THE JPM INSTITUTIONAL MONEY MARKET FUND
THE JPM INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND
THE JPM INSTITUTIONAL TREASURY MONEY MARKET FUND
THE JPM INSTITUTIONAL SHORT TERM BOND FUND
THE JPM INSTITUTIONAL BOND FUND
THE JPM INSTITUTIONAL TAX EXEMPT BOND FUND
THE JPM INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
THE JPM INSTITUTIONAL SELECTED U.S. EQUITY FUND
THE JPM INSTITUTIONAL U.S. SMALL COMPANY FUND
THE JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND
THE JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND
THE JPM INSTITUTIONAL DIVERSIFIED FUND
STATEMENT OF ADDITIONAL INFORMATION
June 21, 1995
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT
CONTAINS ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION
WITH THE PROSPECTUS FOR THE FUND OR FUNDS LISTED ABOVE, AS SUPPLEMENTED
FROM TIME TO TIME, WHICH MAY BE OBTAINED UPON REQUEST FROM SIGNATURE
BROKER-DEALER SERVICES, INC., ATTENTION: THE JPM INSTITUTIONAL FUNDS;
(800) 847-9487.
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Table of Contents
PAGE
General . . . . . . . . . . . . . . . . . . . 1
Investment Objectives and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 29
Trustees and Officers . . . . . . . . . . . . 52
Investment Advisor . . . . . . . . . . . . . . 56
Administrator and Distributor . . . . . . . . 60
Services Agent . . . . . . . . . . . . . . . . 63
Custodian . . . . . . . . . . . . . . . . . . 67
Shareholder Servicing . . . . . . . . . . . . 67
Independent Accountants . . . . . . . . . . . 69
Expenses . . . . . . . . . . . . . . . . . . . 69
Purchase of Shares . . . . . . . . . . . . . . 70
Redemption of Shares . . . . . . . . . . . . . 71
Exchange of Shares . . . . . . . . . . . . . . 71
Dividends and Distributions . . . . . . . . . 72
Net Asset Value . . . . . . . . . . . . . . . 72
Performance Data . . . . . . . . . . . . . . . 74
Portfolio Transactions . . . . . . . . . . . . 78
Massachusetts Trust . . . . . . . . . . . . . 81
Description of Shares . . . . . . . . . . . . 82
Taxes . . . . . . . . . . . . . . . . . . . . 85
Additional Information . . . . . . . . . . . 89
Financial Statements . . . . . . . . . . . . . 90
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Additional Information
New York Municipal Obligations . . . . . . . . B-1
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GENERAL
The JPM Institutional Family of Funds is a family of open-end
investment companies, currently consisting of thirteen funds: The JPM
Institutional Money Market Fund, The JPM Institutional Treasury Money Market
Fund, The JPM Institutional Tax Exempt Money Market Fund, The JPM Institutional
Short Term Bond Fund, The JPM Institutional Bond Fund, The JPM Institutional Tax
Exempt Bond Fund, The JPM Institutional International Bond Fund, The JPM
Institutional New York Total Return Bond Fund, The JPM Institutional Selected
U.S. Equity Fund, The JPM Institutional U.S. Small Company Fund, The JPM
Institutional International Equity Fund, The JPM Institutional Emerging Markets
Equity Fund, and The JPM Institutional Diversified Fund (collectively, the
"Funds"). Each of the Funds is a series of The JPM Institutional Funds, an
open-end management investment company formed as a Massachusetts business trust
(the "Trust") (where appropriate, references to the "Trust" refer to the Trust
acting on behalf of a Fund and references to a "Fund" refer to a Fund acting
through the Trust).
This Statement of Additional Information describes the financial
history, investment objectives and policies, management and operation of each of
the Funds to enable investors to select the Funds which best suit their needs.
The Funds operate through Signature Financial Group, Inc.'s Hub and Spoke(R)
financial services method.
