Switzerland, is an internationally diversified organization with
operations in many aspects of the financial services industry. Brinson Partners
also serves as the investment advisor to nine other investment companies:
Brinson Relationship Funds, which includes fifteen investment portfolios
(series); The Enterprise Group of Funds, Inc. - International Growth Portfolio;
Enterprise Accumulation Trust - the International Equity Portfolio; Enterprise
International Growth Portfolio; Fort Dearborn Income Securities, Inc.; The
Hirtle Callaghan International Trust -International Equity Portfolio; John
Hancock Variable Series Trust I -International Balanced Portfolio; Managed
Accounts Services Portfolio Trust -Pace Large Company Value Equity Investments;
AON Funds - International Equity Fund; and The Republic Funds - Republic Equity
Fund.
Pursuant to its investment advisory agreements (the "Agreements") with the
Trust, on behalf of each Series, Brinson Partners receives from each Series a
monthly fee at an annual rate (as described in each Series' Prospectus and
below) multiplied by the average daily net assets of that Series for providing
investment advisory services. Brinson Partners is responsible for paying its
expenses. Under the Agreements, each Series pays the following expenses: (1) the
fees and expenses of the Trust's disinterested Trustees; (2) the salaries and
expenses of any of the Trust's officers or employees who are not affiliated with
Brinson Partners; (3) interest expenses; (4) taxes and governmental fees; (5)
brokerage commissions and other expenses incurred in acquiring or disposing of
portfolio securities; (6) the expenses of registering and qualifying shares for
sale with the SEC and with various state securities commissions; (7) auditing
and legal costs; (8) insurance premiums; (9) fees and expenses of the Trust's
custodian, administrative and transfer agent and any related services; (10)
expenses of obtaining quotations of the Series' portfolio securities and of
pricing the Series' shares; (11) expenses of maintaining the Trust's legal
existence and of shareholders' meetings; (12) expenses of preparation and
distribution to existing shareholders of reports, proxies and prospectuses; and
(13) fees and expenses of membership in industry organizations.
Under the Agreements, the Advisor is entitled to a monthly fee of the respective
Series' average daily net assets as follows: annual rates of 0.80% for the
Global Fund, Global Equity Fund and Non-U.S. Equity Fund; 0.75% for the Global
Bond Fund; 0.70% for the U.S. Balanced Fund, U.S. Equity Fund and U.S. Large
Capitalization Equity Fund; and 0.50% for the U.S. Bond Fund. The Advisor has
agreed irrevocably to waive its fees and reimburse expenses to the extent that
total operating expenses exceed the following rates of the respective Series'
average daily net assets as follows, without regard to 12b-1 Plan expenses for
the SwissKey Fund class or the Brinson - Class N of each Series: 1.10% for the
Global Fund; 1.00% for the Global Equity Fund, Non-U.S. Equity Fund and the U.S.
Large Capitalization Equity Fund; 0.90% for the Global Bond Fund; 0.80% for the
U.S. Balanced Fund, the U.S. Equity Fund and the U.S. Large Capitalization
Equity Fund; and 0.60% for the U.S. Bond Fund.
Advisory fees accrued to Brinson Partners were as follows:
29
<PAGE>
<TABLE>
<CAPTION>
A. FISCAL YEAR ENDED JUNE 30, 1995
- -------------------------------------------------------------------------------------------
SERIES* GROSS ADVISORY FEES NET ADVISORY FEES PAID FUND EXPENSES PAID
EARNED BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FUND $2,681,392 $2,681,392 $ 0.00
- -------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND $ 163,038 $ 0.00 $216,658
- -------------------------------------------------------------------------------------------
GLOBAL BOND FUND $ 329,156 $ 95,216 $233,940
- -------------------------------------------------------------------------------------------
U.S. BALANCED FUND $ 441,419 $ 275,707 $165,712
- -------------------------------------------------------------------------------------------
U.S. EQUITY FUND $ 154,258 $ 0.00 $199,708
- -------------------------------------------------------------------------------------------
U.S. BOND FUND NA NA NA
- -------------------------------------------------------------------------------------------
NON-U.S. EQUITY FUND $ 933,521 $ 666,061 $267,460
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
B. FISCAL YEAR ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------------------
SERIES* GROSS ADVISORY FEES NET ADVISORY FEES PAID FUND EXPENSES PAID
EARNED BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FUND $3,415,057 $3,415,057 $ 0.00
- -------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND $ 390,824 $ 12,198 $378,626
- -------------------------------------------------------------------------------------------
GLOBAL BOND FUND $ 310,066 $ 158 $309,908
- -------------------------------------------------------------------------------------------
U.S. BALANCED FUND $1,465,283 $1,015,531 $449,752
- -------------------------------------------------------------------------------------------
U.S. EQUITY FUND $ 638,063 $ 326,322 $311,741
- -------------------------------------------------------------------------------------------
U.S. BOND FUND $ 37,868 $ 0.00 $230,216
- -------------------------------------------------------------------------------------------
NON-U.S. EQUITY FUND $1,403,109 $1,050,199 $352,910
- -------------------------------------------------------------------------------------------
</TABLE>
C. FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES* GROSS ADVISORY FEES NET ADVISORY FEES PAID FUND EXPENSES PAID
EARNED BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FUND $4,294,925 $4,294,925 $ 0.00
- -------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND $ 641,075 $ 445,564 $195,511
- -------------------------------------------------------------------------------------------
GLOBAL BOND FUND $ 344,152 $ 149,228 $194,924
- -------------------------------------------------------------------------------------------
U.S. BALANCED FUND $1,775,454 $1,559,981 $215,473
- -------------------------------------------------------------------------------------------
U.S. EQUITY FUND $1,423,666 $1,234,361 $189,305
- -------------------------------------------------------------------------------------------
U.S. BOND FUND $ 67,835 $ 0.00 $142,178
- -------------------------------------------------------------------------------------------
NON-U.S. EQUITY FUND $2,420,667 $2,420,667 $ 0.00
- -------------------------------------------------------------------------------------------
</TABLE>
* The U.S. Large Capitalization Equity Fund had not commenced operations as of
the time periods indicated.
