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THE BRINSON FUNDS
GLOBAL FUND
GLOBAL EQUITY FUND
GLOBAL BOND FUND
U.S. BALANCED FUND
U.S. EQUITY FUND
U.S. LARGE CAPITALIZATION EQUITY FUND
U.S. LARGE CAPITALIZATION GROWTH FUND
U.S. SMALL CAPITALIZATION GROWTH FUND
U.S. BOND FUND
HIGH YIELD FUND
GLOBAL (EX-U.S.) EQUITY FUND
EMERGING MARKETS EQUITY FUND
EMERGING MARKETS DEBT FUND
STATEMENT OF ADDITIONAL INFORMATION
October 14, 1999
The Brinson Funds (the "Trust") currently offers thirteen 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 UBS Investment Funds class. Information concerning the Brinson
Fund-Class I of each series is included in a separate Prospectus dated October
14, 1999. Information concerning the Brinson Fund-Class N of each series is
included in a separate Prospectus dated October 14, 1999. Information concerning
the UBS Investment Funds class of shares of each series is included in a
separate Prospectus dated October 14, 1999. This Statement of Additional
Information ("SAI") 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 and the Annual Report may be obtained without charge from the Trust
at the addresses and telephone numbers below.
UNDERWRITER: ADVISOR:
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Funds Distributor, Inc. Brinson Partners, Inc.
60 State Street, Suite 1300 209 South LaSalle Street
Boston, MA 02109 Chicago, IL 60604-1295
1-800-448-2430 (Brinson Fund-Class I 1-800-448-2430 (Brinson Fund-Class I and
and Brinson Fund-Class N) Brinson Fund-Class N)
1-800-794-7753 (UBS Investment Funds class) 1-800-794-7753 (UBS Investment
Funds Class)
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The Annual Reports dated June 30, 1999 to shareholders of the Trust's
series are separate documents supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing in
each of the Annual Reports are incorporated by reference into (legally made a
part of) this SAI. The audited financial statements, accompanying notes and
reports of independent auditors appearing in the Annual Reports dated December
31, 1997 and December 31, 1998 for the U.S. Large Capitalization Growth Fund,
U.S. Small Capitalization Growth Fund and High Yield Fund also are incorporated
by reference into this SAI.
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TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE TRUST.................................................................... 5
Diversified Status............................................................................ 5
General Definitions........................................................................... 5
INVESTMENT STRATEGIES.................................................................................. 6
INVESTMENTS RELATING TO ALL FUNDS...................................................................... 6
Cash and Cash Equivalents..................................................................... 6
Repurchase Agreements......................................................................... 7
Reverse Repurchase Agreements................................................................. 7
Borrowing..................................................................................... 8
Loans of Portfolio Securities................................................................. 8
Swaps......................................................................................... 8
Futures....................................................................................... 9
Options....................................................................................... 10
Index Options................................................................................. 13
Special Risks of Options on Indices........................................................... 13
Rule 144A and Illiquid Securities............................................................. 14
Investment Company Securities................................................................. 14
Other Investments............................................................................. 14
INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL EQUITY FUND, U.S. BALANCED FUND, U.S. EQUITY FUND, U.S.
LARGE CAPITALIZATION EQUITY FUND, U.S. LARGE GROWTH FUND, U.S. SMALL CAPITALIZATION GROWTH FUND, GLOBAL
(EX-U.S.) EQUITY FUND AND EMERGING MARKETS EQUITY FUND................................................. 15
Equity Securities............................................................................. 15
INVESTMENTS RELATING TO THE GLOBAL FUNDS, U.S. LARGE CAPITALIZATION GROWTH FUND, U.S. SMALL
CAPITALIZATION GROWTH FUND, HIGH YIELD FUND, GLOBAL (EX-U.S.) EQUITY FUND, EMERGING MARKETS EQUITY FUND
AND EMERGING MARKETS DEBT FUND......................................................................... 15
Foreign Securities............................................................................ 15
Forward Foreign Currency Contracts............................................................ 16
Options on Foreign Currencies................................................................. 16
Short Sales................................................................................... 17
INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL BOND FUND, U.S. BALANCED FUND, U.S. BOND FUND, HIGH
YIELD FUND, EMERGING MARKETS EQUITY FUND AND EMERGING MARKETS DEBT FUND................................ 18
Lower Rated Debt Securities................................................................... 18
Pay-In-Kind Bonds............................................................................. 19
Convertible Securities........................................................................ 19
When-Issued Securities........................................................................ 19
Mortgage-Backed Securities and Mortgage Pass-Through Securities............................... 20
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits
("REMICs")............................................................................... 22
Other Mortgage-Backed Securities.............................................................. 23
Asset-Backed Securities....................................................................... 23
Zero Coupon and Delayed Interest Securities................................................... 24
INVESTMENTS RELATING TO THE GLOBAL FUND, HIGH YIELD FUND, EMERGING MARKETS EQUITY FUND AND EMERGING
MARKETS DEBT FUND...................................................................................... 25
Emerging Markets Investments.................................................................. 25
Risks of Investing in Emerging Markets........................................................ 27
Investments in Russian Securities............................................................. 29
Investments in Affiliated Investment Companies................................................ 29
INVESTMENT RESTRICTIONS................................................................................ 30
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MANAGEMENT OF THE TRUST................................................................................ 33
Trustees and Officers......................................................................... 33
Compensation Table............................................................................ 35
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................................................... 36
INVESTMENT ADVISORY AND OTHER SERVICES................................................................. 44
Advisor....................................................................................... 44
Administrator................................................................................. 49
Independent Auditors.......................................................................... 53
Legal Counsel................................................................................. 53
Underwriter................................................................................... 53
Distribution Plan............................................................................. 54
Code of Ethics................................................................................ 56
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS....................................................... 57
Portfolio Turnover............................................................................ 60
SHARES OF BENEFICIAL INTEREST.......................................................................... 61
PURCHASES.............................................................................................. 62
Exchanges of Shares........................................................................... 63
Transfer of Securities........................................................................ 63
Net Asset Value............................................................................... 64
REDEMPTIONS............................................................................................ 65
TAXATION............................................................................................... 67
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................................... 68
PERFORMANCE CALCULATIONS............................................................................... 69
Total Return.................................................................................. 70
Yield......................................................................................... 74
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS............................................... 74
CORPORATE DEBT RATINGS --- APPENDIX A................................................................. A-1
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GENERAL INFORMATION ABOUT THE TRUST
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 thirteen 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. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund, U.S. Bond
Fund, High Yield Fund, Global (Ex-U.S.) Equity Fund (formerly, the Non-U.S.
Equity Fund), Emerging Markets Equity Fund and Emerging Markets Debt Fund. The
Trust currently offers three classes of shares for each Series: the Brinson
Fund-Class I, Brinson Fund-Class N and UBS Investment Funds class of shares. 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 UBS Investment Funds class of 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. The Trust was
organized as a Delaware business trust on December 1, 1993.
Diversified Status
Each of the Global Fund, Global Equity Fund, U.S. Balanced Fund, U.S.
Equity Fund, U.S. Small Capitalization Growth Fund, U.S. Bond Fund, High Yield
Fund and Global (Ex-U.S.) Equity Fund is "diversified" as that term is defined
in the Investment Company Act of 1940, as amended (the "Act"). Each of the
Global Bond Fund, U.S. Large Capitalization Equity Fund, U.S. Large
Capitalization Growth Fund, Emerging Markets Equity Fund and Emerging Markets
Debt Fund is classified as "non-diversified" for purposes of the Act, which
means that each Fund is not limited by the Act with regard to the portion of its
assets that may be invested in the securities of a single issuer. To the extent
that a non-diversified Fund makes investments in excess of 5% of its assets in
the securities of a particular issuer, its exposure to the risks associated with
that issuer is increased. Because each Fund may invest in a limited number of
issuers, the performance of particular securities may adversely affect the
performance of the Fund or subject the Fund to greater price volatility than
that experienced by diversified investment companies.
General Definitions
As used throughout this SAI, the following terms shall have the meanings
listed:
"Act" shall mean the Investment Company Act of 1940, as amended.
"Advisor" or "Brinson Partners" shall mean Brinson Partners, Inc., which
serves as the Funds' investment advisor.
"Board" shall mean the Board of Trustees of the Trust.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Funds" or "Series" shall mean collectively 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 Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund, U.S. Bond Fund, High Yield Fund, Global (Ex-U.S.)
Equity Fund, Emerging Markets Equity Fund and Emerging Markets Debt Fund (or
individually, a "Fund" or a "Series").
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"Global Funds" shall mean collectively the Global Fund, Global Equity Fund,
Global Bond Fund, Emerging Markets Equity Fund and Emerging Markets Debt Fund
(or individually, as the "Global Fund").
"Moody's" shall mean Moody's Investors Services, Inc.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's Ratings Group.
"Trust" shall mean The Brinson Funds, an open-end management investment
company registered under the Act.
"U.S. Funds" shall mean collectively the U.S. Balanced Fund, U.S. Equity
Fund, U.S. Large Capitalization Equity Fund, U.S. Large Capitalization Growth
Fund, U.S. Small Capitalization Growth Fund, U.S. Bond Fund and High Yield Fund.
"1933 Act" shall mean the Securities Act of 1933, as amended.
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 without the approval of the shareholders.
INVESTMENTS RELATING TO ALL FUNDS
The following discussion applies to all Series.
Cash and Cash Equivalents
The Series may invest a portion of their assets in short-term debt
securities (including repurchase agreements and reverse repurchase agreements)
of corporations, the U.S. government and its agencies and instrumentalities and
banks and finance companies, which may be denominated in any currency. The
Series may also invest a portion of their assets in shares issued by money
market mutual funds. When unusual market conditions warrant, a Series may make
substantial temporary defensive investments in cash equivalents up to a maximum
of 100% of its net assets. Cash equivalent holdings may be in any currency
(although such holdings may not constitute "cash or cash equivalents" for tax
diversification purposes under the Code). When a Series invests for defensive
purposes, it may affect the attainment of the Series' investment objective.
Under the terms of an exemptive order issued by the SEC, each Series may
invest cash (i) held for temporary defensive purposes; (ii) not invested pending
investment in securities; (iii) that is set aside to cover an obligation or
commitment of the Series to purchase securities or other assets at a later date;
(iv) to be invested on a strategic management basis (i-iv is herein referred to
as "Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Series' securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained Brinson Partners to manage its
investments. The Trustees of the Trust also serve as Trustees of the Brinson
Supplementary Trust. The Supplementary Series Trust invests in U.S. dollar
denominated money market instruments having a dollar-weighted average maturity
of 90 days or less, and operates in accordance with Rule 2a-7 under the Act. A
Series' investment of Uninvested Cash in shares of the Supplementary Series
Trust will not exceed 25% of the Series' total assets. In the event that
Brinson
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Partners waives 100% of its investment advisory fee with respect to a Series, as
calculated monthly, then that Series will be unable to invest in the
Supplementary Trust Series until additional investment advisory fees are owed by
the Series.
Repurchase Agreements
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 are
considered under the Act to be collateralized loans by a Series to the seller
secured by the securities transferred to the Series. 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
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.
Reverse Repurchase Agreements
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 SAI as "Segregated Assets"), and
such Segregated Assets shall be maintained in accordance with pertinent
positions of the SEC.
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'
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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
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 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 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
The Series may lend portfolio securities to qualified broker-dealers and
financial institutions pursuant to agreements 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 respective Series.
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 the Advisor under the supervision of
the Board, including the creditworthiness of the borrower and then only if the
consideration to be received from such loans would justify the risk.
Creditworthiness will be monitored on an ongoing basis by the Advisor.
Swaps
The Series (except for the Global Equity Fund, U.S. Equity Fund, U.S. Large
Capitalization Equity Fund, U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund, High Yield Fund and Global (Ex-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. A Series expects 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.
Interest rate swaps involve the exchange by a Series with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return with a
predetermined range of interest rates or values.
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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.
Swaps do not involve the delivery of securities or other underlying assets or
principal. 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 using the appropriate methodology prescribed by the
Internal Revenue Service.
The equity swaps in which all aforementioned Series intend to invest
involve agreements with a counterparty. The return to the Series on any equity
swap contract will be the total return on the notional amount of the contract as
if it were invested in the stocks comprising the contract index in exchange for
an interest component based on the notional amount of the agreement. A Series
will only enter into an equity swap contract on a net basis, i.e., the two
parties' obligations are netted out, with the Series paying or receiving, as the
case may be, only the net amount of the payments. Payments under the equity
swap contracts may be made at the conclusion of the contract or periodically
during its term.
If there is a default by the counterparty to a swap contract, the Series
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a swap contract or that, in the
event of a default, the Series will succeed in pursuing contractual remedies.
The Series thus assumes the risk that it may be delayed in or prevented from
obtaining payments owed to it pursuant to a swap contract. However, the amount
at risk is only the net unrealized gain, if any, on the swap, not the entire
notional amount. The Advisor will closely monitor, subject to the oversight of
the Board, the creditworthiness of swap counterparties in order to minimize the
risk of swaps.
The Advisor and the Trust do not believe that the Series' obligations under
swap contracts are senior securities and, accordingly, the Series will not treat
them as being subject to its borrowing or senior securities restrictions.
However, the net amount of the excess, if any, of a Series' obligations over its
entitlements with respect to each swap contract will be accrued on a daily basis
and an amount of cash, U.S. government securities or other liquid assets having
an aggregate market value at least equal to the accrued excess will be
segregated in accordance with SEC positions. To the extent that a Series cannot
dispose of a swap in the ordinary course of business within seven days at
approximately the value at which the Series has valued the swap, the Series will
treat the swap as illiquid and subject to its overall limit on illiquid
investments of 15% of the Series' total net assets.