This Statement of Additional Information provides additional
information with respect to the Funds, and should be read in conjunction with
the current Prospectus. Capitalized terms not otherwise defined in this
Statement of Additional Information have the meanings accorded to them in the
Funds' Prospectus. The Funds' executive offices are located at 6 St. James
Avenue, Boston, Massachusetts 02116.
INVESTMENT OBJECTIVES AND POLICIES
THE JPM INSTITUTIONAL MONEY MARKET FUND (the "Money Market Fund") is
designed to be an economical and convenient means of making substantial
investments in money market instruments. The Money Market Fund's investment
objective is to maximize current income and maintain a high level of liquidity.
The Fund attempts to achieve this objective by investing all of its investable
assets in The Money Market Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Money
Market Fund.
The Portfolio seeks to achieve its investment objective by maintaining
a dollar-weighted average portfolio maturity of not more than 90 days and by
investing in U.S. dollar denominated securities described in the Prospectus and
this Statement of Additional Information that meet certain rating criteria,
present minimal credit risk and have effective maturities of not more than
thirteen months. The Portfolio's ability to achieve maximum current income is
affected by its high quality standards. See "Quality and Diversification
Requirements".
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THE JPM INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND (the "Tax Exempt
Money Market Fund") is designed to be an economical and convenient means of
making substantial investments in instruments that are exempt from federal
income tax. The Tax Exempt Money Market Fund's investment objective is to
provide a high level of current income that is exempt from federal income tax
and maintain a high level of liquidity. See "Taxes". The Fund attempts to
achieve this objective by investing all of its investable assets in The Tax
Exempt Money Market Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Tax
Exempt Money Market Fund.
The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. dollar-denominated securities described in the
Prospectus and this Statement of Additional Information that meet certain rating
criteria, present minimal credit risks, have effective maturities of not more
than thirteen months and earn interest wholly exempt from federal income tax in
the opinion of bond counsel for the issuer, but it may invest up to 20% of its
total assets in taxable obligations. See "Quality and Diversification
Requirements". Interest on these securities may be subject to state and local
taxes. For more detailed information regarding tax matters, including the
applicability of the alternative minimum tax, see "Taxes".
THE JPM INSTITUTIONAL TREASURY MONEY MARKET FUND (the "Treasury Money
Market Fund") is designed to be an economical and convenient means of making
substantial investments in short term direct obligations of the U.S. Treasury.
The Treasury Money Market Fund's investment objective is to provide current
income, maintain a high level of liquidity and preserve capital. The Fund
attempts to accomplish this objective by investing all of its investable assets
in The Treasury Money Market Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Treasury Money Market Fund.
The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. Treasury securities described in the Prospectus
and in this Statement of Additional Information that have effective maturities
of not more than thirteen months. See "Quality and Diversification
Requirements".
THE JPM INSTITUTIONAL SHORT TERM BOND FUND (the "Short Term Bond Fund")
is designed for investors who place a strong emphasis on conservation of capital
but who also want a return greater than that of a money market fund or other
very low risk investment vehicles. It is appropriate for investors who do not
require the stable net asset value typical of a money market fund but who want
less price fluctuation than is typical of a longer-term bond fund. The Short
Term Bond Fund's investment objective is to provide a high total return while
attempting to limit the likelihood of negative quarterly returns. The Short Term
Bond Fund seeks to achieve this high total return to the extent consistent with
modest risk of capital and the maintenance of liquidity. The Short Term Bond
Fund attempts to achieve its investment objective by investing all of its
investable assets in The Short Term Bond Portfolio (the "Portfolio"), a
diversified open-end
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management investment company having the same investment objective as the Short
Term Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the corporate and government debt obligations and related
securities described in the Prospectus and this Statement of Additional
Information.
THE JPM INSTITUTIONAL BOND FUND (the "Bond Fund") is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
See "Quality and Diversification Requirements". The Bond Fund's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the Bond
Fund will fluctuate, the Bond Fund attempts to conserve the value of its
investments to the extent consistent with its objective. The Bond Fund attempts
to achieve its objective by investing all of its investable assets in The U.S.