General expenses of the Trust (such as costs of maintaining corporate existence,
legal fees, insurances, etc.) will be allocated among the Series in proportion
to their relative net assets. Expenses which relate exclusively to a particular
Series, such as certain registration fees, brokerage commissions and other
portfolio expenses, will be borne directly by that Series.
ADMINISTRATOR
- -------------
Administrative, Accounting, Transfer Agency and Custodian Services
Effective May 10, 1997, the Trust, on behalf of each Fund, has entered into a
Multiple Services Agreement (the "Services Agreement") with Morgan Stanley Trust
Company, One Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC"), pursuant to
which MSTC is required to provide general administrative, accounting, portfolio
valuation, transfer agency and custodian services to the Fund, including the
coordination and monitoring of any third party service providers.
30
<PAGE>
Custody Services. MSTC provides custodian services for the securities and cash
of the Fund. The custody fee schedule is based primarily on the net amount of
assets held during the period for which payment is being made plus a per
transaction fee for transactions during the period and out-of-pocket expenses.
As authorized under the Services Agreement, MSTC has entered into a Mutual Funds
Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office space,
equipment and personnel to perform administrative and clerical services;
preparing, filing and distributing proxy materials, periodic reports to
Investors, registration statements and other documents; and responding to
Investor inquiries;
(2) accounting and portfolio valuation services, including the daily calculation
of the Fund's net asset value and the preparation of certain financial
statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning accounts,
processing purchases and redemptions of the Fund's shares, acting as dividend
and distribution disbursing agent and performing other service functions.
Shareholder inquiries should be made to the transfer agent at 1-800-448-2430
(for the Brinson Fund-Class N and Brinson Fund-Class I) or 1-800-SWISSKEY (for
the SwissKey Funds).
Also as authorized under the Services Agreement, MSTC has entered into a
sub-administration agreement (the "FDI Agreement") with Funds Distributor, Inc.
("FDI") under which FDI provides administrative assistance to the Fund with
respect to (i) regulatory matters, including regulatory developments and
examinations, (ii) all aspects of the Fund's day-to-day operations, (iii) office
facilities, clerical and administrative services, and (iv) maintenance of books
and records. FDI's business address is 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
Pursuant to the CGFSC Agreement and the FDI Agreement, MSTC pays CGFSC and FDI,
respectively, for the services that CGFSC and FDI provide to MSTC in fulfilling
MSTC's obligations under the Services Agreement.
Until May 9, 1997, FPS Services, Inc., 3200 Horizon Drive, King of Prussia, PA
19406-0903 ("FPS"), provided certain administrative services to the Trust
pursuant to an administration agreement (the "Administration Agreement").
31
<PAGE>
As compensation for services performed under the Administration Agreement, FPS
received a fee payable monthly at an annual rate multiplied by the average daily
net assets of the Trust.
Administration fees paid to FPS were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SERIES* FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FUND $211,243 $293,601 $271,364
- -------------------------------------------------------------------------------
GLOBAL EQUITY FUND $ 15,062 $ 32,468 $ 38,047
- -------------------------------------------------------------------------------
GLOBAL BOND FUND $ 28,889 $ 29,216 $ 25,412
- -------------------------------------------------------------------------------
U.S. BALANCED FUND $ 39,523 $140,841 $121,580
- -------------------------------------------------------------------------------
U.S. EQUITY FUND $ 15,362 $ 58,286 $ 76,534
- -------------------------------------------------------------------------------
U.S. BOND FUND NA $ 58,286 $ 6,542
- -------------------------------------------------------------------------------
NON-U.S. EQUITY FUND $ 72,350 $119,433 $122,780
- -------------------------------------------------------------------------------
</TABLE>
* The U.S. Large Capitalization Equity Fund had not commenced operations as of
the time periods indicated.
UNDERWRITER
- -----------
FDI, 60 State Street, Suite 1300, Boston, MA 02109, acts as an underwriter of
the Series' continuous offer of shares for the purpose of facilitating the
filing of notices regarding sale of the shares of the Series under state
securities laws and to assist in sales of shares pursuant to an underwriting
agreement (the "Underwriting Agreement") approved by the Board of Trustees. In
this regard, FDI has agreed at its own expense to qualify as a broker-dealer
under all applicable federal or state laws in those states which the Trust shall
from time to time identify to FDI as states in which it wishes to offer the
Series' shares for sale, in order that state filings may be maintained for the
Series. FDI does not receive any compensation under the Underwriting Agreement.
FDI is a broker-dealer registered with the SEC and a member in good standing of
the National Association of Securities Dealers, Inc.
The Trust does not impose any sales loads or redemption fees. Each Series shall
continue to bear the expense of all filing fees incurred in connection with the
filing of notices regarding sale of shares under state securities laws.
The Underwriting Agreement may be terminated by either party upon sixty (60)
days' prior written notice to the other party, and if so terminated, the pro
rata portion of the unearned fee will be returned to the Trust.