Futures
The Series may enter into contracts for the purchase or sale for future
delivery of securities and indices. The Global Funds, Global (Ex-U.S.) Equity
Fund, U.S. Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund and High Yield 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 the
Series' assets.
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When a Series enters into a futures transaction, it must deliver to the
futures commission merchant selected by the 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
may also effect futures transactions through futures commission merchants who
are affiliated with the Advisor or the Series in accordance with procedures
adopted by the Board.
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 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 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
The Series may purchase and write call or put options on foreign or U.S.
securities and indices and enter into related closing transactions, 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, the U.S. Large Capitalization
Growth Fund, U.S. Small Capitalization
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Growth Fund and the Global (Ex-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 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
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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
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
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.
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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.
Rule 144A and Illiquid Securities
The Series may invest in securities that are exempt under Rule 144A from
the registration requirements of the 1933 Act. Those securities purchased under
Rule 144A are traded among qualified institutional investors.
The Board 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 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 and Brinson Partners will continue to monitor the liquidity
of that security to ensure that each Series has no more than 15% of its net
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' net assets, excluding restricted
securities eligible for resale pursuant to Rule 144A that have been determined
to be liquid pursuant to a policy and procedures adopted by the Trust's Board
which includes continuing oversight by the Board.
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.
Investment Company Securities
Securities of other investment companies may be acquired by each Series to
the extent that such purchases are consistent with that entity's investment
objectives and restrictions and are permitted under the Act. The Act requires
that, as determined immediately after a purchase is made, (i) not more than 5%
of the value of the Series' total assets will be invested in the securities of
any one investment company, (ii) not more than 10% of the value of the Series'
total assets will be invested in securities of investment companies as a group
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Series. Certain exceptions to these limitations may
apply. As a shareholder of another investment company, a Series would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the expenses that such a Series would bear in connection with its own
operations.
Other Investments
The Board may, in the future, authorize a Series to invest in securities
other than those listed in this SAI 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.
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INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL EQUITY FUND, U.S. BALANCED FUND,
U.S. EQUITY FUND, U.S. LARGE CAPITALIZATION EQUITY FUND, U.S. LARGE
CAPITALIZATION GROWTH FUND, U.S. SMALL CAPITALIZATION GROWTH FUND, HIGH YIELD
FUND, GLOBAL (EX-U.S.) EQUITY FUND AND EMERGING MARKETS EQUITY FUND
Equity Securities
The Series may invest in a broad range of equity securities of U.S. and
non-U.S. issuers, including common stocks of companies or closed-end investment
companies, preferred stocks, debt securities convertible into or exchangeable
for common stock, securities such as warrants or rights that are convertible
into common stock and sponsored or unsponsored American, European and Global
depositary receipts ("Depositary Receipts"). The issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States. The Series, except for the U.S. Small Capitalization Growth
Fund, expect their U.S. equity investments to emphasize large and intermediate
capitalization companies. The U.S. Small Capitalization Growth Fund expects its
U.S. equity investments to emphasize small capitalization companies. The Global
Fund and U.S. Small Capitalization Growth Fund may also invest in small
capitalization equity markets. The equity markets in the non-U.S. component of
the Series will typically include available shares of larger capitalization
companies. Capitalization levels are measured relative to specific markets,
thus large, intermediate and small capitalization ranges vary country by
country. The Global Fund may invest in equity securities of companies
considered by the Advisor to be in their post-venture capital stage, or "post-
venture capital companies." A post-venture capital company is a company that
has received venture capital financing either: (a) during the early stages of
the company's existence or the early stages of the development of a new product
or service, or (b) as part of a restructuring or recapitalization of the
company. The Global Fund may also invest in open-end investment companies
advised by Brinson Partners, in equity securities of issuers in emerging markets
and in securities with respect to which the return is derived from the equity
securities of issuers in emerging markets.
INVESTMENTS RELATING TO THE GLOBAL FUNDS, U.S LARGE CAPITALIZATION GROWTH FUND,
U.S. SMALL CAPITALIZATION GROWTH FUND, HIGH YIELD FUND, GLOBAL (EX-U.S.) EQUITY
FUND, EMERGING MARKETS EQUITY FUND AND EMERGING MARKETS DEBT FUND
The following discussion of strategies, techniques and policies applies
only to the Global Fund, Global Equity Fund, Global Bond Fund, U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund, High Yield
Fund, Global (Ex-U.S.) Equity Fund, Emerging Markets Equity Fund and Emerging
Markets Debt 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.
The Global Bond Fund, High Yield Fund, Emerging Markets Equity Fund and
Emerging Markets Debt Fund may invest in Eurodollar securities, which are fixed
income securities of a U.S. issuer or a
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foreign issuer that are issued outside the United States. Interest and dividends
on Eurodollar securities are payable in U.S. dollars.
On January 1, 1999, the European Monetary Union introduced a new single
currency, the Euro, which replaced the national currencies of participating
member nations. If the Series hold investments in nations with currencies
replaced by the Euro, the investment process, including trading, foreign
exchange, payments, settlements, cash accounts, custody and accounting, was
impacted. Because this change to a single currency is new and untested, the
establishment of the Euro may result in market volatility. For the same reason,
it is not possible to predict the impact of the Euro on the business or
financial condition of European issuers which the Funds may hold in their
portfolios and the impact of the Euro on the performance of the Funds. To the
extent the Funds hold non-U.S. dollar (Euro or other) denominated securities,
they will still be exposed to currency risk due to fluctuations in those
currencies versus the U.S. dollar.
Additional risks that may result include the fact that European issuers in
which the Series invest may face substantial conversion costs which may not be
accurately anticipated and may impact issuer profitability and
creditworthiness.
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
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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.
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.
Short Sales
The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund and High Yield Fund may from time to time sell securities short. In the
event that the Advisor anticipates that the price of a security will decline, it
may sell the security short and borrow the same security from a broker
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or other institution to complete the sale. The Series will only enter into short
sales for hedging purposes. The Series will incur a profit or a loss, depending
upon whether the market price of the security decreases or increases between the
date of the short sale and the date on which the Series must replace the
borrowed security. All short sales will be fully collateralized and a Series
will not sell securities short if immediately after and as a result of the short
sale, the value of all securities sold short by the Series exceeds 25% of its
total assets. Each Series will also limit short sales of any one issuer's
securities to 2% of its total assets and to 2% of any one class of the issuer's
securities. Short sales involve certain risks and special considerations.
Possible losses from short sales may be unlimited, whereas losses from direct
purchases of securities are limited to the total amount invested.
INVESTMENTS RELATING TO THE GLOBAL FUND, GLOBAL BOND FUND, U.S. BALANCED FUND,
U.S. BOND FUND, HIGH YIELD FUND, EMERGING MARKETS EQUITY FUND AND EMERGING
MARKETS DEBT FUND
The following discussion applies to the Global Fund, Global Bond Fund, U.S.
Balanced Fund, U.S. Bond Fund, High Yield Fund, Emerging Markets Equity Fund and
Emerging Markets Debt Fund.
Lower Rated Debt Securities
Fixed income securities rated lower than Baa by Moody's or BBB by S&P are
below investment grade and 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 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. The risk of loss due to
default by the issuer is significantly greater for the holders of low-grade
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer. 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 and the Series' ability to dispose of
particular issues when necessary to meet the Series' liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer may be adversely affected.
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Low-grade securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Series. If a call were
exercised by the issuer during a period of declining interest rates, the Series
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Series and any
dividends to investors.
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 SAI.
Securities issued by foreign issuers rated below investment grade entail
greater risks than higher rated securities, including risk of untimely interest
and principal payment, default, price volatility and may present problems of
liquidity and valuation. The Emerging Markets Equity Fund and the Emerging
Markets Debt Fund do not intend to limit investments in low-grade securities.
Pay-In-Kind Bonds
The High Yield Fund, the Emerging Markets Equity Fund and the Emerging
Markets Debt Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are
securities that pay interest through the issuance of additional bonds. The
Series will be deemed to receive interest over the life of such bonds and may be
treated for federal income tax purposes as if interest were paid on a current
basis, although no cash interest payments are received by the Series until the
cash payment date or until the bonds mature.
Convertible Securities (also for U.S. Large Capitalization Growth Fund and U.S.
Small Capitalization Growth Fund)
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 (also for U.S. Large Capitalization Growth Fund and U.S.
Small Capitalization Growth Fund)
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
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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. The Segregated Assets maintained by the Series
with respect to any when-issued or forward delivery securities shall be liquid,
unencumbered and marked-to-market daily, and such Segregated Assets shall be
maintained in accordance with pertinent SEC positions.
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
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 Fannie
Mae, formerly known as 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
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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) 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
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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 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.
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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 SAI have been supplemented.
Asset-Backed Securities (also for U.S. Large Capitalization Growth Fund and U.S.
Small Capitalization Growth Fund)
The Series may invest a portion of their 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). The High Yield Fund will not invest
in asset-backed securities with remaining effective maturities of less than
thirteen months.
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.
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
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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.
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
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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, each 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, HIGH YIELD FUND, EMERGING MARKETS
EQUITY FUND AND EMERGING MARKETS DEBT FUND
Emerging Markets Investments
The Global Fund may invest up to 10% of its assets, and the Emerging
Markets Equity Fund and Emerging Markets Debt Fund may invest substantially all
of their 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 High Yield Fund may invest up to
25% of its assets in securities of foreign issuers, which may include 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
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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 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.
The High Yield Fund, the Emerging Markets Equity Fund and the Emerging
Markets Debt Fund may invest in Brady Bonds, which 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 Plan debt
restructurings have been implemented to date in Argentina, Bulgaria, Brazil,
Costa Rica, Jordan, Mexico, Nigeria, the Philippines, Poland, Uruguay, Panama,
Peru and Venezuela. Brady Bonds have been issued only in recent years, and for
that reason do not have a very long payment history. 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.
Brady Bonds are often viewed as having three or four valuation components:
the collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
Bonds in which the Series invests will not be subject to restructuring
arrangements or to requests for a new credit which may cause the Series to
suffer a loss of interest or principal in any of its holdings.
The High Yield Fund, the Emerging Markets Equity Fund and the Emerging
Markets Debt Fund may invest a portion of their assets in 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 cash
flow of the underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Securities of the type in which the Series
anticipate investing typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. The Series
are permitted to invest in a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities. Thus, investments by a Series in Structured Securities will be
limited by the Series' prohibition on investing more than 15% of its net assets
in illiquid securities.
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The High Yield Fund, the Emerging Markets Equity Fund and the Emerging
Markets Debt Fund 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. Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender with
respect to the Participations. Even under such a structure, in the event of the
Lender's insolvency, the Lender's servicing of the Participation may be delayed
and the assignability of the Participation may be impaired. A Series will
acquire the Participations only if the Lender interpositioned between the Series
and the borrower is determined by the Advisor to be creditworthy.
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
There are additional risks inherent in investing in less developed
countries which are applicable to the Global Fund, High Yield Fund, Emerging
Markets Equity Fund and Emerging Markets Debt Fund. The Series consider a
country to be an "emerging market" if it is defined as an emerging or developing
economy by any one of the following: the International Bank for Reconstruction
and Development (i.e., the World Bank), the International Finance Corporation,
or the United Nations or its authorities. An emerging market security is a
security issued by a government or other issuer that, in the opinion of the
Advisor, has one or more of the following characteristics: (i) the principal
trading market of the security is an emerging market; (ii) the primary revenue
of the issuer (at least 50%) is generated from goods produced or sold,
investments made, or services performed in an emerging market country; or (iii)
at least 50% of the assets of the issuer are situated in emerging market
countries.
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
27
<PAGE>
currency depreciation, large amounts of external debt, balance of payments and
trade difficulties and 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 expect 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
28
<PAGE>
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 Russian Securities
The Global Fund, Emerging Markets Equity Fund and Emerging Markets Debt
Fund may invest in securities of Russian companies. The registration, clearing
and settlement of securities transactions in Russia are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. Ownership of shares of Russian companies is
evidenced by entries in a company's share register (except where shares are held
through depositories that meet the requirements of the Act) and the issuance of
extracts from the register or, in certain limited cases, by formal share
certificates. However, Russian share registers are frequently unreliable and a
Series could possibly lose its registration through oversight, negligence or
fraud. Moreover, Russia lacks a centralized registry to record securities
transactions and registrars located throughout Russia or the companies
themselves maintain share registers. Registrars are under no obligation to
provide extracts to potential purchasers in a timely manner or at all and are
not necessarily subject to state supervision. In addition, while registrars are
liable under law for losses resulting from their errors, it may be difficult for
a Series to enforce any rights it may have against the registrar or issuer of
the securities in the event of loss of share registration. Although Russian
companies with more than 1,000 shareholders are required by law to employ an
independent company to maintain share registers, in practice, such companies
have not always followed this law. Because of this lack of independence of
registrars, management of a Russian company may be able to exert considerable
influence over who can purchase or sell the company's shares by illegally
instructing the registrar to refuse to record transactions on the share
register. Furthermore, these practices may prevent a Series from investing in
the securities of certain Russian companies deemed suitable by the Advisor and
could cause a delay in the sale of Russian securities by the Series if the
company deems a purchaser unsuitable, which may expose the Series to potential
loss on its investment.
In light of the risks described above, the Board has approved certain
procedures concerning the Series' investments in Russian securities. Among
these procedures is a requirement that the Series will not invest in the
securities of a Russian company unless that issuer's registrar has entered into
a contract with the Series' sub-custodian containing certain protective
conditions including, among other things, the sub-custodian's right to conduct
regular share confirmations on behalf of the Series. This requirement will
likely have the effect of precluding investments in certain Russian companies
that the Series would otherwise make.