Fixed Income Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
in high grade corporate and government debt obligations and related securities
of domestic and foreign issuers described in the Prospectus and this Statement
of Additional Information.
INVESTMENT PROCESS
Duration/yield curve management: Morgan's duration decision begins with
an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors Morgan
studies with regard to interest rates include economic growth and inflation,
capital flows and monetary policy. Based on this analysis, Morgan forms a view
of the most likely changes in the level and shape of the yield curve -- as well
as the timing of those changes -- and sets the Portfolio's duration and maturity
structure accordingly. To help contain interest rate risk, Morgan typically
limits the overall duration of the Portfolio to a range between one year shorter
and one year longer than that of the Salomon Brothers Broad Investment Grade
Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by Morgan's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, Morgan utilizes market and credit
analysis to assess whether the current risk-adjusted yield spreads of various
sectors are likely to widen or narrow. Morgan then overweights (underweights)
those sectors its analysis indicates offer the most (least) relative value,
basing the speed and magnitude of these shifts on valuation considerations.
Security selection: Securities are selected by the portfolio manager,
with substantial input from Morgan's fixed income analysis and traders. Using
quantitative analysis as well as traditional valuation methods, Morgan's
applied-research analysts aim to optimize security selection within the bounds
of the
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Portfolio's investment objective. In addition, credit analysts -- supported by
Morgan's equity analysts -- assess the creditworthiness of issuers and
counterparties. A dedicated trading desk contributes to security selection by
tracking new issuance, monitoring dealer inventories, and identifying
attractively priced bonds. The traders also handle all transactions for the
Portfolio.
THE JPM INSTITUTIONAL TAX EXEMPT BOND FUND (the "Tax Exempt Bond Fund")
is designed to be an economical and convenient means of making substantial
investments in debt obligations that are exempt from federal income tax. The Tax
Exempt Bond Fund's investment objective is to provide a high level of current
income exempt from federal income tax consistent with moderate risk of capital
and maintenance of liquidity. See "Taxes". The Fund attempts to achieve its
investment objective by investing all of its investable assets in The Tax Exempt
Bond Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Tax Exempt Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in securities of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest of which is exempt from federal income tax in the opinion of bond
counsel for the issuer, but it may invest up to 20% of its total assets in
taxable obligations. The Tax Exempt Bond Fund seeks to maintain a current yield
that is greater than that obtainable from a portfolio of short term tax exempt
obligations, subject to certain quality restrictions. See "Quality and
Diversification Requirements".
THE JPM INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND (the "New York
Total Return Bond Fund") is designed to be an economical and convenient means of
investing in a portfolio consisting primarily of debt obligations that are
exempt from federal and New York State income taxes. The New York Total Return
Bond Fund's investment objective is to provide a high after tax total return for
New York residents consistent with moderate risk of capital. Total return will
consist of income plus capital gains and losses. The Fund attempts to achieve
its objective by investing all of its investable assets in The New York Total
Return Bond Portfolio (the "Portfolio"), a non-diversified open-end management
investment company having the same investment objective as the Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in municipal securities issued by New York State and its political
subdivisions and by agencies, authorities and instrumentalities of New York and
its political subdivisions. These securities earn income exempt from federal and
New York State and local income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In addition, the Portfolio may invest in
municipal securities issued by states other than New York, by territories and
possessions of the United States and by the District of Columbia and their
political subdivisions, agencies and instrumentalities. These securities earn
income exempt from federal income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In order to seek to enhance the Portfolio's
after tax return, the Portfolio may also invest in securities which earn income
subject to New York and/or federal income taxes. These securities include
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U.S. government securities, corporate securities and municipal securities issued
on a taxable basis.
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND (the "International Bond
Fund") is designed to be an economical and convenient means of making
substantial investments in a broad range of international fixed income
securities. The International Bond Fund's investment objective is to provide a
high total return, consistent with moderate risk of capital, from a portfolio of
international fixed income securities. The International Bond Fund attempts to
achieve its objective by investing all of its investable assets in The Non-U.S.