32
<PAGE>
DISTRIBUTION PLAN
- -----------------
The Board of Trustees of the Trust has adopted a distribution plan (the
"SwissKey Plan") pursuant to Rule 12b-1 under the Act, for each Series' SwissKey
Fund class shares and a separate distribution plan (the "Class N Plan") pursuant
to Rule 12b-1 under the Act for each Series' Brinson Fund-Class N shares (the
SwissKey Plan and the Class N Plan together, the "Plans"). The Plans permit each
Series to reimburse FDI, Brinson Partners and others from the assets of the
SwissKey Fund class and Brinson Fund-Class N shares with a quarterly fee for
services and expenses incurred in distributing and promoting sales of SwissKey
Fund class shares and Brinson Fund-Class N shares, respectively. The aggregate
fees paid by the SwissKey Fund class and Brinson Fund-Class N shares to FDI, and
others under the Plan for each Class may not exceed 0.90% of a SwissKey Fund
classes' average daily net assets and 0.25% of a Brinson Fund-Class N's average
daily net assets, respectively, in any year.
The SwissKey Plan does not apply to the Brinson Fund-Class I or the Brinson
Fund-Class N shares of each Series and those shares are not included in
calculating the SwissKey Plan's fees. Amounts spent on behalf of each SwissKey
Fund class pursuant to the SwissKey Plan during the fiscal year ended June 30,
1997 are set forth below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FUND+ PRINTING COMPENSATION COMPENSATION COMPENSATION TO ADVERTISING OTHER
TO TO SWISS BANK SALES
UNDERWRITERS* DEALERS PERSONNEL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SwissKey Global $ 4,946 $416 $0 $107,822 $12,238 $ 0
Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey Global $14,229 $416 $0 $285,887 $27,577 $ 0
Equity Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey Global $ 936 $416 $0 $ 17,467 $ 1,814 $ 0
Bond Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey U.S. $ 1,618 $416 $0 $ 20,805 $ 3,137 $ 0
Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey U.S. $ 379 $416 $0 $ 7,253 $ 734 $ 0
Equity Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey U.S. $ 2,601 $416 $0 $ 68,212 $ 5,065 $ 0
Bond Fund
- -----------------------------------------------------------------------------------------------------------------------
SwissKey Non- $ 314 $416 $0 $ 4,624 $ 590 $ 0
U.S. Equity Fund
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The SwissKey U.S. Large Capitalization Equity Fund had not commenced
operations as of the time period indicated.
* Prior to February 5, 1997, FPS Broker Services, Inc. served as underwriter to
the Trust.
The Brinson Fund-Class N shares commenced operations on June 30, 1997, and
therefore, no 12b-1 fees were accrued or expended under the Class N Plan on
behalf of the Brinson Fund-Class N shares during the periods reported.
CODE OF ETHICS
- --------------
The Trust has adopted a Code of Ethics which establishes standards by which
certain access persons of the Trust, which include officers of the Advisor and
officers and Trustees of the Trust, must abide relating to personal securities
trading conduct.
Under the Code of Ethics, access persons are prohibited from engaging in certain
conduct, including, but not limited to: 1) investing in companies in which the
Series invest unless the securities have a broad public market and are
registered on a national securities exchange or are traded in the over-the-
counter markets; 2) making or maintaining an investment in any corporation or
business with which the Series have business relationships if the investment
might create, or give the appearance of creating, a conflict of interest; 3)
participating in an initial public offering; 4) entering into a securities
transaction when the access person knows or should know that such activity will
anticipate, parallel or counter any securities transaction of a Series; 5)
entering into any securities transaction, without prior approval, in connection
with any security which has been designated as restricted; 6) entering into a
net short position with respect to any security held by a Series; 7) entering
into any derivative transaction when a direct transaction in the underlying
security would be a violation; and 8) engaging in self-dealing or other
transactions benefiting the access person at the expense of the Series or its
shareholders.
In addition, access persons are required to receive advance approval prior to
purchasing or selling a restricted security, and may not buy or sell certain
prohibited securities. The Advisor will identify for access persons prohibited
securities, which include securities that are being considered for purchase or
sale by any account or fund managed by the Advisor,
33
<PAGE>
and provide a list of such securities to all access persons. Access persons are
required to file quarterly reports of security investment transactions. Trustees
or officers who are not "interested persons" of the Trust, as defined in the
1940 Act, need only report a transaction in a security if such Trustee or
officer, at the time of the transaction, knew or should have known, in the
ordinary course of fulfilling his or her official duties as a Trustee or
officer, that, during the 15-day period immediately preceding or after the date
of the transaction by the Trustee or officer, such security was purchased or
sold by a Series, or was being considered for purchase by a Series.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brinson Partners is responsible for decisions to buy and sell securities for the
Series and for the placement of the Series' portfolio business and the
negotiation of commissions, if any, paid on such transactions. Fixed income
securities in which the Series invest are traded in the over-the-counter market.
These securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the
bid/ask spread quoted on securities includes an implicit profit to the dealers.
In over-the-counter transactions, orders are placed directly with a principal
market-maker unless a better price and execution can be obtained by using a
broker. Brokerage commissions are paid on transactions in listed securities,
futures contracts and options thereon. Brinson Partners is responsible for
effecting portfolio transactions and will do so in a manner deemed fair and
reasonable to the Series. Under its advisory agreements with the Global Funds
and the Non-U.S. Equity Fund, Brinson Partners is authorized to utilize the
trading desk of its foreign subsidiaries to execute foreign securities
transactions, but monitors the selection by such subsidiaries of brokers and
dealers used to execute transactions for those Series. The primary consideration
in all portfolio transactions will be prompt execution of orders in an efficient
manner at the most favorable price. In selecting and monitoring broker-dealers
and negotiating commissions, Brinson Partners considers the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to brokers who provide research or statistical material
or other services to the Series or to Brinson Partners. Such services include
advice, both directly and in writing, as to the value of the securities; the
advisability of investing in, purchasing or selling securities; and the
availability of securities, or purchasers or sellers of securities, as well as
analyses and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy and the performance of accounts. This allows
Brinson Partners to supplement its own investment research activities and obtain
the views and information of others prior to making investment decisions.