Investments in Affiliated Investment Companies
The Series may invest in securities issued by other registered investment
companies advised by Brinson Partners 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 the 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 the 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
the 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
29
<PAGE>
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 of the Brinson Relationship Funds. The investment
objective of the Brinson High Yield Fund is to maximize total U.S. dollar
return, consisting of capital appreciation and current income, while controlling
risk. The Brinson 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 Brinson
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 the 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 Equity Index, and, as such, at least 65% of its
assets are invested in small capitalization equity securities.
Each portfolio of the 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 portfolios of the 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 "The Funds" and "Risk Considerations" in each
Prospectus, or "Investment Strategies" in this SAI, each of the Funds 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 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, the U.S. Large Capitalization Growth Fund, U.S.
Small Capitalization Growth Fund, High Yield Fund, Emerging Markets
Equity Fund and Emerging Markets Debt 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
30
<PAGE>
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 (this does not apply to the U.S.
Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund, High Yield Fund, Emerging Markets Equity Fund and Emerging
Markets Debt Fund);
(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 (this
does not apply to the U.S. Large Capitalization Growth Fund, U.S.
Small Capitalization Growth Fund, High Yield Fund, Emerging Markets
Equity Fund and Emerging Markets Debt Fund);
(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 (this does not apply to the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund,
High Yield Fund, Emerging Markets Equity Fund and Emerging Markets
Debt Fund);
(xii) Invest in puts, calls, straddles or combinations thereof except to
the extent disclosed in a Series' Prospectus
(this does not apply to the U.S. Large Capitalization Growth Fund,
U.S. Small Capitalization Growth Fund, High Yield Fund, Emerging
Markets Equity Fund and Emerging Markets Debt Fund); and
31
<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 (this does not apply
to the U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund, High Yield Fund, Emerging Markets Equity
Fund and Emerging Markets Debt Fund).
32
<PAGE>
MANAGEMENT OF THE TRUST
The Trust is a Delaware business trust. Under Delaware law, the Board
has overall responsibility for managing the business and affairs of the Trust.
The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Series.
The Trustees and executive officers of the Trust, along with their
principal occupations over the past five years and their affiliations, if any,
with Brinson Partners, are listed below.
Trustees and Officers
<TABLE>
<CAPTION>
POSITION
WITH
NAME AGE THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ---- ----- ---------- -------------------------------------------
<S> <C> <C> <C>
Walter E. Auch 78 Trustee Retired; prior thereto, Chairman and CEO of Chicago Board
6001 N. 62nd Place of Options Exchange 1979-1986; Trustee of the Trust since
Paradise Valley, AZ 85253 May, 1994; Trustee, Brinson Relationship Funds since
1994; Trustee, Brinson Supplementary Trust since 1997;
Director, Thomson Asset Management Corp. since 1987;
Director, Fort Dearborn Income Securities, Inc. 1987-1995;
Director, Smith Barney VIP Fund since 1991; Director, SB
Advisers since 1992; Director, SB Trak since 1992;
Director, Banyan Realty Trust since 1988; 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 Funds
and Legend Properties, Inc.; Director, Geotek Industries,
Inc. 1987-1998.
Frank K. Reilly 63 Chairman and Professor, University of Notre Dame since 1982; Trustee
College of Business Trustee of the Trust since 1993; Trustee, Brinson Relationship
Administration Funds since 1994; Trustee, Brinson Supplementary
University of Notre Dame Trust since 1997; Director of The Brinson Funds, Inc.
Notre Dame, IN 46556-0399 1992-1993;Director, Fort Dearborn Income Securities,
Inc. since 1993; Director, Greenwood Trust Company
since 1993; and Director, Dean Witter Trust, FSB since
1996.
Edward M. Roob 64 Trustee Retired; prior thereto, Senior Vice President, Daiwa
841 Woodbine Lane Securities America Inc. 1986-1993; Trustee of the Trust
Northbrook, IL 60002 since 1995; Trustee, Brinson Relationship Funds since
1995; Trustee, Brinson Supplementary Trust since 1997;
Director, Fort Dearborn Income Securities, Inc. since
1993; Director, Brinson Trust Company since 1993;
Committee Member, Chicago Stock Exchange since 1993.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
POSITION
WITH OFFICER
NAME AGE THE TRUST SINCE PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----- ---- ----------- -------- --------------------------------------------
<S> <C> <C> <C> <C>
E. Thomas 55 President 1992 Managing Director, Brinson Partners, Inc. since 1991; Chairman,
McFarlan Brinson Trust Company since 1996; Trustee, Brinson Trust Company
since 1991; Chairman, UBS Brinson Funds Management Co. since
1999; Managing Director, UBS Brinson since 1998; President, The
Brinson Funds since 1993; Treasurer and Principal Accounting
Officer, The Brinson Funds 1995-1997; President, Brinson
Relationship Funds since 1994; President, Brinson Supplementary
Trust since 1997.
Thomas J. 35 Vice 1993 Director, Brinson Partners, Inc. since 1993; Vice President, The
Digenan President Brinson Funds since 1997; Assistant Treasurer, The Brinson Funds
1995-1997; Assistant Secretary, The Brinson Funds 1993-1995;
Vice President, Brinson Relationship Funds 1994-1995 and since
1997; Assistant Treasurer and Assistant Secretary, Brinson
Relationship Funds 1995-1997; Vice President, Brinson
Supplementary Trust since 1997.
Debra L. 33 Vice 1992 Director, Brinson Partners, Inc. since 1995; Associate, Brinson
Nichols President Partners, Inc. 1991-1995; Vice President, The Brinson Funds
since 1997; Secretary, The Brinson Funds 1997; Assistant
Secretary, The Brinson Funds 1993-1997; Assistant Secretary,
Brinson Relationship Funds 1994-1997; Secretary, Brinson
Relationship Funds 1997; Vice President, Brinson Relationship Funds
since 1997; Vice President, Brinson Supplementary Trust since 1997.
Carolyn M. 32 Treasurer, 1995 Director, Brinson Partners, Inc., since 1997; Associate,
Burke Secretary Brinson Partners, Inc. 1995-1996; Secretary, Treasurer and
and Principal Accounting Officer, The Brinson Funds since 1997;
Principal Assistant Secretary, The Brinson Funds 1996-1997; Assistant
Accounting Treasurer and Assistant Secretary, Brinson Relationship Funds,
Officer 1995-1997; Secretary, Treasurer and Principal Accounting
Officer, Brinson Relationship Funds since 1997; Secretary, Treasurer
and Principal Accounting Officer, Brinson Supplementary Trust
since 1997; Financial Analyst, Van Kampen American Capital
Investment Advisory Corp. 1992-1995.
David E. 30 Assistant 1998 Associate Director, Brinson Partners, Inc. since 1998;
Floyd Secretary Associate, Brinson Partners, Inc., 1994-1998; Assistant Trust
Officer, Brinson Trust Company since 1993; Assistant Secretary,
The Brinson Funds since 1998; Assistant Secretary, Brinson
Relationship Funds since 1998; Assistant Secretary, Brinson
Supplementary Trust since 1998.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Mark F. 41 Assistant 1999 Assistant Secretary, Brinson Partners, Inc. since 1993;
Kemper Secretary Assistant Secretary, Brinson Trust Company since 1993;
Secretary, UBS Brinson since 1998; Assistant Secretary, Brinson
Holdings, Inc. 1993-1998; Assistant Secretary, The Brinson Funds
since 1999; Assistant Secretary, Brinson Relationship Funds
since 1999; Assistant Secretary, Brinson Supplementary Trust
since 1999.
</TABLE>
COMPENSATION TABLE
Trustees
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM TRUST FOR FISCAL YEAR TRUST AND FUND COMPLEX
NAME AND POSITION HELD ENDED JUNE 30, 1999 PAID TO TRUSTEES/1/
- ---------------------- ------------------- -------------------
<S> <C> <C>
Walter E. Auch, Trustee $17,400 $42,600
6001 N. 62nd Place
Paradise Valley, AZ 85253
Frank K. Reilly, Trustee $17,400 $54,600
College of Business Administration
University of Notre Dame
Notre Dame, IN 46556-0399
Edward M. Roob, Trustee $17,400 $55,350
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 for the Trust's most recently completed
fiscal year; and (b) service on the Board of Trustees of other investment
companies managed by Brinson Partners for the fiscal year ended June 30,
1999.
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 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 audited financial statements, and (iv) review with such independent
auditors the adequacy of the Series' basic accounting system and the
effectiveness of the Series' internal controls. The Audit Committee met once
during the fiscal year ended June 30, 1999. There is no separate nominating or
investment committee. Items pertaining to these committees are submitted to the
full Board.
35
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 30, 1999, the officers and Trustees unless otherwise
noted, 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 September 30, 1999, 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, UBS Investment Funds class of shares or the
Series, as applicable:
GLOBAL FUND
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ------------------------------------------------ ------------- -------------
<S> <C> <C>
Brinson Fund-Class I
American Express 8.38% 7.91%
Minneapolis, MN
Northern Trust Company 7.62% 7.19%
Chicago, IL
Charles Schwab & Co., Inc. 7.23% 6.83%
San Francisco, CA
Wilmington Trust Company 6.46% 6.10%
Wilmington, DE
Norwest Bank 5.46% 5.15%
Minneapolis, MN
Brinson Fund-Class N
* Emjayco 87.33% N/A
Milwaukee, WI
Merrill Lynch Trust Co. 12.16% N/A
Jacksonville, FL
UBS Investment Funds Class
* UBS AG 74.59% N/A
New York, NY
Hans Frisch 5.83% N/A
Jacksonville, FL
</TABLE>
36
<PAGE>
GLOBAL EQUITY FUND
<TABLE>
<CAPTION> Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
Brinson Fund-Class I
*Wachovia Bank NA 25.32% 12.44%
Winston Salem, NC
Resources Trust Company 17.17% 8.45%
Englewood, CO
Wilmington Trust Co. 16.48% 8.10%
Wilmington, DE
Charles Schwab & Co. Inc. 15.44% 7.56%
San Francisco, CA
Brinson Fund-Class N
* National Financial Services Corp. 99.46% N/A
New York, NY
UBS Investment Funds Class
* UBS AG 38.92% 19.70%
New York, NY
UBS SA 16.55% 8.38%
Zurich, Switzerland
UBS SA 12.11% 6.13%
Zurich, Switzerland
</TABLE>
GLOBAL BOND FUND
<TABLE>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
Brinson Fund-Class I
Resources Trust Company 21.99% 20.70%
Englewood, CO
Baptist Health Systems, Inc. 14.50% 13.65%
Birmingham, AL
Munson Williams Proctor Institute 11.05% 10.40%
Utica, NY
Charles Schwab & Co. Inc. 10.77% 10.14%
San Francisco, CA
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
FTC & Co. 8.74% 8.22%
Denver, CO
Wilmington Trust Co. Trustee 7.82% 7.36%
Wilmington, DE
Wilmington Trust Co. 7.77% 7.31%
Wilmington, DE
Brinson Fund-Class N
* Prudential Securities Inc. 89.22% N/A
Georgetown, MD
Emjayco 10.68% N/A
Milwaukee, WI
UBS Investment Funds Class
* UBS AG 57.93% N/A
New York, NY
UBS AG 15.50% N/A
New York, NY
UBS SA 6.19% N/A
Zurich, Switzerland
U.S. BALANCED FUND
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
*+ Mitra & Co. 31.73% 30.41%
Milwaukee, WI
*+ Wachovia Bank of NA 27.87% 26.71%
Winston Salem, NC
American Express 16.29% 15.61%
Minneapolis, MN
Carn & Co. 5.94% 5.69%
Washington, DC
The Society of Sisters of Christian Charity 5.46% 5.23%
Wilmette, IL
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
Brinson Fund-Class N
* Brinson Partners, Inc. 100% N/A
Chicago, IL
UBS Investment Funds Class
* UBS AG 51.96% N/A
New York, NY
APD Profit Sharing Plan 18.27% N/A
Key West, FL
UBS SA 12.96% N/A
Zurich, Switzerland
U.S. EQUITY FUND
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
Wachovia Bank NA 13.56% 12.09%
Winston Salem, NC
Charles Schwab & Co., Inc. 11.53% 10.28%
San Francisco, CA
Brinson Fund-Class N
* Merrill Lynch Trust Co. 93.72% N/A
Jacksonville, FL
Emjayco 6.14% N/A
Milwaukee, WI
UBS Investment Funds Class
* UBS SA 57.93% 5.55%
Zurich, Switzerland
UBS SA 24.26% N/A
Zurich, Switzerland
UBS AG 12.03% N/A
New York, NY
</TABLE>
39
<PAGE>
U.S. LARGE CAPITALIZATION EQUITY FUND
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
*The Animal Medical Center 26.73% 23.67%
New York, NY
Resources Trust Company 22.18% 19.64%
Englewood, CO
Wyoming Community Foundation 18.32% 16.22%
Laramie, WY
Charles Schwab & Co., Inc. 12.31% 10.90%
San Francisco, CA
FTC & Co. 7.43% 6.58%
Denver, CO
Brinson Fund-Class N
* National Financial Services Corp. 84.36% 9.55%
New York, NY
Prudential Securities Inc. 15.64% N/A
Georgetown, MD
UBS Investment Funds Class
* Thomas Michael Quinn 81.89% N/A
England, United Kingdom
Laiki C. Huxorli 14.56% N/A
New York, NY
U.S. BOND FUND
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial Owners Class Series
- ----------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
Lafayette College Endowment 18.98% 18.08%
Easton, Pa
Resources Trust Company 15.71% 14.97%
Englewood, CO
Charles Schwab & Co. Inc. 12.68% 12.08%
San Francisco, CA
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
Wachovia Bank NA 11.74% 11.18%
Winston Salem, NC
FTC & Co. 5.85% 5.57%
Denver, CO
Brinson Fund-Class N
* Brinson Partners, Inc. 100% N/A
Chicago, IL
UBS Investment Funds Class
* UBS AG 30.55% N/A
New York, NY
Arlington Press 18.01% N/A
Profit Sharing Plan
Brooklyn, NY
UBS SA 15.86% N/A
Zurich, Switzerland
UBS AG 14.12% N/A
New York, NY
PJ Mechanical Corp. 5.04% N/A
Employee Pension Plan
New York, NY
GLOBAL (EX-U.S.) EQUITY FUND
<CAPTION> Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
The Northern Trust Company 13.71% 13.51%
Chicago, IL
Charles Schwab & Co., Inc. 10.81% 10.65%
San Francisco, CA
The Northern Trust Company 10.46% 10.31%
Chicago, IL
Key Trust Company 5.08% 5.01%
Cleveland, OH
Brinson Fund-Class N
* Emjayco 92.06% N/A
Milwaukee, WI
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
Brinson Partners, Inc. 7.94% N/A
Chicago, IL
UBS Investment Funds Class
* UBS AG 37.18% N/A
New York, NY
Emjayco 21.56% N/A
Milwaukee, WI
UBS SA 16.49% N/A
Zurich, Switzerland
HIGH YIELD FUND
<CAPTION> Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
Brinson Fund-Class I
*+ UBS AG 74.31% 66.74%
New York, NY
UBS AG 10.40% 9.34%
New York, NY
Resources Trust Company 5.40% N/A
Englewood, CO
Brinson Fund-Class N
* Brinson Partners Inc. 100% N/A
Chicago, IL
UBS Investment Funds Class
* Warburg Dillon Read LLC 48.44% N/A
Stamford, CT
UBS AG 18.02% N/A
New York, NY
UBS AG 16.30% N/A
New York, NY
</TABLE>
42
<PAGE>
U.S. LARGE CAPITALIZATION GROWTH FUND
<TABLE>
<CAPTION>
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
* Howard Smith & Levin LLP 38.13% 12.13%
New York, NY
UBS AG 21.60% 6.87%
New York, NY
CRC Asset Management Corp. 12.53% N/A
Montvale, NJ
Wilmington Trust Company 11.70% N/A
Wilmington, DE
Brinson Fund-Class N
* Brinson Partners, Inc. 100% N/A
Chicago, IL
UBS Investment Funds Class
*+ UBS AG 58.72% 40.03%
New York, NY
Brian Vaughan 11.15% 7.61%
Moraga, CA
<CAPTION>
U.S. SMALL CAPITALIZATION GROWTH FUND
Percentage of Percentage of
Name & Address of Beneficial and Record Owners Class Series
- ---------------------------------------------- ----- ------
<S> <C> <C>
Brinson Fund-Class I
*+ UBS AG 72.70% 71.20%
New York, NY
Resources Trust Company 8.42% 8.25%
Englewood, CO
Brinson Fund-Class N
* Brinson Partners, Inc. 100% N/A
Chicago, IL
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
UBS Investment Funds Class
Donald L. Chalmers 23.55% N/A
Profit Sharing Plan
Houston, TX
UBS AG 17.86% N/A
New York, NY
Clinical Systems 14.95% N/A
Garden City, NY
Arlington Press 10.29% N/A
Profit Sharing Plan
Brooklyn, NY
PJ Mechanical Corp. 8.69% N/A
Employee Pension Plan
New York, NY
David J. Nash 8.68% N/A
New York, NY
Anron Heating & Air Conditioning Inc. 5.04% N/A
Employee Pension Plan
North Babylon, 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 June 30, 1999, USD 79 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 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 Bahrain, Basel, Frankfurt, Geneva, Hong Kong, London, Melbourne, New York,
Paris, Rio de Janeiro, Singapore, Sydney, Tokyo and Zurich in addition to its
principal office at 209 South LaSalle Street, Chicago, IL 60604-1295. Brinson
Partners is a wholly-owned subsidiary of UBS AG. UBS AG, with headquarters in
Zurich, Switzerland, is an internationally diversified organization with
operations in many aspects of the financial services industry. UBS AG was formed
by the merger of Union Bank of Switzerland and Swiss Bank Corporation in June
1998.