Fixed Income Portfolio (the "Portfolio"), a non-diversified open-end management
investment company having the same investment objective as the International
Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in high grade, non-dollar-denominated corporate and government debt
obligations of foreign issuers described in the Prospectus and this Statement of
Additional Information.
INVESTMENT PROCESS
Duration management: The duration decision is central to Morgan's
investment process and begins with an analysis of economic conditions and real
yields in the countries that make up the Portfolio's universe. Based on this
analysis, fixed income portfolio managers forecast three potential paths
(optimistic, pessimistic, and most likely) that interest rates in each market
could follow over the next three and twelve months. These forecasts are
converted into return curves that enable Morgan to estimate the risk-return
profile of different portfolio durations. In each market, duration is set at its
"optimal" level-that is, at the level that Morgan believes will generate the
highest excess return per unit of excess risk, as measured against the
benchmark.
Country allocation: Morgan allocates the Portfolio's assets primarily
among the developed countries of the world outside the United States. Country
allocations are determined through and optimization procedure that ranks markets
according to the risks and returns inherent in their "optimal" durations.
Country weightings also reflect liquidity and credit quality considerations. To
help contain risk, Morgan typically limits the country-weighted duration of the
Portfolio to a range between one year shorter and one year longer than that of
the benchmark.
Sector/security selection: Holdings primarily consist of government and
government-guaranteed bonds, but also include publicly and privately traded
corporates, debt obligations of banks and bank holding companies and of
supranational organizations, and convertible securities. Sectors are over- or
under-weighted when Morgan perceives significant valuation distortions in their
yield spreads. Securities are selected by the portfolio manager, with
substantial input from fixed income analysts and traders as well as from
Morgan's extended network of equity analysts. Credit analysts monitor the
quality of current and prospective holdings and, in conjunction with the credit
committee, recommend purchases and sales.
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THE JPM INSTITUTIONAL SELECTED U.S. EQUITY FUND (the "Selected U.S.
Equity Fund") is designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the S&P 500 Index. The
Selected U.S. Equity Fund's investment objective is to provide a high total
return from a portfolio of selected equity securities. The Fund attempts to
achieve its investment objective by investing all of its investable assets in
The Selected U.S. Equity Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Selected U.S. Equity Fund.
In normal circumstances, at least 65% of the Portfolio's net assets
will be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights , convertible securities, trust certifications, limited partnership
interests and equity participations (collectively, "Equity Securities"). The
Portfolio's primary equity investments are the common stock of large and medium
sized U.S. corporations and, to a limited extent, similar securities of foreign
corporations.
INVESTMENT PROCESS
Fundamental research: Morgan's 20 domestic equity analysts, each an
industry specialist with an average of 13 years of experience, follow 700
predominantly large- and medium-sized U.S. companies -- 500 of which form the
universe for the Portfolio's investments. Their research goal is to forecast
normalized, longer term earnings and dividends for the most attractive companies
among those they cover. In doing this, they may work in concert with Morgan's
international equity analysts-in order to gain a broader perspective for
evaluating industries and companies in today's global economy.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by a dividend discount model, which calculates those
expected returns by comparing a company's current stock price with the "fair
value" price forecasted by its estimated long-term earnings power. Within each
sector, companies are ranked by their expected return and grouped into
quintiles; those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among first-quintile stocks; the specific names selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that the perceived misvaluation will be corrected within a reasonable
time frame, and the magnitude of the risks versus the rewards. Once a stock
falls into the third quintile -- because its price has risen or its fundamentals
have deteriorated -- it generally becomes a sale candidate. The portfolio
manager seeks to hold sector weightings close to those of the S&P 500 Index,
reflecting Morgan's belief that its research has the potential to add value at
the individual stock level, but not at the sector level. Sector neutrality is
also seen as a way to help to protect the portfolio from macroeconomic risks,
and --
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together with diversification -- represents an important element of Morgan's
risk control strategy. Morgan's dedicated trading desk handles all transactions
for the Portfolio.