Brinson Partners is of the opinion that, because this material must be analyzed
and reviewed by its staff, its receipt and use does not tend to reduce expenses
but may benefit the Series by supplementing the Advisor's research.
Brinson Partners effects portfolio transactions for other investment companies
and advisory accounts. Research services furnished by dealers through whom the
Series effect its securities transactions may be used by Brinson Partners in
servicing all of its accounts; not all such services may be used in connection
with the Series. In the opinion of Brinson Partners, it is not possible to
measure separately the benefits from research services to each of the accounts
(including the Series). Brinson Partners will attempt to equitably allocate
portfolio transactions among the Series and others whenever concurrent decisions
are made to purchase or sell securities by the Series and another. In making
such allocations between the Series and others, the main factors to be
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for recommending investments to the Series
and the others. In some cases, this procedure could have an adverse effect on
the Series. In the opinion of Brinson Partners, however, the results of such
procedures will, on the whole, be in the best interest of each of the clients.
The Series incurred brokerage commissions as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SERIES* FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL FUND $196,381 $329,191 $385,571
- -------------------------------------------------------------------------------
GLOBAL EQUITY FUND $ 34,283 $123,467 $142,922
- -------------------------------------------------------------------------------
GLOBAL BOND FUND $ 0.00 $ 0.00 $ 0.00
- -------------------------------------------------------------------------------
</TABLE>
* The U.S. Large Capitalization Equity Fund had not commenced operations as of
the time periods indicated.
34
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SERIES FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. BALANCED FUND $ 88,904 $ 99,554 $139,165
- -------------------------------------------------------------------------------
U.S. EQUITY FUND $ 53,830 $105,887 $290,526
- -------------------------------------------------------------------------------
U.S. BOND FUND $ 0.00 $ 0.00 $ 0.00
- -------------------------------------------------------------------------------
NON-U.S. EQUITY FUND $172,829 $322,915 $833,293
- -------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended June 30, 1997 the Trust and the Advisor had no
agreements or understandings with a broker or otherwise causing brokerage
transactions or commissions for research services.
PORTFOLIO TURNOVER*
- ------------------
The Series are free to dispose of their portfolio securities at any time,
subject to complying with the Code and the Act, when changes in circumstances or
conditions make such a move desirable in light of the respective investment
objective. The Series will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving that Series'
investment objective.
The Series do not intend to use short-term trading as a primary means of
achieving their investment objectives. The rate of portfolio turnover shall be
calculated by dividing (a) the lesser of purchases and sales of portfolio
securities for the particular fiscal year by (b) the monthly average of the
value of the portfolio securities owned by that Series during the particular
fiscal year. Such monthly average shall be calculated by totaling the values of
the portfolio securities as of the beginning and end of the first month of the
particular fiscal year and as of the end of each of the succeeding eleven months
and dividing the sum by 13.
Under normal circumstances, the portfolio turnover rate for the Global Equity
Fund, U.S. Equity Fund, U.S. Large Capitalization Equity Fund and Non-U.S.
Equity Fund is not expected to exceed 100%. The portfolio turnover rates for the
Global Fund and Global Bond Fund may exceed 100% and in some years, 200% and for
the U.S. Balanced Fund and U.S. Bond Fund, may exceed 100% and in some years,
300%. High portfolio turnover rates (over 100%) may involve correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the Series and ultimately by that Series' shareholders. In addition,
high portfolio turnover may result in increased short-term capital gains, which,
when distributed to shareholders, are treated as ordinary income.
With respect to the Global Fund, for the fiscal years ended June 30, 1994, June
30, 1995, June 30, 1996 and June 30, 1997, respectively, the portfolio turnover
rate of the Series was 231%, 238%, 142% and 150%, respectively. With respect to
the Global Bond Fund, for the period July 30, 1993 (commencement of operations)
to June 30, 1994 and the fiscal years ended June 30, 1995, June 30, 1996 and
June 30, 1997 the portfolio turnover rate of the Series was 189%, 199%, 184% and
235%, respectively. With respect to the U.S. Balanced Fund, for the fiscal years
ended June 30, 1996, and June 30, 1997 the portfolio turnover rate of the Series
was 240% and 329%. With respect to the U.S. Bond Fund, for the period from
August 31, 1995 (commencement of operations) to June 30, 1996, and the fiscal
year ended June 30, 1997, the portfolio turnover rate of the Series was 363% and
410%. The significant variation in portfolio turnover rates over such periods
was due to an increase in the assets of the Series which caused the Series, to
reposition their portfolio holdings in order to meet their investment objectives
and policies.
*The U.S. Large Capitalization Equity Fund has not commenced operations as of
the time periods indicated.
SHARES OF BENEFICIAL INTEREST
The Trust presently offers eight Series of shares of beneficial interest, each
of which offers three classes of shares. Each share of beneficial interest
represents an equal proportionate interest in the assets and liabilities of the
applicable Series and has the same voting and other rights and preferences as
the other class of that Series, except that only shares of the SwissKey Fund
class may vote on any matter affecting only the SwissKey Plan under Rule 12b-1.