Brinson Partners also serves as the investment advisor to nine other
investment companies: Brinson Relationship Funds, which includes seventeen
investment portfolios (series); Fort Dearborn
44
<PAGE>
Income Securities, Inc.; The Hirtle Callaghan International Trust -
International Equity Portfolio; John Hancock Variable Annuity Series Trust I -
International Balanced Portfolio; Managed Accounts Services Portfolio Trust -
Pace Large Company Value Equity Investments; The Republic Funds -Republic Equity
Fund; Governor Funds International Equity Fund; Horace Mann Growth Fund; and
Horace Mann Balanced Fund (equities only).
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 the Prospectuses 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 1.10%
for the Emerging Markets Equity Fund; 1.00% for the U.S. Small Capitalization
Growth Fund; 0.80% for the Global Fund, Global Equity Fund and Global (Ex-U.S.)
Equity Fund; 0.75% for the Global Bond Fund; 0.70% for the U.S. Balanced Fund,
U.S. Equity Fund, U.S. Large Capitalization Growth Fund and the U.S. Large
Capitalization Equity Fund; 0.65% for the Emerging Markets Debt Fund; 0.60% for
the High Yield Fund; and 0.50% for the U.S. Bond Fund. The fee payable to
Brinson Partners by the Global Fund, Global Equity Fund, U.S. Small
Capitalization Growth Fund, Global (Ex-U.S.) Equity Fund and Emerging Markets
Equity Fund is higher than the advisory fees paid by most other mutual funds,
but is comparable to those of other mutual funds with similar investment
objectives. 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 UBS Investment Funds class of shares or the Brinson-
Class N shares of each Series: 1.60% for the Emerging Markets Equity Fund; 1.15%
for the U.S. Small Capitalization Growth Fund and the Emerging Markets Debt
Fund; 1.10% for the Global Fund; 1.00% for the Global Equity Fund and the Global
(Ex-U.S.) Equity Fund; 0.90% for the Global Bond Fund; 0.80% for the U.S.
Balanced Fund, the U.S. Equity Fund, the U.S. Large Capitalization Equity Fund
and the U.S. Large Capitalization Growth Fund; 0.70% for the High Yield Fund;
and 0.60% for the U.S. Bond Fund.
Advisory fees accrued to Brinson Partners were as follows:
A. FISCAL YEAR ENDED JUNE 30, 1997
45
<PAGE>
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
FEES EARNED PAID PAID
SERIES* BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- ------ ---------- ---------------- ----------
<S> <C> <C> <C>
GLOBAL FUND $4,294,925 $4,294,925 $ 0
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 $142,178
GLOBAL (EX-U.S.) EQUITY FUND $2,420,667 $2,420,667 $ 0
</TABLE>
* The U.S. Large Capitalization Equity Fund, the U.S. Large Capitalization
Growth Fund, the U.S. Small Capitalization Growth Fund, the High Yield Fund, the
Emerging Markets Debt Fund and the Emerging Markets Equity Fund had not
commenced operations as of the time period indicated. Effective December 10,
1998, the Non-U.S. Equity Fund changed its name to the Global (Ex-U.S.) Equity
Fund.
B. FISCAL YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
FEES EARNED PAID PAID
SERIES* BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- ------ ---------- ---------------- ----------
<S> <C> <C> <C>
GLOBAL FUND $5,378,141 $5,378,141 $ 0
GLOBAL EQUITY FUND $ 719,439 $ 697,541 $21,898
GLOBAL BOND FUND $ 500,982 $ 457,480 $43,502
U.S. BALANCED FUND $1,674,661 $1,655,564 $19,097
U.S. EQUITY FUND $3,792,120 $3,792,120 $ 0
U.S. LARGE CAPITALIZATION
EQUITY FUND $ 21,230 $ 0 $23,989
U.S. BOND FUND $ 142,474 $ 74,626 $67,848
GLOBAL (Ex-U.S.) EQUITY FUND $3,475,953 $3,475,953 $ 0
</TABLE>
* The U.S. Large Capitalization Growth Fund, the U.S. Small Capitalization
Growth Fund, the High Yield Fund, the Emerging Markets Debt Fund and the
Emerging Markets Equity Fund had not commenced operations as of the time period
indicated. Effective December 10, 1998, the Non-U.S. Equity Fund changed its
name to the Global (Ex-U.S.) Equity Fund.
C. PERIOD FROM DECEMBER 19, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
FEES EARNED BY PAID PAID BY
SERIES* BRINSON PARTNERS AFTER FEE WAIVER BRINSON PARTNERS
- ------ ---------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. LARGE CAPITALIZATION
GROWTH FUND $ 849 $ 0 $ 849
U.S. SMALL CAPITALIZATION
GROWTH FUND $6,538 $2,107 $4,431
HIGH YIELD FUND $6,278 $3,630 $2,648
</TABLE>
D. FISCAL YEAR ENDED JUNE 30, 1999
46
<PAGE>
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
FEES EARNED PAID PAID
SERIES* BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- ------ ---------- ---------------- ----------
<S> <C> <C> <C>
GLOBAL FUND $4,403,642 $4,403,642 $ 0
GLOBAL EQUITY FUND $ 628,067 $ 591,107 $36,960
GLOBAL BOND FUND $ 957,176 $ 957,176 $ 0
U.S. BALANCED FUND $ 347,296 $ 268,010 $79,286
U.S. EQUITY FUND $5,047,492 $5,047,492 $ 0
U.S. LARGE CAPITALIZATION $ 137,200 $ 40,042 $97,158
EQUITY FUND
U.S. BOND FUND $ 418,445 $ 407,073 $11,372
GLOBAL (EX-U.S.) EQUITY FUND $3,713,448 $3,713,448 $ 0
U.S. LARGE CAPITALIZATION $ 18,582 $ 0 $42,136
GROWTH FUND*
U.S. SMALL CAPITALIZATION $ 148,873 $ 123,087 $25,786
GROWTH FUND**
HIGH YIELD FUND** $ 173,302 $ 137,039 $36,263
</TABLE>
* The Emerging Markets Debt Fund and the Emerging Markets Equity Fund had not
commenced operations as of the time period indicated. Effective December 10,
1998, the Non-U.S. Equity Fund changed its name to the Global (Ex-U.S.) Equity
Fund.
** Effective on December 19, 1998, and as further discussed below, the UBS
Large Cap Growth Fund, UBS Small Cap Fund and UBS High Yield Bond Fund were
reorganized into the U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund and High Yield Fund, respectively. Fees for the U.S.
Large Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High
Yield Fund reflect fees paid during the period from January 1, 1999 through June
30, 1999. The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization
Growth Fund and High Yield Fund initially had fiscal years ending on December
31. At the February 22, 1999 Board of Trustees' meeting, the Board of Trustees
of the Trust voted to change the fiscal year end of these three Funds to June
30.
Prior to the reorganization of the UBS Large Cap Growth Fund, UBS Small Cap
Fund and UBS High Yield Bond Fund (collectively, the "UBS Funds" and each a "UBS
Fund") into the U.S. Large Capitalization Growth Fund, U.S. Small Capitalization
Growth Fund and High Yield Fund, respectively, each of the UBS Funds invested
substantially all of its investable assets in a corresponding portfolio of UBS
Investor Portfolios Trust (collectively, the "UBS Portfolios" and each a "UBS
Portfolio"). Under the investment advisory agreement of each UBS Portfolio with
the New York office of UBS A.G., as the successor to the New York Branch of the
Union Bank of Switzerland ("UBS"), UBS was entitled to a monthly fee of the
corresponding UBS Portfolios' average daily net assets as follows: annual rates
of 0.60% for the UBS Large Cap Growth Fund and the UBS Small Cap Fund and 0.45%
for the UBS High Yield Bond Fund. UBS agreed to waive its fees and reimburse
each UBS Fund and its corresponding Portfolio to the extent that each UBS Fund's
total operating expenses (including its share of its corresponding Portfolio's
expenses) exceeded, on an annual basis, the following rates of the respective
UBS Fund's average daily net assets: 1.00% for the UBS Large Cap Growth Fund,
1.20% for the UBS Small Cap Fund and 0.90% for the UBS High Yield Bond Fund.
Advisory fees accrued to UBS for the UBS Funds were as follows:
A. PERIOD FROM DECEMBER 21, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
<S> <C> <C>
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
FEES EARNED PAID PAID
SERIES* BY ADVISOR AFTER FEE WAIVER BY ADVISOR
- ------ ---------- ---------------- ----------
<S> <C> <C> <C>
UBS LARGE CAP GROWTH FUND* $ 923 $ 0 $ 923
UBS SMALL CAP FUND $4,233 $ 0 $4,233
UBS HIGH YIELD BOND FUND $1,611 $ 0 $1,611
</TABLE>
* Advisory fees for the UBS Large Cap Growth Fund were for the period
December 29, 1997 through December 31, 1997.
B. PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 18, 1998
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY FEES FUND EXPENSES
FEES EARNED PAID PAID
SERIES BY UBS AFTER FEE WAIVER BY UBS
- ------ ------ ---------------- ------
<S> <C> <C> <C>
UBS LARGE CAP GROWTH FUND $ 32,644 $ 0 $ 97,199
UBS SMALL CAP FUND $107,673 $19,971 $ 87,702
UBS HIGH YIELD BOND FUND $ 71,860 $ 0 $117,430
</TABLE>
Under Sub-Advisory Agreements with UBS Brinson, Inc., as the successor to
UBS Asset Management (New York) Inc. (the "Sub-Advisor"), UBS paid the Sub-
Advisor a monthly fee of the respective UBS Portfolios' average daily net assets
as follows:
UBS LARGE CAP GROWTH PORTFOLIO 0.30% of the first $25 million; 0.25% of
the next $25 million; and 0.20% over $50
million
UBS SMALL CAP PORTFOLIO 0.40% of the first $25
million; 0.325% of the next $25
million; and 0.25% over $50 million
UBS HIGH YIELD BOND PORTFOLIO 0.25% of the first $25 million; 0.20% of
the next $25 million; and 0.15% over $50
million
UBS was responsible for paying the Sub-Advisor its fees. For the period
December 29, 1997 to December 31, 1997, UBS paid $100 to the Sub-Advisor on
behalf of the UBS Large Cap Growth Portfolio. For the period December 22, 1997
to December 31, 1997, UBS paid $1,250 and $535 to the Sub-Advisor on behalf of
the UBS Small Cap and UBS High Yield Bond Portfolios, respectively. For the
period January 1, 1998 to December 20, 1998, UBS paid $ 0 to the Sub-Advisor on
behalf of the UBS Large Cap Growth Portfolio, UBS Small Cap Portfolio and UBS
High Yield Bond Portfolio.
General expenses of the Trust (such as costs of maintaining corporate
existence, legal fees, insurance, 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.
48
<PAGE>
Administrator
Administrative, Accounting, Transfer Agency and Custodian Services
Effective May 10, 1997, the Trust, on behalf of each Fund, 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 was required to provide general administrative, accounting, portfolio
valuation, transfer agency and custodian services to the Funds, including the
coordination and monitoring of any third party service providers. Effective
October 1, 1998, MSTC was merged into The Chase Manhattan Bank, 270 Park Avenue,
New York, New York 10017 ("Chase"), and Chase assumed all of MSTC's rights and
obligations under the Services Agreement.
Custody Services. Chase provides custodian services for the securities and
cash of the Funds. 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.
Effective October 1, 1998, Chase became the custodian of the Funds pursuant to
the Services Agreement as a result of the merger of MSTC into Chase.
As authorized under the Services Agreement, MSTC had entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of Chase, under which CGFSC provides
administrative, accounting, portfolio valuation and transfer agency services to
the Funds. Chase has assumed all of MSTC's rights and obligations under the
CGFSC Agreement. 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 each 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 each 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 1-800-794-7753 (for the UBS Investment Funds
class of shares).
For its administrative, accounting, transfer agency and custodian services,
Chase receives the following as compensation from the Trust on an annual basis:
0.0025% of the average daily U.S. assets of the Trust; 0.0525% of the average
daily non-U.S. assets of the Trust; 0.3250% of the average daily emerging
markets equity assets of the Trust; and 0.019% of the average daily emerging
markets debt assets of the Trust. Chase receives an additional fee of 0.075% of
the average daily net assets of the
49
<PAGE>
Trust for administrative duties the latter subject to the expense limitation
applicable to the Trust. No fee (asset based or otherwise) is charged on any
investments made by any fund into any other fund sponsored or managed by the
Advisor and assets of a fund that are invested in another investment company or
series thereof sponsored or managed by the Advisor will not be counted in
determining the 0.075% administrative duties fee or the applicability of the
expense limitation on such fee. The foregoing fees include all out-of-pocket
expenses or transaction charges incurred by Chase and any third party service
provider in providing such services.
Also as authorized under the Services Agreement, Chase has entered into a
sub-administration agreement (the "FDI Agreement") with Funds Distributor, Inc.
("FDI") under which FDI provides administrative assistance to the Funds with
respect to: (i) regulatory matters, including regulatory developments and
examinations, (ii) all aspects of each 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, Chase pays CGFSC and
FDI, respectively, for the services that CGFSC and FDI provide to Chase in
fulfilling Chase's obligations under the Services Agreement.
For the period October 1, 1998 through June 30, 1999, aggregate fees paid
to Chase for administration, accounting, portfolio valuation and transfer agency
services under the Services Agreement were as follows:
<TABLE>
<CAPTION>
OCTOBER 1, 1998
SERIES* THROUGH FISCAL YEAR
- ------- ENDED JUNE 30, 1999
-------------------
<S> <C>
GLOBAL FUND $265,350
GLOBAL EQUITY FUND $ 0
GLOBAL BOND FUND $ 13,905
U.S. BALANCED FUND $ 0
U.S. EQUITY FUND $209,093
U.S. LARGE CAPITALIZATION EQUITY FUND $ 0
U.S. BOND FUND $ 0
GLOBAL (EX-U.S.) EQUITY FUND $265,131
U.S. LARGE CAPITALIZATION GROWTH FUND $ 0
U.S. SMALL CAPITALIZATION GROWTH FUND $ 0
HIGH YIELD FUND $ 0
</TABLE>
* Effective December 10, 1998, the Non-U.S. Equity Fund changed its name to
the Global (Ex-U.S.) Equity Fund. Effective on December 19, 1998, and as further
discussed below, the UBS Large Cap Growth Fund, UBS Small Cap Fund and UBS High
Yield Bond Fund were reorganized into the U.S. Large Capitalization Growth Fund,
U.S. Small Capitalization Growth Fund and High Yield Fund, respectively. Fees
for the U.S. Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund and High Yield Fund reflect fees paid during the period from January 1,
1999 through June 30, 1999.
For the period December 19, 1998 through December 31, 1998, the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High Yield
Fund did not pay any fees to Chase for administration, accounting, portfolio
valuation and transfer agency services under the Services Agreement.
For the fiscal years ended June 30, 1997, June 30, 1998 and the period July
1, 1998 through September 30, 1998, aggregate fees paid to MSTC, prior to the
merger into Chase, for administration, accounting, portfolio valuation and
transfer agency services under the Services Agreement were as follows:
50
<PAGE>
<TABLE>
<CAPTION>
MAY 10, 1997 FISCAL YEAR JULY 1, 1998
THROUGH FISCAL ENDED THROUGH
SERIES* YEAR END JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
- ------- ---------------------- ------------- ------------------
<S> <C> <C> <C>
GLOBAL FUND $69,572 $464,398 $112,813
GLOBAL EQUITY FUND $ 7,799 $ 9,809 $ 865
GLOBAL BOND FUND $ 3,707 $ 0 $ 1,985
U.S. BALANCED FUND $10,324 $ 79,503 $ 0
U.S. EQUITY FUND $12,495 $247,167 $ 58,362
U.S. LARGE CAPITALIZATION
EQUITY FUND $ 0 $ 0 $ 0
U.S. BOND FUND $ 0 $ 0 $ 0
GLOBAL (EX-U.S.) EQUITY FUND $17,159 $305,643 $ 82,044
</TABLE>
* The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund, High Yield Fund, Emerging Markets Debt Fund and Emerging Markets Equity
Fund had not commenced operations as of the time periods indicated. Effective
December 10, 1998, the Non-U.S. Equity Fund changed its name to the Global (Ex-
U.S.) Equity Fund.
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").
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>
JULY 1, 1996 THROUGH
SERIES* MAY 9, 1997
- ------- -----------
<S> <C>
GLOBAL FUND $271,364
GLOBAL EQUITY FUND $ 38,047
GLOBAL BOND FUND $ 25,412
U.S. BALANCED FUND $121,580
U.S. EQUITY FUND $ 76,534
U.S. BOND FUND $ 6,542
GLOBAL (EX-U.S.) EQUITY FUND $122,780
</TABLE>
* The U.S. Large Capitalization Equity Fund, U.S. Large Capitalization Growth
Fund, U.S. Small Capitalization Growth Fund, High Yield Fund, Emerging Markets
Debt Fund and Emerging Markets Equity Fund had not commenced operations as of
the time period indicated. Effective December 10, 1998, the Non-U.S. Equity Fund
changed its name to the Global (Ex-U.S.) Equity Fund.
Prior to the reorganization of the UBS Funds into the Trust, IBT Trust &
Custodial Services (Ireland) Limited ("IBT Ireland") and Investors Bank and
Trust Company ("Investors Bank"), 200 Clarendon Street, Boston, Massachusetts
02116, provided certain administrative services to the UBS Portfolios and the
UBS Funds, respectively, pursuant to Administration Agreements. For its services
under the Administration Agreements, each corresponding UBS Portfolio paid IBT
Ireland a fee calculated daily and paid monthly equal, on an annual basis, to
0.07% of the UBS Portfolio's first $100 million in average daily net assets and
0.05% of the assets in excess of $100 million. For its services under the
Administration Agreements, each corresponding UBS Fund paid Investors Bank a fee
calculated daily and paid monthly equal, on an annual basis, to 0.065% of the
UBS Fund's first $100 million in average daily net assets and 0.025% of the next
$100 million in average daily net assets. Investors Bank was not paid a fee from
a UBS Fund on average daily net assets in excess of $200 million.
51
<PAGE>
Administrative fees paid to IBT Ireland by the UBS Portfolios were as
follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF JANUARY 1, 1998
OPERATIONS** THROUGH THROUGH
SERIES* DECEMBER 31, 1997 DECEMBER 18, 1998
------- ----------------- -----------------
<S> <C> <C>
UBS LARGE CAP GROWTH PORTFOLIO $2,096 $12,574
UBS SMALL CAP PORTFOLIO $3,362 $22,896
UBS HIGH YIELD BOND PORTFOLIO $1,870 $16,854
</TABLE>
52
<PAGE>
Administrative fees paid to Investors Bank by the UBS Funds were as
follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF JANUARY 1, 1998
OPERATIONS ** THROUGH THROUGH
SERIES* DECEMBER 31, 1997 DECEMBER 18, 1998
- ------ ----------------- -----------------
<S> <C> <C>
UBS LARGE CAP GROWTH FUND $ 450 $ 7,361
UBS SMALL CAP FUND $1,580 $24,165
UBS HIGH YIELD BOND FUND $1,185 $21,515
</TABLE>
* Effective on December 19, 1998, the UBS Large Cap Growth Fund, UBS
Small Cap Fund and UBS High Yield Bond Fund were reorganized into the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High Yield
Fund, respectively. The U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund and High Yield Fund initially had fiscal years ending
on December 31. At the February 22, 1999 Board of Trustees' meeting, the Board
of Trustees of the Trust voted to change the fiscal year end of these three
Funds to June 30.
** The UBS Large Cap Growth Portfolio and its corresponding UBS Fund
commenced operations on October 14, 1997. The UBS Small Cap Portfolio and UBS
High Yield Bond Portfolio and their respective corresponding UBS Funds commenced
operations on September 30, 1997.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, are the independent auditors of the
Trust.
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania, is legal
counsel to the Trust.
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. 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, except for a
transaction charge applicable to purchases of shares of the Emerging Markets
Equity Fund and Emerging Markets Debt Fund and to redemptions of shares of the
Emerging Markets Equity Fund. 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.
53
<PAGE>
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.
Distribution Plan
The Board has adopted a distribution plan (the "UBS Investment Plan")
pursuant to Rule 12b-1 under the Act, for each Series' UBS Investment Funds
class of 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
UBS Investment Plan and the Class N Plan together, the "Plans"). The UBS
Investment Funds class of shares was formerly known as the SwissKey class of
shares. The name change was made effective on September 15, 1998. The Plans
permit each Series to reimburse FDI, Brinson Partners and others from the assets
of the UBS Investment Funds class of shares and Brinson Fund-Class N shares with
a quarterly fee for services and expenses incurred in distributing and promoting
sales of UBS Investment Funds class of shares and Brinson Fund-Class N shares,
respectively. These expenses include, but are not limited to, preparing and
distributing advertisements and sales literature, printing prospectuses and
reports used for sales purposes, and paying distribution and maintenance fees to
brokers, dealers and others in accordance with a selling agreement with the
Trust on behalf of the UBS Investment Funds class of shares and the Brinson
Fund-Class N shares or FDI. In addition, each Series may make payments directly
to FDI for payment to dealers or others, or directly to others, such as banks,
who assist in the distribution of the UBS Investment Funds class of shares or
Brinson Fund-Class N shares or provide services with respect to the UBS
Investment Funds class of shares or Brinson Fund-Class N shares.
UBS A.G., or one of its affiliates, pursuant to a selected dealer
agreement, may provide additional compensation to securities dealers from its
own resources in connection with sales of the UBS Investment Funds class of
shares or Brinson Fund-Class N shares of the Series.
The aggregate distribution fees paid by the Series from the assets of the
respective UBS Investment Funds class of shares to FDI and others under the UBS
Investment Plan may not exceed 0.90% of a Fund's average daily net assets in any
year (0.25% of which are service fees to be paid by the Series to FDI, dealers
and others, for providing personal service and/or maintaining shareholder
accounts). The UBS Investment Plan provides, however, that the aggregate
distribution fees for each respective Fund shall not exceed the following
maximum amounts for the 1999 fiscal year: UBS Investment Fund-Global - 0.65%,
UBS Investment Fund-Global Equity - 0.76%, UBS Investment Fund-Global Bond -
0.49%, UBS Investment Fund-U.S. Balanced - 0.50%, UBS Investment Fund-U.S.
Equity - 0.52%, UBS Investment Fund-U.S. Large Capitalization Equity - 0.52%,
UBS Investment Fund-U.S. Large Capitalization Growth - 0.77%, UBS Investment
Fund-U.S. Small Capitalization Growth - 0.77%, UBS Investment Fund-U.S. Bond -
0.47%, UBS Investment Fund-High Yield - 0.85%, UBS Investment Fund-Global (Ex-
U.S.) Equity - 0.84%, UBS Investment Fund-Emerging Markets Equity - 0.85% and
UBS Investment Fund-Emerging Markets Debt - 0.75%.
The aggregate distribution fees paid by the Series from the assets of the
respective Brinson Fund-Class N shares to FDI and others under the Class N Plan
may not exceed 0.25% of a Fund's average daily net assets in any year.
The UBS Investment 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 UBS Investment Plan's fees. The Class N Plan does not apply to
the Brinson Fund-Class I or the UBS Investment Funds class of shares of each
Series and those shares are not included in calculating the Class N Plan's fees.