THE JPM INSTITUTIONAL U.S. SMALL COMPANY FUND (the "U.S. Small Company
Fund") is designed for investors who are willing to assume the somewhat higher
risk of investing in small companies in order to seek a higher return over time
than might be expected from a portfolio of stocks of large companies. The U.S.
Small Company Fund's investment objective is to provide a high total return from
portfolio of Equity Securities of small companies. The Fund attempts to achieve
its investment objective by investing all of its investable assets in The U.S.
Small Company Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the U.S. Small
Company Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2500 Index, which is composed of 2,500 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
INVESTMENT PROCESS
Fundamental research: Morgan's 20 domestic equity analysts -- each an
industry specialist with an average of 13 years of experience -- continuously
monitor the small cap stocks in their respective sectors with the aim of
identifying companies that exhibit superior financial strength and operating
returns. Meetings with management and on-site visits play a key role in shaping
their assessments. Their research goal is to forecast normalized, long-term
earnings and dividends for the most attractive small cap companies among those
they monitor -- a universe that generally contains a total of 300-350 names.
Because Morgan's analysts follow both the larger and smaller companies in their
industries -- in essence, covering their industries from top to bottom -- they
are able to bring broad perspective to the research they do on both.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by Morgan's dividend discount model, which
calculates those returns by comparing a company's current stock price with the
"fair value" price forecasted by its estimated long-term earnings power. Within
each industry, companies are ranked by their expected returns and grouped into
quintiles; those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among the stocks in the top two quintiles of the rankings; the specific names
selected reflect the portfolio manager's judgment concerning the soundness of
the underlying forecasts, the likelihood that the perceived misevaluation will
soon be corrected, and the magnitude of the risks versus the rewards. Once a
stock
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falls into the third quintile -- because its price has risen or its fundamentals
have deteriorated -- it generally becomes a sale candidate. The portfolio
manager seeks to hold sector weightings close to those of the Russell 2500
Index, the Portfolio's benchmark, reflecting Morgan's belief that its research
has the potential to add value at the individual stock level, but not at the
sector level. Sector neutrality is also seen as a way to help to protect the
portfolio from macroeconomic risks, and -- together with diversification --
represents an important element of Morgan's risk control strategy .
THE JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND (the "International
Equity Fund") is designed for investors with a long-term investment horizon who
want to diversify their portfolios by investing in an actively managed portfolio
of non-U.S. securities that seeks to outperform the Morgan Stanley Europe,
Australia and Far East Index. The International Equity Fund's investment
objective is to provide a high total return from a portfolio of Equity
Securities of foreign corporatio. The Fund attempts to achieve its investment
objective by investing all of its investable assets in The Non-U.S. Equity
Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the International Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations . Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of developed
foreign countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: Morgan's country allocation decision begins with a
forecast of equity risk premiums, which provide a valuation signal by measuring
the relative attractiveness of stocks versus bonds. Using a proprietary
approach, Morgan calculates this risk premium for each of the nations in the
Portfolio's universe, determines the extent of its deviation -- if any -- from
its historical norm, and then rank countries according to the size of those
deviations. Countries with high (low) rankings are overweighted (underweighted)
in comparisons to the EAFE Index to reflect the above-average (below-average)
attractiveness of their stock markets. In determining weightings, Morgan
analyzes a variety of qualitative factors as well -- including the liquidity,
earnings momentum and interest rate climate of the market at hand. These
qualitative assessments can change the magnitude but not the direction of the
country allocations called for by the risk premium forecast. In an effort to
contain risk, Morgan places limits on the total size of the Portfolio's country
over- and under-weightings.