Similarly, only shares of the Brinson Fund-Class N may vote on matters that
affect only the Class N Plan. No class may vote on matters that affect only
another class. Under Delaware law, the Trust does not normally hold annual
meetings of shareholders. Shareholders' meetings may be held from time to time
to consider certain matters including changes to a Series' fundamental
investment objective and fundamental investment policies, changes to the Trust's
investment advisory agreement and the election of Trustees when required by the
Act. When matters are submitted to shareholders for a vote, shareholders are
entitled to one vote per share with proportionate voting
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for fractional shares. The shares of the Series do not have cumulative voting
rights or any preemptive or conversion rights, and the Trustees have authority
from time to time to divide or combine the shares of the Series into a greater
or lesser number of shares so affected. In the case of a liquidation of a
Series, each shareholder of the Series will be entitled to share, based upon the
shareholder's percentage share ownership, in the distribution out of assets, net
of liabilities, of the Series. No shareholder is liable for further calls or
assessment by the Series.
On any matters affecting only one Series or class, only the shareholders of that
Series or class are entitled to vote. On matters relating to the Trust but
affecting the Series differently, separate votes by the Series or class are
required. With respect to the submission to shareholder vote of a matter
requiring separate voting by a Series or class, the matter shall have been
effectively acted upon with respect to any Series or class if a majority of the
outstanding voting securities of that Series or class votes for the approval of
the matter, notwithstanding that: (1) the matter has not been approved by a
majority of the outstanding voting securities of any other Series or class; and
(2) the matter has not been approved by a majority of the outstanding voting
securities of the Trust.
PURCHASES
Shares of each class of each Series are sold at the net asset value next
determined after the receipt of a purchase application in proper form by the
transfer agent. The minimum for initial investments with respect to the Brinson
Fund-Class I for each Series is $1,000,000; subsequent investment minimums are
$2,500. The minimum for initial investments with respect to the SwissKey Fund
class for each Series is $1,000; subsequent investment minimums are $50. The
minimum for initial investment with respect to the Brinson Fund-Class N for each
Series is $1,000,000. A more detailed description of methods of purchase is
included in the Prospectuses.
Certificates representing shares purchased are not issued. However, such
purchases are confirmed to the investor and credited to the shareholder's
account on the books maintained by the Trust's transfer agent. The investor will
have the same rights of ownership with respect to such shares as if certificates
had been issued.
EXCHANGES OF SHARES
- -------------------
Shares of one class of a Series may only be exchanged for the same class of
another Series of the Trust. Exchanges will not be permitted between the
different classes.
Each qualifying exchange will be made on the basis of the relative net asset
values per share of both the Series from which, and the Series into which, the
exchange is made, that is next computed following receipt of the exchange order
in proper form by the Trust's transfer agent. Exchanges may be made by telephone
if the shareholder's Account Application Form includes specific authorization
for telephone exchanges. The telephone exchange privilege may be difficult to
implement during times of drastic economic or market changes.
The transactions described above will result in a taxable gain or loss for
federal income tax purposes. Generally, any such taxable gain or loss will be a
capital gain or loss (long-term or short-term, depending on the holding period
of the shares) in the amount of the difference between the net asset value of
the shares surrendered and the shareholder's tax basis for those shares. Each
investor should consult his or her tax adviser regarding the tax consequences of
an exchange transaction.
Any shareholder who wishes to make an exchange should first obtain and review
the Prospectus of the Series to be acquired in the exchange. Requests for
telephone exchanges must be received prior to the close of regular trading on
the New York Stock Exchange ("NYSE") on any day on which the NYSE is open for
regular trading.
At the discretion of the Trust, this exchange privilege may be terminated or
modified at any time for any of the participating Series upon 60 days' prior
written notice to shareholders. Contact the transfer agent for details about a
particular exchange.
NET ASSET VALUE
- ---------------
The net asset value per share is calculated separately for each class of each
Series. The net asset value per share of a Series is computed by dividing the
value of the assets of the Series, less its liabilities, by the number of shares
of the Series outstanding.
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Each class of a Series will bear pro rata all of the common expenses of that
Series. The net asset values of all outstanding shares of each class of a Series
will be computed on a pro rata basis for each outstanding share based on the
proportionate participation in the Series represented by the value of shares of
that Series. All income earned and expenses incurred by a Series will be borne
on a pro rata basis by each outstanding share of a class, based on each class'
percentage in the Series represented by the value of such shares of such
classes, except that none of the shares of a class will incur any of the
expenses under the 12b-1 plan of another class.
Portfolio securities are valued and net asset value per share is determined as
of the close of regular trading on the NYSE which currently is 4:00 p.m. Eastern
time on each day the NYSE is open for trading. The Series of the Trust reserve
the right to change the time at which purchases, redemptions or exchanges are
priced if the NYSE closes at a time other than 4:00 p.m. Eastern time or if an
emergency exists. The NYSE is open for trading on every day except Saturdays,
Sundays and the following holidays: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day (day observed), Independence Day,
Labor Day, Thanksgiving and Christmas and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday,
respectively.
Portfolio securities listed on a national or foreign securities exchange are
valued on the basis of the last sale on the date the valuation is made.
Securities that are not traded on a particular day or an exchange, are valued at
either (a) the bid price or (b) a valuation within the range considered best to
represent value in the circumstances. Price information on listed securities is
generally taken from the closing price on the exchange where the security is
primarily traded. Other portfolio securities which are traded in the over-the-
counter market are valued at the bid price as long as the bid price, in the
opinion of the Advisor, continues to reflect the value of the security.
Valuations of fixed income and equity securities may be obtained from a pricing
service and/or broker-dealers when such prices are believed to reflect the fair
value of such securities. Use of a pricing service and/or broker-dealers has
been approved by the Board of Trustees.
Futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded. Forward foreign currency contracts are
valued daily using the mean between the bid and asked forward points added to
the current exchange rate and an unrealized gain or loss is recorded. A Series
realizes a gain or loss upon settlement of the contracts. Swaps will be priced
at fair value based on (1) swap prices provided by broker-dealers; (2) values,
or estimates of values, of the applicable equity indices and foreign rates
underlying the contracts; and (3) consideration of other relevant factors. A
Series' obligation under a swap agreement will be accrued daily (offset by any
amounts owing to the portfolio) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of Segregated Assets. For valuation purposes, foreign securities
initially expressed in foreign currency values will be converted into U.S.
dollar values using WM/Reuters closing spot rates as of 4:00 p.m. London time.
Securities with a remaining maturity of 60 days or less are valued at amortized
cost, which approximates market value. Fixed income securities having a
remaining maturity of over 60 days are valued at market price. Debt securities
are valued on the basis of prices provided by a pricing service, or at the bid
price where readily available, as long as the bid price, in the opinion of FPS
and the Advisor, continues to reflect the value of the security. Redeemable
securities issued by open-end investment companies are valued using their
respective net asset values for purchase orders placed at the close of the
NYSE. Securities (including over-the-counter options) for which market
quotations are not readily available and other assets are valued at their fair
value as determined in good faith by or under the direction of the Trustees.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the NYSE and values of
foreign futures and options and foreign securities will be determined as of the
earlier closing of such exchanges and securities markets. However, events
affecting the values of such foreign securities may occasionally occur between
the earlier closings of such exchanges and securities markets and the closing of
the NYSE which will not be reflected in the computation of the net asset value
of a Series. If an event materially affecting the value of such foreign
securities occurs during such period, then such securities will be valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees. Where a foreign securities market remains open at the time that a
Series values its portfolio securities, or closing prices of securities from
that market may not be retrieved because of local time differences or other
difficulties in obtaining such prices at that time, last sale prices in such
market at a point in time most practicable to timely valuation of the Series may
be used.
REDEMPTIONS
Under normal circumstances shareholders may redeem their shares at any time
without a fee. The redemption price will be based upon the net asset value per
share next determined after receipt of the redemption request, provided it has
been submitted in the manner described below. The redemption price may be more
or less than the original cost, depending upon the net asset value per share at
the time of redemption.
Payment for shares tendered for redemption is made by check within five business
days after tender in proper form, except that the Trust reserves the right to
suspend the right of redemption, or to postpone the date of payment upon
redemption beyond five business days, (i) for any period during which the NYSE
is closed (other than customary weekend and holiday closings) or during which
trading on the NYSE is restricted, (ii) for any period during which an
emergency exists as determined by the SEC as a result of which disposal of
securities owned by a Series is not reasonably practicable or it is not
reasonably practicable for the Series fairly to determine the value of its net
assets, or
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(iii) for such other periods as the SEC may by order permit for the protection
of shareholders of the Series.
Under unusual circumstances, when the Board of Trustees deems it in the best
interest of the Series' shareholders, the Trust may make payment for shares
repurchased or redeemed in whole or in part in securities of the Series taken at
current values. With respect to such redemptions in kind, the Trust has made an
election pursuant to Rule 18f-1 under the Act. This will require the Trust to
redeem in cash at a shareholder's election in any case where the redemption
involves less than $250,000 (or 1% of the Series' net asset value at the
beginning of each 90 day period during which such redemptions are in effect, if
that amount is less than $250,000), during any 90-day period for any one
shareholder. Should payment be made in securities, the redeeming shareholder may
incur brokerage costs in converting such securities to cash.
TAXATION
- --------
Each of the Series has qualified, and intends to continue to qualify each year,
as a regulated investment company under Subchapter M of the Code. In order to so
qualify, a mutual fund must, among other things, (i) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, gains from the sale of securities or foreign currencies, or
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (ii) distribute at least 90% of its dividend,
interest and certain other taxable income each year; and (iii) at the end of
each fiscal quarter maintain at least 50% of the value of its total assets in
cash, government securities, securities of other regulated investment companies
and other securities of issuers which represent, with respect to each issuer, no
more than 5% of the value of a fund's total assets and 10% of the outstanding
voting securities of such issuer, and with no more than 25% of its assets
invested in the securities (other than those of the government or other
regulated investment companies) of any one issuer or of two or more issuers
which the fund controls and which are engaged in the same, similar or related
trades and businesses.
To the extent each of the Series qualifies for treatment as a regulated
investment company, it will not be subject to federal income tax on income and
net capital gains paid to shareholders in the form of dividends or capital gains
distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Series' "required distributions" over actual distributions in any calendar year.
Generally, the "required distribution" is 98% of a Series' ordinary income for
the calendar year plus 98% of its capital gain net income recognized during the
one-year period ending on October 31 plus undistributed amounts from prior
years. The Series intend to make distributions sufficient to avoid imposition of
the excise tax. Distributions declared by the Series during October, November or
December to shareholders of record during such month and paid by January 31 of
the following year will be taxable to shareholders in the calendar year in which
they are declared, rather than the calendar year in which they are received.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Series accrues interest or other receivables or accrues
expenses or liabilities denominated in a foreign currency and the time the
Series actually collects such receivables, or pays such liabilities, are
generally treated as ordinary income or loss. Similarly, a portion of the gains
or losses realized on disposition of debt securities denominated in a foreign
currency may also be treated as ordinary gain or loss. These gains, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Series' investment company taxable income to be distributed to its
shareholders, rather than increasing or decreasing the amount of the Series'
capital gains or losses.
When a Series writes a call, or purchases a put option, an amount equal to the
premium received or paid by it is included in the Series' assets and liabilities
as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked-to-
market" to reflect the current market value of the option written. The current
market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which a Series has written
expires on its stipulated expiration date, the Series recognizes a short-term
capital gain. If a Series enters into a closing purchase transaction with
respect to an option which the Series has written, the Series realizes a short-
term gain (or loss if the cost of the closing transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option is
extinguished. If a call option which a Series has written is exercised, the
Series realizes a capital gain or loss from the
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sale of the underlying security and the proceeds from such sale are increased by
the premium originally received.