The quarterly fees paid to FDI under the Plans are subject to the review
and approval by the Trust's Trustees who are not "interested persons" of the
Advisor or FDI (as defined in the Act) and who may reduce the fees or terminate
the Plans at any time.
54
<PAGE>
Amounts spent on behalf of each UBS Investment Funds class of shares
pursuant to the UBS Investment Plan during the fiscal year ended June 30, 1999
are set forth below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COMPENSATION COMPENSATION COMPENSATION TO
OF OF UBS SALES
FUND* PRINTING UNDERWRITERS DEALERS PERSONNEL ADVERTISING OTHER
===================================================================================================
<S> <C> <C> <C> <C> <C> <C>
UBS $0.00 $0.00 $0.00 $169,039.77 $0.00 $0.00
Investment
Fund-Global
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $359,693.61 $0.00 $0.00
Investment
Fund-Global
Equity
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 21,247.50 $0.00 $0.00
Investment
Fund-Global
Bond
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 9,692.92 $0.00 $0.00
Investment
Fund-U.S.
Balanced
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $352,849.81 $0.00 $0.00
Investment
Fund-U.S.
Equity
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 6.22 $0.00 $0.00
Investment
Fund-U.S.
Large
Capitalization
on Equity
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 24,945.86 $0.00 $0.00
Investment
Fund-U.S.
Bond
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 43,437.06 $0.00 $0.00
Investment
Fund-Global
(Ex-U.S.)
Equity
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 8,852.64 $0.00 $0.00
Investment
Fund- U.S.
Large
Capitalization
on Growth**
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 1,597.63 $0.00 $0.00
Investment
Fund- U.S.
Small
Capitalization
on Growth**
- ---------------------------------------------------------------------------------------------------
UBS $0.00 $0.00 $0.00 $ 15,533.05 $0.00 $0.00
Investment
Fund- High
Yield**
- ---------------------------------------------------------------------------------------------------
</TABLE>
Amounts spent on behalf of each Brinson Fund - Class N class of shares
pursuant to the Class N Plan during the fiscal year ended June 30, 1999 are set
forth below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COMPENSATION COMPENSATION COMPENSATION TO
OF OF UBS SALES
FUND* PRINTING UNDERWRITERS DEALERS PERSONNEL ADVERTISING OTHER
===================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Global Fund - $0.00 $0.00 $ 758.24 $0.00 $0.00 $0.00
Class N
- ---------------------------------------------------------------------------------------------------
Global Equity $0.00 $0.00 $ 0.00 $0.00 $0.00 $0.00
Fund -
Class N
- ---------------------------------------------------------------------------------------------------
Global Bond $0.00 $0.00 $ 5.57 $0.00 $0.00 $0.00
Fund -
Class N
- ---------------------------------------------------------------------------------------------------
U.S. $0.00 $0.00 $ 0.00 $0.00 $0.00 $0.00
Balanced Fund -
Class N
- ---------------------------------------------------------------------------------------------------
U.S. $0.00 $0.00 $ 701.32 $0.00 $0.00 $0.00
Equity Fund -
Class N
- ---------------------------------------------------------------------------------------------------
U.S. Large $0.00 $0.00 $9,277.02 $0.00 $0.00 $0.00
Capitalization
Equity
Fund -
Class N
- ---------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Bond Fund $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
- - Class N
- ----------------------------------------------------------------------------------------------
Global (Ex-U.S.) $0.00 $0.00 $6.03 $0.00 $0.00 $0.00
Equity Fund -
Class N
- ----------------------------------------------------------------------------------------------
U.S. Large $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Capitalization
Growth - Class
N**
- ----------------------------------------------------------------------------------------------
U.S. Small $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Capitalization
Growth - Class
N**
- ----------------------------------------------------------------------------------------------
High Yield - $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Class N**
- ----------------------------------------------------------------------------------------------
</TABLE>
* The Emerging Markets Equity Fund and Emerging Markets Debt Fund had not
commenced operations as of the time period indicated. Effective December
10, 1998, the Non-U.S. Equity Fund changed its name to the Global (Ex-U.S.)
Equity Fund.
** Effective on December 19, 1998, the UBS Large Cap Growth Fund, UBS
Small Cap Fund and UBS High Yield Bond Fund were reorganized into the U.S.
Large Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and
High Yield Fund, respectively. Amounts spent for the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High
Yield Fund reflect the amounts spent for the period from January 1, 1999 to
June 30, 1999.
The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization
Growth Fund and High Yield Fund did not pay any fees under their respective
Plans for the period December 19, 1998 through December 31, 1998.
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, 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 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
56
<PAGE>
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 Global (Ex-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. However, subject to policies established by
the Board of the Trust, a Series may pay a broker-dealer a commission for
effecting a portfolio transaction for the Series in excess of the amount of
commission another broker-dealer would have charged if Brinson Partners
determines in good faith that the commission paid was reasonable in relation to
the brokerage or research services provided by such broker-dealer, viewed in
terms of that particular transaction or such firm's overall responsibilities
with respect to the clients, including the Series, as to which it exercises
investment discretion. 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 their 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.
When buying or selling securities, the Series may pay commissions to brokers
who are affiliated with the Advisor or the Series. The Series may purchase
securities in certain underwritten offerings for which an affiliate of the
Series or the Advisor may act as an underwriter. The Series may effect future
57
<PAGE>
transactions through, and pay commissions to, futures commission merchants who
are affiliated with the Advisor or the Series in accordance with procedures
adopted by the Board.
The Series incurred brokerage commissions as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
SERIES* JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
- ------- ------------- ------------- -------------
<S> <C> <C> <C>
GLOBAL FUND $385,571 $442,603 $ 612,462
GLOBAL EQUITY FUND $142,922 $166,103 $ 225,396
GLOBAL BOND FUND $ 0 $ 0 $ 0
U.S. BALANCED FUND $139,165 $ 85,784 $ 38,711
U.S. EQUITY FUND $290,526 $560,721 $ 798,223
U.S. LARGE CAPITALIZATION
EQUITY FUND* $ N/A $ 9,714 $ 33,488
U.S. BOND FUND $ 0 $ 0 $ 0
GLOBAL (EX-U.S.) EQUITY FUND* $833,293 $942,115 $1,617,312
U.S. LARGE CAPITALIZATION
GROWTH FUND** N/A N/A $ 6,142
U.S. SMALL CAPITALIZATION
GROWTH FUND** N/A N/A $ 110,942
HIGH YIELD FUND** N/A N/A $ 0
</TABLE>
* The U.S. Large Capitalization Equity Fund commenced operations on April 6,
1998. The Emerging Markets Debt Fund and the Emerging Markets Equity Fund had
not commenced operations as of the time periods indicated. Effective December
10, 1998, the Non-U.S. Equity Fund changed its name to the Global (Ex-U.S.)
Equity Fund.
** Effective on December 19, 1998, the UBS Large Cap Growth Fund, UBS Small Cap
Fund and UBS High Yield Bond Fund were reorganized into the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High Yield
Fund, respectively. Brokerage commissions for the U.S. Large Capitalization
Growth Fund, U.S. Small Capitalization Growth Fund and High Yield Fund reflect
fees paid during the period from January 1, 1999 to June 30, 1999.
For the fiscal year ended June 30, 1998, the Global Fund, U.S. Balanced
Fund, U.S. Equity Fund and U.S. Large Capitalization Equity Fund paid brokerage
commissions to Warburg Dillon Read ("Warburg"), an affiliated broker-dealer, as
follows:
<TABLE>
<CAPTION>
AGGREGATE
DOLLAR AMOUNT OF % OF AGGREGATE DOLLAR AMOUNT
COMMISSIONS PAID % OF AGGREGATE COMMISSIONS PAID TO
SERIES TO WARBURG PAID TO WARBURG WARBURG
- ------ ---------- --------------- -------
<S> <C> <C> <C>
GLOBAL FUND $ 6,078 1.37% 0.78%
U.S. BALANCED FUND $ 2,190 2.55% 0.27%
U.S. EQUITY FUND $93,356 16.65% 21.43%
U.S. LARGE CAPITALIZATION
EQUITY FUND $ 453 4.66% 5.16%
</TABLE>
For the fiscal year ended June 30, 1999, the Global Fund, Global Equity
Fund, U.S. Balanced Fund, U.S. Equity Fund, U.S. Large Capitalization Equity
Fund, U.S. Large Capitalization Growth Fund, and U.S. Small Capitalization
Growth Fund paid brokerage commissions to Warburg, as follows:
58
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
DOLLAR AMOUNT OF % OF AGGREGATE DOLLAR AMOUNT
COMMISSIONS PAID % OF AGGREGATE COMMISSIONS PAID TO
SERIES TO WARBURG PAID TO WARBURG WARBURG
- ------ ---------- --------------- -------
<S> <C> <C> <C>
GLOBAL FUND $42,341 6.91% 2.26%
GLOBAL EQUITY FUND $ 6,322 2.80% 4.45%
U.S. BALANCED FUND $ 3,207 8.28% 2.08%
U.S. EQUITY FUND $55,295 6.93% 8.01%
U.S. LARGE CAPITALIZATION
EQUITY FUND $10,625 31.73% 22.35%
U.S. LARGE CAPITALIZATION
GROWTH FUND $ 2,469 40.20% 59.78%
U.S. SMALL CAPITALIZATION
GROWTH FUND $ 5,232 4.72% 8.23%
</TABLE>
For the fiscal year ended June 30, 1999, the Global (Ex-U.S.) Equity Fund
paid brokerage commissions to UBS, A.G., London, an affiliated broker-dealer, as
follows:
<TABLE>
<CAPTION>
AGGREGATE
DOLLAR AMOUNT OF % OF AGGREGATE DOLLAR AMOUNT
COMMISSIONS PAID % OF AGGREGATE COMMISSIONS PAID TO
SERIES TO UBS, A.G. PAID TO UBS, A.G. UBS, A.G.
- ------ ------------ ----------------- ---------
<S> <C> <C> <C>
GLOBAL FUND $47,584 2.94% 2.46%
</TABLE>
For the fiscal years ended June 30, 1998 and June 30, 1999, the Trust
and the Advisor had no agreements or understandings with a broker or otherwise
causing brokerage transactions or commissions for research services.
The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization Growth
Fund and High Yield Fund, and the UBS Funds that were merged into the Funds,
incurred brokerage commissions as follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF DECEMBER 19, 1998
OPERATIONS** THROUGH JANUARY 1, 1998 THROUGH THROUGH DECEMBER 31,
SERIES* DECEMBER 31, 1997 DECEMBER 18, 1998 1998
- ------- ----------------- ----------------- ----
<S> <C> <C> <C>
U.S. LARGE CAPITALIZATION
GROWTH FUND $18,270*** $31,628*** $ 25
U.S. SMALL CAPITALIZATION
GROWTH FUND $30,680*** $52,862*** $4,722
HIGH YIELD FUND N/A*** N/A*** $ 0
</TABLE>
* The U.S. Large Capitalization Growth Fund, U.S. Small Capitalization
Growth Fund and High Yield Fund commenced operations effective on December 19,
1998. Effective on December 19, 1998, the UBS Large Cap Growth Fund, UBS Small
Cap Fund and UBS High Yield Bond Fund were reorganized into the U.S. Large
Capitalization Growth Fund, U.S. Small Capitalization Growth Fund and High Yield
Fund, respectively. The U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund and High Yield Fund initially had fiscal years ending
on December 31. At the February 22, 1999 Board of Trustees' meeting, the Board
of Trustees of the Trust voted to change the fiscal year end of these three
Funds to June 30.
59
<PAGE>
** The UBS Large Cap Growth Fund commenced operations on October 14, 1997.
The UBS Small Cap Fund and UBS High Yield Bond Fund commenced operations on
September 30, 1997.
*** Prior to the reorganization of the UBS Funds into the corresponding series
of the Trust, each of the UBS Funds invested substantially all of its investable
assets in corresponding series of the UBS Investor Portfolios Trust
(collectively, the "UBS Portfolios"). As a result, the UBS Funds did not incur
brokerage commissions. The brokerage commissions reflected were incurred by the
UBS Portfolios.
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, Global
(Ex-U.S.) Equity Fund and U.S. Large Capitalization Growth Fund is not expected
to exceed 100%. The portfolio turnover rates for the Global Fund, Global Bond
Fund, High Yield Fund, Emerging Markets Equity Fund and Emerging Markets Debt
Fund may exceed 100%, and in some years, 200%. The portfolio turnover rate for
the U.S. Small Capitalization Growth Fund may exceed 150%, 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, 1998
and June 30, 1999, the portfolio turnover rate of the Series was 88% and 105%,
respectively. With respect to the Global Bond Fund, for the fiscal years ended
June 30, 1998 and June 30, 1999, the portfolio turnover rate of the Series was
151% and 138%, respectively. With respect to the U.S. Balanced Fund, for the
fiscal years ended June 30, 1998 and June 30, 1999, the portfolio turnover rate
of the Series was 194% and 113%, respectively. With respect to the U.S. Bond
Fund, for the fiscal years ended June 30, 1998 and June 30, 1999, the portfolio
turnover rate of the Series was 198% and 260%, respectively. With respect to the
Global Equity Fund, for the fiscal years ended June 30, 1998 and June 30, 1999,
the portfolio turnover rate of the Series was 46% and 86%, respectively. With
respect to the Global (Ex-U.S.) Equity Fund, for the fiscal years ended June 30,
1998 and June 30, 1999, the portfolio turnover rate of the Series was 49% and
74%, respectively. With respect to the U.S. Equity Fund, for the fiscal years
ended June 30, 1998 and June 30, 1999, the portfolio turnover rate of the Series
was 42% and 48%, respectively. With respect to the U.S. Large Capitalization
Equity Fund, for the period April 6, 1998 (commencement of operations) to June
30, 1998 and for the fiscal year ended June 30, 1999, the portfolio turnover
rate of the Series was 12% and 88%, respectively. With respect to the High Yield
Fund for the period December 19, 1998 to December 31, 1998 the portfolio
turnover rate was 2%. With respect to the High Yield Fund for the period January
1, 1999 to June 30, 1999, the portfolio turnover rate of the Series was 77%.