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Stock selection: Morgan's 44 international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These forecasts
are converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the purchases in the top third
of the rankings, and to keep sector weightings close to those of the EAFE Index,
the Fund's benchmark. Once a stock falls into the bottom third of the rankings
- -because its price has risen or its convertibles may be purchased instead of
common stock if they are deemed a more attractive means of investing in an
undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Fund's return. Morgan's currency decisions are supported by a proprietary
tactical mode which forecasts currency movements based on an analysis of four
fundamental factors -- trade balance trends, purchasing power parity, real
short-term interest differentials, and real bond yields -- plus a technical
factor designed to improve the timing of transactions. Combining the output of
this model with a subjective assessment of economic political and market
factors, Morgan's currency group recommends currency strategies that are
implemented in conjunction with the portfolio's investment strategy.
THE JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND (the "Emerging
Markets Equity Fund") is designed for investors with a long term investment
horizon who want exposure to the rapidly growing emerging markets. The Emerging
Markets Equity Fund's investment objective is to provide a high total return
from a portfolio of Equity Securities of companies in emerging markets. The Fund
attempts to achieve its investment objective by investing all of its investable
assets in The Emerging Markets Equity Portfolio (the "Portfolio"), a diversified
open-end management investment company having the same investment objective as
the Emerging Markets Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in Equity Securities of emerging markets issuers . Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: Morgan's country allocation decision begins with a
forecast of the expected return of each market in the Portfolio's universe.
These expected returns are calculated using a proprietary valuation method that
is forward looking in nature rather than based on historical data. Morgan then
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evaluates these expected returns from two different perspectives: first, it
identifies those countries that have high real expected returns relative to
their own history and other nations in their universe. Second, it identifies
those countries that it expects will provide high returns relative to their
currency risk. Countries that rank highly on one or both of these scores are
overweighted relative to the Fund's benchmark, The IFC Investable Index, while
those that rank poorly are underweighted. To help contain risk, Morgan places
limits on the total size of the Portfolio's country over- and underweightings.
Stock selection: Morgan's 12 emerging market equity analysts -- each an
industry specialist -- monitor a universe of approximately 900 companies in
these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio managers' objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of Morgan's rankings.
THE JPM INSTITUTIONAL DIVERSIFIED FUND (the "Diversified Fund") is
designed for investors who wish to invest for long term objectives such as
retirement and who seek to attain real appreciation in their investments over
the long term, but with somewhat less price fluctuation than a portfolio
consisting solely of equity securities. The Diversified Fund's investment
objective is to provide a high total return from a diversified portfolio of
equity and fixed income securities. The Fund attempts to achieve its investment
objective by investing all of its investable assets in The Diversified
Portfolio, a diversified open-end management investment company having the same
investment objective as the Diversified Fund.
The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include the
Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Fund may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Funds appears below. See "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
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ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Funds, except the
Treasury Money Market Fund, may invest in obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. These obligations may or may not
be backed by the "full faith and credit" of the United States. In the case of
securities not backed by the full faith and credit of the United States, each
Fund must look principally to the federal agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Securities in which each Fund, except the Treasury Money
Market Fund, may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation, and the U.S.
Postal Service, each of which has the right to borrow from the U.S. Treasury to
meet its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credits of each issuing agency. Securities which are backed by the
full faith and credit of the United States include obligations of the Government
National Mortgage Association, the Farmers Home Administration, and the
Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Funds, except the Tax
Exempt Money Market Fund, the Treasury Money Market Fund, the Tax Exempt Bond
Fund and the New York Total Return Bond Fund, subject to its applicable
investment policies, may also invest in short term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. These securities may be denominated in the U.S. dollar
or, in the case of the Short Term Bond, Bond, International Bond, Selected U.S.
Equity, U.S. Small Company, International Equity, Emerging Markets Equity or
Diversified Funds, in another currency. See "Foreign Investments".