The premium paid by a Series for the purchase of a put option is recorded in the
Series' assets and liabilities as an investment and subsequently adjusted daily
to the current market value of the option. For example, if the current market
value of the option exceeds the premium paid, the excess would be unrealized
appreciation and, conversely, if the premium exceeds the current market value,
such excess would be unrealized depreciation. The current market value of a
purchased option is the last sale price on the principal Exchange on which such
option is traded or, in the absence of a sale, the mean between the last bid and
asked prices. If an option which a Series has purchased expires on the
stipulated expiration date, the Series realizes a short-term or long-term
capital loss for Federal income tax purposes in the amount of the cost of the
option. If a Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale which will be decreased by the premium originally paid.
Accounting for options on certain stock indices will be in accordance with
generally accepted accounting principles. The amount of any realized gain or
loss on closing out such a position will result in a realized gain or loss for
tax purposes. Such options held by a Series at the end of each fiscal year on a
broad-based stock index will be required to be "marked-to-market" for Federal
income tax purposes. Sixty percent of any net gain or loss recognized on such
deemed sales or on any actual sales will be treated as long-term capital gain or
loss and the remainder will be treated as short-term capital gain or loss.
Certain options, futures contracts and options on futures contracts utilized by
the Series are "Section 1256 contracts." Any gains or losses on Section 1256
contracts held by a Series at the end of each taxable year (and on October 31 of
each year for purposes of the 4% excise tax) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they were realized
and the resulting gain or loss is treated as a 60/40 gain or loss.
The Taxpayer Relief Act of 1997 also provides, in general, that if there is a
constructive sale (e.g., short sale against the box) of an appreciated financial
position the taxpayer must recognize gain as if such position were sold,
assigned, or otherwise terminated at its fair market value as of the date of the
constructive sale and immediately repurchased. Shareholders will be subject to
federal income taxes on distributions made by the Series whether received in
cash or additional shares of the Series. Distributions of net investment income
and net short-term capital gains, if any, will be taxable to shareholders as
ordinary income. Distributions of net long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains, without regard to how long a
shareholder has held shares of the Series. A loss on the sale of shares held for
six months or less will be treated as a long-term capital loss to the extent of
any long-term capital gain dividend paid to the shareholder with respect to such
shares. Dividends eligible for designation under the dividends received
deduction and paid by a Series may qualify in part for the 70% dividends
received deduction for corporations provided, however, in respect of any
dividend, that those shares have been held for at least 46 days during the 90-
day period that begins 45 days before the stock becomes ex-dividend with respect
to such dividend. The Series will notify shareholders each year of the amount of
dividends and distributions, including the amount of any distribution of long-
term capital gains and the portion of its dividends which may qualify for the
70% deduction.
The Taxpayer Relief Act of 1997, which was signed into law by President Clinton
on August 5, 1997, makes sweeping changes to the Internal Revenue Code. New
special rules apply in determining the Fund's income which, in turn, will effect
the amount of the Fund's distributions to you. Generally, after July 28, 1997,
long-term capital gain rates will apply for assets held more than 18 months.
Subject to certain transitional rules, the maximum tax rate for long-term
capital gains is 20%. Gains from sales or exchanges after July 28, 1997 of
assets held for more than 12 months but not more than 18 months ("mid-term
gains") are still subject to a maximum capital gains rate of 28%. The Act does
not contain any relief in the capital gain rates for corporations. Beginning in
1998, the Act allows nondeductible contributions to two new types of IRAs, Roth
IRAs and Education IRAs, subject to various income and other limitations. Also,
the income limits for deductible IRA contributions are increased for years after
1997.
Each class of shares of a Series will share proportionately in the investment
income and expenses of that Series, except that the respective SwissKey Fund
class and Brinson Fund-Class N for each Series will incur distribution fees
under their respective 12b-1 plans.
It is expected that certain dividends and interest received by the Global Funds
and the Non-U.S. Equity Fund will be subject to foreign withholding taxes. If
more than 50% in value of the total assets of a fund at the close of any taxable
year consists of stocks or securities of foreign corporations, such fund may
elect to treat any foreign taxes paid by it as if paid by its shareholders.
These Series will notify shareholders in writing each year whether it has made
the election and the amount of foreign taxes it has elected to have treated as
paid by the shareholders. If a Series makes the election, its shareholders will
be required to include in gross income their proportionate share of the amount
of foreign taxes paid by the Series and will be entitled to claim either a
credit or deduction for their share of the taxes in computing their U.S. federal
income tax subject to certain limitations. No deduction for foreign taxes may be
claimed by shareholders who do not itemize deductions.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his or her total foreign
source taxable income. For this purpose, the source of each Series' income flows
through to its shareholders. Gains from the sale of securities will be treated
as derived from U.S. sources and certain currency fluctuation gains, including
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fluctuation gains from foreign currency denominated debt securities, receivables
and payables, will be treated income derived from U.S. sources. The limitation
on the foreign tax credit is applied separately to foreign source passive income
(as defined for purposes of foreign tax credit), such as foreign source passive
income received from the respective Series. Because of changes made by the Code,
shareholders may be unable to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by the Series. Beginning in 1998,
an individual with $300 or less ($600 or less for joint filers) of foreign tax
credits is generally exempt from the foreign tax credit limitation and likely
will not have to file Form 1116 in order to claim a foreign tax credit.