With
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respect to the U.S. Large Capitalization Growth Fund, for the period December
19, 1998 to December 31, 1998 , the portfolio turnover rate was 0%. With respect
to the U.S. Large Capitalization Growth Fund for the period January 1, 1999 to
June 30, 1999, the portfolio turnover rate of the Series was 51%. With respect
to the U.S. Small Capitalization Growth Fund, for the period December 19, 1998
to December 31, 1998, the portfolio turnover rate was 5%. With respect to the
U.S. Small Capitalization Growth Fund for the period January 1, 1999 to June 30,
1999, the portfolio turnover rate of the Series was 71%. Any 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.
SHARES OF BENEFICIAL INTEREST
Each Series is authorized to issue an unlimited number of shares of
beneficial interest with a $0.001 par value per share. Each share of beneficial
interest represents an equal proportionate interest in the assets and
liabilities of the applicable Series and has identical voting, dividend,
redemption, liquidation, and other rights and preferences as the other class of
that Series, except that only shares of the UBS Investment Funds class may vote
on any matter affecting only the UBS Investment 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 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.
The Trustees of the Trust do not intend to hold annual meetings of
shareholders of the Series. The SEC, however, requires the Trustees to promptly
call a meeting for the purpose of voting upon the question of removal of any
Trustee when requested to do so by not less than 10% of the outstanding
shareholders of the respective Series. In addition, subject to certain
conditions, shareholders of each Series may apply to the Series to communicate
with other shareholders to request a shareholders' meeting to vote upon the
removal of a Trustee or Trustees.
Currently, the Trust offers thirteen Series: Global Fund, Global Equity
Fund, Global Bond Fund, U.S. Balanced Fund, U.S. Equity Fund, U.S. Large
Capitalization Equity Fund, U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund, U.S. Bond Fund, High Yield Fund, Global (Ex-U.S.)
Equity Fund, Emerging Markets Equity Fund and Emerging Markets Debt Fund. Three
classes of shares are currently issued by the Trust for each Series: the Brinson
Fund-Class N, Brinson Fund-Class
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I and UBS Investment Funds classes. Prior to September 15, 1998, the "UBS
Investment Funds class" of shares was known as the "SwissKey Class" of shares.
PURCHASES
Shares of each class of each Series are sold at the net asset value (plus
transaction charges applicable to purchases of shares of the Emerging Markets
Equity Fund and Emerging Markets Debt Fund) next determined after the receipt of
a purchase application in proper form by the transfer agent. There is no sales
load in connection with the purchase of Fund shares. The Trust reserves the
right to reject any purchase order and to suspend the offering of shares of the
Brinson Fund-Class I shares, Brinson Fund-Class N shares, UBS Investment Funds
class of shares or any Series. 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 UBS
Investment Funds class of shares for each Series is $25,000; subsequent
investment minimums are $5,000. The minimum for initial investments with respect
to the Brinson Fund-Class N for each Series is $1,000,000. The Trust reserves
the right to vary the initial investment minimum and minimums for additional
investments in any of the Funds at any time. In addition, Brinson Partners may
waive the minimum initial investment requirement for any investor.
The Brinson Fund-Class N shares and UBS Investment Funds class of shares
may be purchased through broker-dealers having sales agreements with FDI, or
through financial institutions having agency agreements with FDI. The Brinson
Fund-Class N shares and UBS Investment Funds class of shares are subject to
annual 12b-1 plan expenses of 0.25% and 0.90% (0.25% of which are service fees
to be paid by the Funds to FDI, dealers or others for providing personal service
and/or maintaining shareholder accounts), respectively, of the Funds' average
daily net assets of such share class. The Brinson Fund-Class N shares may also,
and the UBS Investment Funds will, be marketed directly through the offices of
UBS A.G. Through its branches and subsidiaries, UBS A.G. conducts securities
research, provides investment advisory services and manages mutual funds in
major cities throughout the world, including Amsterdam, Basel, Frankfurt,
Geneva, Hong Kong, Houston, London, Los Angeles, Luxembourg, Miami, Monte Carlo,
New York, Paris, San Francisco, Singapore, Sydney, Tokyo, Toronto and Zurich.
Purchase orders for shares of the Funds which are received by the transfer
agent in proper form prior to the close of regular trading hours (currently 4:00
p.m. Eastern time) on the New York Stock Exchange (the "NYSE") on any day that
the Funds' net asset values per share are calculated, are priced according to
the net asset value determined on that day. Purchase orders for shares of the
Funds received after the close of the NYSE on a particular day are priced as of
the time the net asset value per share is next determined. The Funds reserve the
right to change the time at which purchases are priced if the NYSE closes at a
time other than 4:00 p.m. Eastern time or if an emergency exists.
Under certain circumstances, the Trust has entered into one or more
agreements (each, a "Sales Agreement") with brokers, dealers or financial
institutions (each, an "Authorized Dealer") under which the Authorized Dealer
may directly, or through intermediaries that the Authorized Dealer is authorized
to designate under the Sales Agreement (each, a "Sub-designee"), accept purchase
and redemption orders that are in "good form" on behalf of the Funds. A Fund
will be deemed to have received a purchase order when the Authorized Dealer or
Sub-designee accepts the purchase order and such order will be priced at the
Fund's net asset value next computed after such order is accepted by the
Authorized Dealer or Sub-designee.
The Trust may accept telephone orders for Fund shares from broker-dealers
or service organizations which have been previously approved by the Trust. It is
the responsibility of such broker-dealers or service organizations to promptly
forward purchase orders and payments for the same to the Fund. Shares of the
Funds may be purchased through broker-dealers, banks and bank trust departments
which may charge the investor a transaction fee or other fee for their services
at the time of purchase. Such fees would not otherwise be charged if the shares
were purchased directly from the Trust.
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Brinson Partners, or its affiliates, from its own resources, may compensate
broker-dealers or other financial intermediaries ("Service Providers") for
marketing, shareholder servicing, recordkeeping and/or other services performed
with respect to a Fund's Class N shares, Class I shares and UBS Investment Funds
class of shares. Payments made for any of these purposes may be made from its
revenues, its profits or any other sources available to it. When such service
arrangements are in effect, they are made generally available to all qualified
Service Providers.
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. Exchanges may be made only for shares of a Series and class
then offering its shares for sale in your state of residence and are subject to
the minimum initial investment requirement.
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. Transaction charges
applicable to purchases and redemptions of shares of the Emerging Markets Equity
Fund and purchases of shares of the Emerging Markets Debt Fund will apply to
exchanges of shares into these funds and to exchanges of shares out of the
Emerging Markets Equity Fund. 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 NYSE (currently 4:00 p.m. Eastern time) on any day on which the NYSE is open
for regular trading. The Funds reserve the right to change the time at which
exchanges are priced if the NYSE closes at a time other than 4:00 p.m. Eastern
time or if an emergency exists.
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.
Transfer of Securities
At the discretion of the Trust, investors may be permitted to purchase Fund
shares by transferring securities to a Series that meet the Series' investment
objective and policies. Securities transferred to a Series will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such acceptance.
Shares issued by a Series in exchange for securities will be issued at net asset
value per share of the Fund determined as of the same time. All dividends,
interest, subscription, or other rights pertaining to such securities shall
become the
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property of the Series and must be delivered to the Series by the investor upon
receipt from the issuer. Investors who are permitted to transfer such securities
will be required to recognize a gain or loss on such transfer and pay tax
thereon, if applicable, measured by the difference between the fair market value
of the securities and the investors' basis therein. Securities will not be
accepted in exchange for shares of a Fund unless: (1) such securities are, at
the time of the exchange, eligible to be included in the Series' portfolio and
current market quotations are readily available for such securities; (2) the
investor represents and warrants that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Series under the 1933
Act, or under the laws of the country in which the principal market for such
securities exists, or otherwise; and (3) the value of any such security (except
U.S. government securities) being exchanged, together with other securities of
the same issuer owned by the Series, will not exceed 5% of the Series' net
assets immediately after the transaction.
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 class of a Series is computed by
dividing the value of the assets related to that class of the Series, less the
liabilities related to that class, by the number of shares of the class of the
Series outstanding.
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, Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (day observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day 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.
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
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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 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.
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.
Due to the specific distribution expenses and other costs that will be
allocable to each class, the dividends paid to each class, and related
performance, of the Series may vary. The per share net asset value of the
Brinson Fund-Class N shares and the UBS Investment Funds class of shares will
generally be lower than that of the Brinson Fund-Class I shares of a Series
because of the higher expenses borne by the UBS Investment Funds class of shares
and the Brinson Fund-Class N shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
payment of dividends, which will differ by approximately the amount of the
service and distribution expenses differential among the classes.
REDEMPTIONS
Under normal circumstances shareholders may redeem their shares at any time
without a fee, except for the transaction charge applicable to redemptions of
shares of the Emerging Markets Equity Fund. The redemption price will be based
upon the net asset value per share (less the transaction charge applicable to
redemptions of shares of the Emerging Markets Equity Fund) 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 (iii) for such other periods as the SEC may by order permit for the
protection of shareholders of the Series.
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Shares of the Funds may be redeemed through certain broker-dealers, banks
and bank trust departments who may charge the investor a transaction fee or
other fee for their services at the time of redemption. Such fees would not
otherwise be charged if the shares were redeemed directly from the Trust.
Under the Sales Agreement, the Authorized Dealer or Sub-designee is
authorized to accept redemption orders on behalf of the Funds. A Fund will be
deemed to have received a redemption order when the Authorized Dealer or Sub-
designee accepts the redemption order and such order will be priced at the
Fund's net asset value next computed after such order is accepted by the
Authorized Dealer or Sub-designee.
The Trust will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of Brinson Partners
or the Board, result in the necessity of a Series selling assets under
disadvantageous conditions and to the detriment of the remaining shareholders of
the Series. Pursuant to the Trust's Agreement and Declaration of Trust, payment
for shares redeemed may be made either in cash or in-kind, or partly in cash and
partly in-kind. Under unusual circumstances, when the Board 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. In-kind payments to
non-affiliated shareholders need not constitute a cross-section of a Series'
portfolio. Where a shareholder has requested redemption of all or a part of the
shareholder's investment and where a Series computes such redemption in-kind,
the Series will not recognize gain or loss for federal tax purposes on the
securities used to compute the redemption, but the shareholder will recognize
gain or loss equal to the difference between the fair market value of the
securities received and the shareholder's basis in the Fund shares redeemed.
Pursuant to an exemptive order issued by the SEC, the Trust is permitted to pay
redemptions in-kind to shareholders that are affiliated persons of the Funds by
nature of a greater than 5% ownership interest in the Funds. Any such
redemptions in-kind would be undertaken in compliance with the order's
condition.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to involuntarily redeem UBS Investment Funds class of shares
in any Fund account for their then current net asset value (which will be
promptly paid to the shareholder) if at any time the total investment does not
have a value of at least $1,000 as a result of redemptions and not due to
changes in the asset value of the Series. The shareholder will be notified that
the value of his or her Fund account is less than the required minimum and will
be allowed at least 60 days to bring the value of the account up to the minimum
before the redemption is processed.
Shareholders who wish to initiate purchase, exchange or redemption
transactions by telephone must elect the option either on the initial
application or by subsequently arranging it in writing. With respect to such
telephone transactions, the Funds will ensure that reasonable procedures are
used to confirm that instructions communicated by telephone are genuine
(including verification of the shareholder's social security number or mother's
maiden name) and, if they do not, the Funds or the transfer agent may be liable
for any losses due to unauthorized or fraudulent transactions. Written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
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TAXATION
Additional Information On Distributions And Taxes
Distributions
Distributions of Net Investment Income. Each Series receives income
generally in the form of dividends and interest on its investments. This income,
less expenses incurred in the operation, constitute a Series' net investment
income from which dividends may be paid to you. Any distributions by a Series
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
Distributions of Capital Gains. A Series may derive capital gains and
losses in connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Series will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in the Series. Any net short-term or long-term capital gains
realized by a Series (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on the
Series.
Effect of Foreign Investments on Distributions. For Series which invest in
foreign debt instruments, most foreign exchange gains realized on the sale of
debt instruments are treated as ordinary income by such Series. Similarly,
foreign exchange losses realized by such Series on the sale of debt instruments
are generally treated as ordinary losses by the Series. These gains when
distributed will be taxable to you as ordinary dividends, and any losses will
reduce the Series' ordinary income otherwise available for distribution to you.
This treatment could increase or reduce the Series' ordinary income
distributions to you, and may cause some or all of the Series' previously
distributed income to be classified as a return of capital.
A Series may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the Series' total assets at the
end of the fiscal year are invested in securities of foreign corporations, the
Series may elect to pass-through to you your pro rata share of foreign taxes
paid by the Series. If this election is made, the year-end statement you receive
from the Series will show more taxable income than was actually distributed to
you. However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or claim a foreign tax credit for such taxes
against your U.S. federal income tax. The Series will provide you with the
information necessary to complete your individual income tax return if such
election is made.
Information on the Tax Character of Distributions. Each Series will inform
you of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held shares of a Series for a full year, you may have designated and distributed
to you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Series.
Taxes
Election to be Taxed as a Regulated Investment Company. Each Series has
elected to be treated as a regulated investment company under Subchapter M of
the Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. As a regulated investment company,
each Series generally pays no federal income tax on the income and gains it
distributes to you. The Board reserves the right not to maintain the
qualification of the Series as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Series will be
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subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Series' available earnings and profits.