BANK OBLIGATIONS. Each of the Funds, except the Treasury Money Market
Fund, unless otherwise noted in the Prospectus or below, may invest in
negotiable certificates of deposit, time deposits and bankers' acceptances of
(i) banks, savings and loan associations and savings banks which have more than
$2 billion in total assets (the "Asset Limitation") and are organized under the
laws of the United States or any state, (ii) foreign branches of these banks or
of foreign banks of equivalent size (Euros) and (iii) U.S. branches of foreign
banks of equivalent size (Yankees). The Tax Exempt Money Market, Tax Exempt Bond
and New York Total Return Bond Funds may not invest in obligations of foreign
branches of foreign banks and the Asset Limitation is not applicable to the
International Bond, International Equity or Emerging Markets Equity Funds. See
"Foreign Investments". The Funds will not invest in obligations for which the
Advisor, or any of its affiliated persons, is the ultimate obligor or accepting
bank. Each of the Funds, other than the Tax Exempt Money Market, Treasury Money
Market, Tax Exempt Bond and New York Total Return Bond Funds, may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank).
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COMMERCIAL PAPER. Each of the Funds (except the Treasury Money Market
Fund) may invest in commercial paper, including master demand obligations.
Master demand obligations are obligations that provide for a periodic adjustment
in the interest rate paid and permit daily changes in the amount borrowed.
Master demand obligations are governed by agreements between the issuer and
Morgan Guaranty Trust Company of New York acting as agent, for no additional
fee, in its capacity as investment advisor to the Portfolios and as fiduciary
for other clients for whom it exercises investment discretion. The monies loaned
to the borrower come from accounts managed by the Advisor or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. The Advisor, acting as a fiduciary on behalf of its
clients, has the right to increase or decrease the amount provided to the
borrower under an obligation. The borrower has the right to pay without penalty
all or any part of the principal amount then outstanding on an obligation
together with interest to the date of payment. Since these obligations typically
provide that the interest rate is tied to the Federal Reserve commercial paper
composite rate, the rate on master demand obligations is subject to change.
Repayment of a master demand obligation to participating accounts depends on the
ability of the borrower to pay the accrued interest and principal of the
obligation on demand which is continuously monitored by the Advisor. Since
master demand obligations typically are not rated by credit rating agencies, a
Fund may invest in such unrated obligations only if at the time of an investment
the obligation is determined by the Advisor to have a credit quality which
satisfies the Fund's quality restrictions. See "Quality and Diversification
Requirements". Although there is no secondary market for master demand
obligations, such obligations are considered by the Funds to be liquid because
they are payable upon demand. The Funds do not have any specific percentage
limitation on investments in master demand obligations.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Funds' Trustees. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Funds invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Treasury Money
Market Fund will only enter into repurchase agreements involving U.S. Treasury
securities. The Funds will always receive securities as collateral whose market
value is, and during the entire term of the agreement remains, at least equal to
100% of the dollar amount invested by the Funds in each agreement plus accrued
interest, and the Funds will make payment for such securities only upon physical
delivery or upon evidence of book entry transfer to the account of the
Custodian. The Money Market, Tax Exempt Money Market, and Treasury Money Markets
Funds will
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be fully collateralized within the meaning of paragraph (a)(3) of Rule 2a-7
under the Investment Company Act of 1940, as amended (the "1940 Act"). If the
seller defaults, a Fund might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Fund may be delayed or limited.
Each of the Funds (other than the Treasury Money Market Fund) may make
investments in other debt securities with remaining effective maturities of not
more than thirteen months, including without limitation corporate and foreign
bonds, asset-backed securities and other obligations described in the Prospectus
or this Statement of Additional Information. The Tax Exempt Money Market and Tax
Exempt Bond Funds may not invest in foreign bonds or asset-backed securities.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, the Bond, Short Term Bond, New York
Total Return Bond, International Bond and Diversified Funds may invest in bonds
and other debt securities of domestic and (except for the New York Total Return
Bond Fund) foreign issuers to the extent consistent with their investment
objectives and policies. A description of these investments appears in the
Prospectus and below. See "Quality and Diversification Requirements". For
information on short-term investments in these securities, see "Money Market
Instruments".