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The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury Regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and
Regulations. The Code and Regulations are subject to change by legislative or
administrative action at any time and retroactively.
Dividends and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state and local taxes as well as the application of the
foreign tax credit.
The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Series, including the possibility that distributions
may be subject to a 30% U.S. withholding tax (or a reduced rate of withholding
provided by treaty).
PERFORMANCE CALCULATIONS
Performance information for the SwissKey Fund class, Brinson Fund-Class N and
Brinson Fund-Class I shares of each Series will vary due to the effect of
expense ratios on the performance calculations.
TOTAL RETURN
- ------------
Current yield and total return quotations used by the Series (and classes
of shares) are based on standardized methods of computing performance mandated
by rules adopted by the SEC. As the following formula indicates, the average
annual total return is determined by multiplying a hypothetical initial purchase
order of $1,000 by the average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes that all dividends and
distributions are reinvested at the net asset value on the reinvestment dates
during the period. The quotation assumes the account was completely redeemed at
the end of each period and deduction of all applicable charges and fees.
According to the SEC formula:
P(1+T)/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 a 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).
Based upon the foregoing calculations, the average annual total return for the
Brinson Fund-Class I (previously Brinson Fund Class) shares of:*
(i) the Global Fund for the one-and three-year periods ended June 30,
1997 and the periods August 31, 1992 (commencement of operations)
through June 30, 1997 was 18.79%, 15.87% and 12.10%, respectively;
(ii) the Global Equity Fund for the one-and three-year periods ended June
30, 1997 and the period January 28, 1994 (commencement of operations)
through June 30, 1997 was 21.26%, 17.32%, and 13.49%, respectively;
(iii) the Global Bond Fund for the one-and three-year periods ended June
30, 1997 and the period July 30, 1993 (commencement of operations)
through June 30, 1997 was 7.71%, 10.16% and 7.48%, respectively;
(iv) the U.S. Balanced Fund for the one-year period ended June 30, 1997
and the period December 30, 1994 (commencement of operations) through
June 30, 1997 was 15.50% and 17.41%, respectively;
(v) the U.S. Equity Fund for the one-and three-year periods ended June
30, 1997 and the period February 22, 1994 (commencement of
operations) through June 30, 1997 was 31.87%, 27.85% and 23.61%,
respectively;
(vi) the U.S. Bond Fund for the one-year period ended June 30, 1997 and
the period August 31, 1995 (commencement of operations)
through June 30, 1997 was 8.45% and 6.58%, respectively; and
(vii) the Non-U.S. Equity Fund for the one-and three-year periods ended
June 30, 1997 and the period August 31, 1993 (commencement of
operations) through June 30, 1997 was 20.27%, 14.09% and 10.16%,
respectively.
Based upon the foregoing calculations, the average annual total return for the
SwissKey Fund class shares of:*
(i) the Global Fund for the one-year period ended June 30,
1997 and the period July 31, 1995 (commencement of operations)
through June 30, 1997 was 18.13% and 16.38%, respectively;
(ii) the Global Equity Fund for the one-year period ended June 30,
1997 and the period July 31, 1995 (commencement of operations)
through June 30, 1997 was 20.34% and 20.73%, respectively;
(iii) the Global Bond Fund for the one-year period ended June 30,
1997 and the period July 31, 1995 (commencement of operations)
through June 30, 1997 was 7.20% and 8.55%, respectively;
* The U.S. Large Capitalization Equity Fund had not commenced operations as
of the time periods indicated.
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(iv) the U.S. Balanced Fund for the one-year period ended June 30, 1997
and the period July 31, 1995 (commencement of operations) through
June 30, 1997 was 14.99% and 13.86%, respectively;
(v) the U.S. Equity Fund for the one-year period ended June
30, 1997 and the period July 31, 1995 (commencement of operations)
through June 30, 1997 was 31.26% and 29.83%, respectively;
(vi) the U.S. Bond Fund for the one-year period ended June 30, 1997 and
the period August 31, 1995 (Commencement of operations) through June
30, 1997 was 7.91% and 6.09%, respectively; and
(vii) the Non-U.S. Equity Fund for the one-year period ended June 30, 1997
and the period July 31, 1995 (commencement of operations) through
June 30, 1997 was 19.32% and 18.36%, respectively.
The Brinson Fund-Class N shares of each Series commenced operations on June 30,
1997, and therefore, the average annual total return for prior periods is not
available.
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YIELD
- -----
As indicated below, current yield is determined by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses accrued
for the period include any fees charged to all shareholders during the 30-day
base periods. According to the SEC formula:
Yield = 2[(a-b + 1)/6/ - 1]
-------------------
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield of a Series may be calculated by dividing the net investment income
per share earned by the particular Series during a 30-day (or one month) period
by the net asset value per share on the last day of the period and annualizing
the result on a semi-annual basis. A Series' net investment income per share
earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
FINANCIAL STATEMENTS
The Series' Financial Statements for the fiscal year ended June 30, 1997 and the
Reports of Independent Auditors thereon, which are contained in the Series'
Annual Report dated June 30, 1997 (which do not include the Brinson U.S. Large
Capitalization Equity Fund, which had not commenced operations as of the time
period indicated), are incorporated herein by reference.
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CORPORATE DEBT RATINGS APPENDIX A
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment 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 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.
Moody's also supplies numerical indicators 1, 2, and 3 to rating categories. The
modifier 1 indicates the security is in the higher end of its rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking toward the lower end of the category.
Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA - This is the highest rating assigned by Standard & Poor's Ratings
Group to a debt obligation and indicates an extremely strong capacity to
pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and in the majority of
instances they differ from the AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more
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susceptible to the adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lend to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC - Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest or repay principal.
CC - The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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