Excise Tax Distribution Requirements. The Code requires each Series to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. Each Series intends to declare and pay sufficient dividends in December
(or in January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
Redemption of Series Shares. Redemptions and exchanges of shares of a
Series are taxable transactions for federal and state income tax purposes that
cause you to recognize a gain or loss. If you hold your shares as a capital
asset, the gain or loss that you realize will be capital gain or loss. Any loss
incurred on the redemption or exchange 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 gains distributed to you by the Series on those shares.
All or a portion of any loss that you realize upon the redemption of your
shares of a Series will be disallowed to the extent that you purchase other
shares in such Series (through reinvestment of dividends or otherwise) within 30
days before or after your share redemption. Any loss disallowed under these
rules will be added to your tax basis in the new shares you purchase.
U.S. Government Obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by a
Series. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. The rules on exclusion of this
income are different for corporations.
Dividends-Received Deduction for Corporations. Corporate investors in
certain Series may be entitled to a dividends-received deduction on a portion of
the ordinary dividends they receive from such Series. The portion of the
dividends which qualifies for the dividends-received deduction depends on the
aggregate qualifying dividend income received by a Series from domestic (US)
sources. Certain holding period and debt financing restrictions may also apply
to corporate investors seeking to claim the deduction. All dividends (including
the deducted portion) must be included in your alternative minimum taxable
income calculation.
Investment in Complex Securities. A Series may invest in complex
securities. Such investments may be subject to numerous special and complex tax
rules. These rules could affect whether gains and losses recognized by a Series
are treated as ordinary income or capital gain, accelerate the recognition of
income to a Series or defer a Series' ability to recognize losses, and, in
limited cases, subject the Series to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by a Series.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shareholders of the Emerging Markets Equity Fund are subject to a 1.50%
transaction charge in connection with each purchase and redemption of shares of
the Series. Shareholders of the Emerging Markets Debt Fund are subject to a
0.75% transaction charge in connection with each purchase of shares of the
Series. Shares of the Series are sold at a price which is equal to the net asset
value of such shares, plus the transaction charge. Redemption requests for the
Emerging Markets Equity Fund are paid at the net asset value less the
transaction charge. The transaction charges do not apply to the reinvestment of
dividends or capital gain distributions. The transaction charges are paid to the
Series and used by them to
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defray the transaction costs associated with the purchase and sale of securities
within the Series. The amount of the transaction charge on purchase and
redemptions represents the estimate of the costs reasonably anticipated to be
associated with the purchase of securities with cash received from shareholders
and the sale of securities to obtain cash to redeem shareholders. Therefore, the
transaction charges offset the dilutive effect such costs would otherwise have
on the net asset value of the Series' shares. Purchases and redemptions which
are made in kind with securities are not subject to the transaction charges.
PERFORMANCE CALCULATIONS
From time to time, performance information, such as yield or total return,
may be quoted in advertisements or in communications to present or prospective
shareholders. Performance quotations represent the Funds' past performance and
should not be considered as representative of future results. The current yield
will be calculated by dividing the net investment income earned per share by a
Fund during the period stated in the advertisement (based on the average daily
number of shares entitled to receive dividends outstanding during the period) by
the maximum net asset value per share on the last day of the period and
annualizing the result on a semi-annual compounded basis. The Funds' total
return may be calculated on an annualized and aggregate basis for various
periods (which periods will be stated in the advertisement). Average annual
return reflects the average percentage change per year in value of an investment
in a Fund. Aggregate total return reflects the total percentage change over the
stated period.
To help investors better evaluate how an investment in the Brinson Funds
might satisfy their investment objectives, advertisements regarding the Funds
may discuss yield or total return as reported by various financial publications.
Advertisements may also compare yield or total return to other investments,
indices and averages. The following publications, benchmarks, indices and
averages may be used: Lipper Mutual Fund Performance Analysis; Lipper Fixed
Income Analysis; Lipper Mutual Fund Indices; Morgan Stanley Indices; Lehman
Brothers Treasury Index; Salomon Smith Barney Indices; Dow Jones Composite
Average or its component indices; Standard & Poor's 500 Stock Index or its
component indices; Wilshire Indices; The New York Stock Exchange composite or
component indices; CDA Mutual Fund Report; Weisenberger-Mutual Funds Panorama
and Investment Companies; Mutual Fund Values and Mutual Fund Service Book,
published by Morningstar, Inc.; comparable portfolios managed by the Advisor;
and financial publications, such as Business Week, Kiplinger's Personal Finance,
Financial World, Forbes, Fortune, Money Magazine, The Wall Street Journal,
Barron's, et al., which rate fund performance over various time periods.
The principal value of an investment in the Funds will fluctuate, so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Any fees charged by banks or other institutional investors
directly to their customer accounts in connection with investments in shares of
the Funds will not be included in the Brinson Funds' calculations of yield or
total return.
Performance information for the UBS Investment Funds class of shares,
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.
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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 five-year periods ended June 30,
1999 and the period August 31, 1992 (commencement of operations)
through June 30, 1999 was 4.76%, 12.03% and 10.43%,
respectively;
(ii) the Global Equity Fund, for the one- and five-year periods ended June
30, 1999 and the period January 28, 1994 (commencement of operations)
through June 30, 1999 was 10.14%, 14.17%, and 12.02%,
respectively;
(iii) the Global Bond Fund, for the one- and five-year periods ended June
30, 1999 and the period July 30, 1993 (commencement of operations)
through June 30, 1999 was 3.13%, 7.20% and 5.91%, respectively;
(iv) the U.S. Balanced Fund, for the one- and three-year periods ended
June 30, 1999 and the period December 30, 1994 (commencement of
operations) through June 30, 1999 was 4.74%, 10.72% and 13.32%,
respectively;
(v) the U.S. Equity Fund, for the one- and five-year periods ended June
30, 1999 and the period February 22, 1994 (commencement of
operations) through June 30, 1999 was 15.22%, 23.95% and 21.60%,
respectively;
(vi) the U.S. Large Capitalization Equity Fund, for the one-year period
ended June 30, 1999 and for the period April 6, 1998 (commencement of
operations) through June 30, 1999 was 14.54% and 9.98%,
respectively;
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(vii) the U.S. Bond Fund, for the one- and three-year periods ended June
30, 1999 and the period August 31, 1995 (commencement of operations)
through June 30, 1999 was 2.97%, 7.29% and 6.64%, respectively;
(viii) the Global (Ex-U.S.) Equity Fund, for the one- and five-year periods
ended June 30, 1999 and the period August 31, 1993 (commencement of
operations) through June 30, 1999 was 3.65%, 10.03% and 8.08%,
respectively;
(ix) the U.S. Large Capitalization Growth Fund, for the one-year period
ended June 30, 1999 and the period October 14, 1997 (commencement of
operations) through June 30, 1999 was 29.70% and 28.87%,
respectively;**
(x) the U.S. Small Capitalization Growth Fund, for the one-year period
ended June 30, 1999 and the period September 30, 1997 (commencement
of operations) through June 30, 1999 was (5.41)% and (4.74)%,
respectively; ** and
(xi) the High Yield Fund, for the one-year period ended June 30, 1999 and
the period September 30, 1997 (commencement of operations) through
June 30, 1999 was 4.90% and 7.50%, respectively **.
* The Emerging Markets Debt Fund and the Emerging Markets Equity Fund had
not commenced operations as of the time periods indicated.
** These Series were reorganized as Series of the Trust on December 18,
1998. The average annual total return calculations also reflect the
performance of these Series while they were series of the UBS Private
Investor Funds, Inc.
Based upon the foregoing calculations, the average annual total return for
the Brinson Funds-UBS Investment Funds (previously the SwissKey Class) class of
shares of:*
(i) the Global Fund, for the one- and three-year periods ended June 30,
1999 and the period July 31, 1995 (commencement of operations)
through June 30, 1999 was 3.92%, 9.72% and 10.83%,
respectively;
(ii) the Global Equity Fund, for the one- and three-year periods ended
June 30, 1999 and the period July 31, 1995 (commencement of
operations) through June 30, 1999 was 9.28%, 12.46% and 14.44%,
respectively;
(iii) the Global Bond Fund, for the one- and three-year periods ended June
30, 1999 and the period July 31, 1995 (commencement of operations)
through June 30, 1999 was 2.58%, 4.00% and 5.38%, respectively;
(iv) the U.S. Balanced Fund, for the one- and three-year periods ended
June 30, 1999 and the period July 31, 1995 (commencement of
operations) through June 30, 1999 was 4.13%, 10.21% and 10.77%,
respectively;
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(v) the U.S. Equity Fund, for the one- and three-year periods ended June
30, 1999 and the period July 31, 1995 (commencement of operations)
through June 30, 1999 was 14.63%, 22.04% and 23.48%,
respectively;
(vi) the U.S. Large Capitalization Equity Fund, for the one-year period
ended June 30, 1999 and the period April 6, 1998 (commencement of
operations) through June 30, 1999 was 13.86% and 9.28%,
respectively;
(vii) the U.S. Bond Fund, for the one- and three-year periods ended June
30, 1999 and the period August 31, 1995 (commencement of operations)
through June 30, 1999 was 2.45%, 6.73% and 6.11%, respectively;
(viii) the Global (Ex-U.S.) Equity Fund, for the one- and three-year
periods ended June 30, 1999 and the period July 31, 1995
(commencement of operations) through June 30, 1999 was 2.78%, 8.41%
and 7.49%, respectively;
The cumulative total return for the Brinson Funds-UBS Investment Funds
class of shares of:
(ix) the U.S. Large Capitalization Growth Fund, for the period December
31, 1998 (commencement of operations) through June 30, 1999 was
16.98%;**
(x) the U.S. Small Capitalization Growth Fund, for the period December
31, 1998 (commencement of operations) through June 30, 1999 was
3.86%; ** and
(xi) the High Yield Fund, for the period December 31, 1998 (commencement
of operations) through June 30, 1999 was 2.61% **.
* The Emerging Markets Debt Fund and the Emerging Markets Equity Fund had
not commenced operations as of the time periods indicated.
** These Series were reorganized as Series of the Trust on December 18,
1998.
Based on the foregoing calculations, the average annual total return for
the Brinson Fund-Class N shares of *:
(i) the Global Fund, for the one-year period ended June 30, 1999 and the
period June 30, 1997 (commencement of operations) through June 30,
1999 was 4.47% and 6.17%, respectively;
(ii) the Global Equity Fund, for the one-year period ended June 30, 1999
and the period June 30, 1997 (commencement of operations) through
June 30, 1999 was 9.80% and 9.20%, respectively;
(iii) the Global Bond Fund, for the one-year period ended June 30, 1999
and the period June 30, 1997 (commencement of operations) through
June 30, 1999 was 2.89% and 2.63%, respectively;
(iv) the U.S. Balanced Fund, for the one-year period ended June 30, 1999
and the period June 30, 1997 (commencement of operations) through
June 30, 1999 was 4.17% and 8.09%, respectively;
(v) the U.S. Equity Fund, for the one-year period ended June 30, 1999
and the period June 30, 1997 (commencement of operations) through
June 30, 1999 was 14.75% and 17.88%, respectively;
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(vi) the U.S. Large Capitalization Equity Fund, for the one-year period
ended June 30, 1999 and the period April 6, 1998 (commencement of
operations) through June 30, 1999 was 14.40% and 9.66%,
respectively;
(vii) the U.S. Bond Fund, for the one-year period ended June 30, 1999 and
the period June 30, 1997 (commencement of operations) through June
30, 1999 was 2.88% and 6.53%, respectively; and
(viii) the Global (Ex-U.S.) Equity Fund, for the one-year period ended June
30, 1999 and the period June 30, 1997 (commencement of operations)
through June 30, 1999 was 3.30% and 3.90%, respectively;
The cumulative total return for the Brinson Fund-Class N of:
(ix) the U.S. Large Capitalization Growth Fund, for the period December
31, 1998 (commencement of operations) through June 30, 1999 was
17.23%;**
(x) the U.S. Small Capitalization Growth Fund, for the period December
31, 1998 (commencement of operations) through June 30, 1999 was
4.07%; ** and
(xi) the High Yield Fund, for the period December 31, 1998 (commencement
of operations) through June 30, 1999 was 2.71%**.
* The Emerging Markets Debt Fund and the Emerging Markets Equity Fund had
not commenced operations as of the time periods indicated.
** These Series were reorganized as Series of the Trust on December 18,
1998.
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<PAGE>
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 AND REPORTS OF INDEPENDENT AUDITORS
The Series' Financial Statements for the fiscal year ended June 30, 1999
and the reports thereon of August 11, 1999, which are contained in the Series'
Annual Reports dated June 30, 1999 (as filed with SEC on ,September 3, 1999
pursuant to Section 30(b) of the Act and Rule 30b2-1 thereunder (Accession
Number 0000950109-99-003295)) are incorporated herein by reference. The
Financial Statements of the U.S. Large Capitalization Growth Fund, U.S. Small
Capitalization Growth Fund and High Yield Fund (formerly the UBS Large Cap
Growth Portfolio, the UBS Small Cap Portfolio and the UBS High Yield Bond
Portfolio (the "Portfolios")), respectively, which appear in the Annual Reports
dated December 31, 1997 and the reports thereon of February 17, 1998 as of and
for the fiscal year ended December 31, 1997 and the Annual Reports dated
December 31, 1998 and the reports thereon of February 12, 1999 as of and for the
fiscal year ended December 31, 1998 (as filed with the SEC on March 11, 1999
pursuant to Section 30(b) of the Act and Rule 30b2-1 thereunder (Accession
Number 0000950131-99-001426)) 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.
A-1
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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 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.
A-2