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
TAX EXEMPT OBLIGATIONS
As discussed in the Prospectus, the Tax Exempt Money Market, Tax Exempt
Bond and New York Total Return Bond Funds and, in certain circumstances, the
Bond and Short Term Bond Funds, may invest in tax exempt obligations to the
extent consistent with each Fund's investment objective and policies. A
description
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of the various types of tax exempt obligations which may be purchased by the
Funds appears in the Prospectus and below. See "Quality and Diversification
Requirements".
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories
of short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable
rate demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or
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by drawing on a bank letter of credit or guaranty issued with respect to such
note. The issuer of the municipal obligation may have a corresponding right to
prepay at its discretion the outstanding principal of the note plus accrued
interest upon notice comparable to that required for the holder to demand
payment. The variable rate demand notes in which each Fund may invest are
payable, or are subject to purchase, on demand usually on notice of seven
calendar days or less. The terms of the notes provide that interest rates are
adjustable at intervals ranging from daily to six months, and the adjustments
are based upon the prime rate of a bank or other appropriate interest rate index
specified in the respective notes. Variable rate demand notes are valued at
amortized cost; no value is assigned to the right of each Fund to receive the
par value of the obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, exempt from federal income tax. For a
description of the attributes of master demand obligations, see "Money Market
Instruments" above. Although there is no secondary market for master demand
obligations, such obligations are considered by each Fund to be liquid because
they are payable upon demand. The Funds have no specific percentage limitations
on investments in master demand obligations.
The Tax Exempt Money Market Fund may purchase securities of the type
described above if they have effective maturities within thirteen months. As
required by regulation of the Securities and Exchange Commission (the "SEC"),
this means that on the date of acquisition the final stated maturity (or if
called for redemption, the redemption date) must be within thirteen months or
the maturity must be deemed to be no more than thirteen months because of a
maturity shortening mechanism, such as a variable interest rate, coupled with a
conditional or unconditional right to resell the investment to the issuer or a
third party. See "Variable Rate Demand Notes" and "Puts". A substantial portion
of the Tax Exempt Money Market Fund's portfolio is subject to maturity
shortening mechanisms consisting of variable interest rates coupled with
unconditional rights to resell the securities to the issuers either directly or
by drawing on a domestic or foreign bank letter of credit or other credit
support arrangement. See "Foreign Investments".
PUTS. The Tax Exempt Money Market, Tax Exempt Bond and New York Total
Return Bond Funds may purchase without limit municipal bonds or notes together
with the right to resell the bonds or notes to the seller at an agreed price or
yield within a specified period prior to the maturity date of the bonds or
notes. Such a right to resell is commonly known as a "put". The aggregate price
for bonds or notes with puts may be higher than the price for bonds or notes
without puts. Consistent with each Fund's investment objective and subject to
the supervision of the Trustees, the purpose of this practice is to permit each
Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default
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on its obligation to repurchase. The Advisor will monitor each writer's ability
to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to each Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in each
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Tax Exempt Money Market Fund values any municipal bonds and notes
which are subject to puts at amortized cost. No value is assigned to the put.
The cost of any such put is carried as an unrealized loss from the time of
purchase until it is exercised or expires. The Tax Exempt Bond and New York
Total Return Bond Funds value any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Tax Exempt Bond and New York Total Return Bond Funds were to invest in municipal
bonds and notes with maturities of 60 days or more that are subject to puts
separate from the underlying securities, the puts and the underlying securities
would be valued at fair value as determined in accordance with procedures
established by the Board of Trustees. The Board of Trustees would, in connection
with the determination of the value of a put, consider, among other factors, the
creditworthiness of the writer of the put, the duration of the put, the dates on
which or the periods during which the put may be exercised and the applicable
rules and regulations of the SEC. Prior to investing in such securities, the Tax
Exempt Bond and New York Total Return Bond Funds, if deemed necessary based upon
the advice of counsel, will apply to the SEC for an exemptive order, which may
not be granted, relating to the valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, each Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is each
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Trustees will review regularly the Advisor's list of approved
dealers, taking into consideration, among other things, the ratings, if
available, of their equity and debt securities, their reputation in the
municipal securities markets, their net worth, their efficiency in consummating
transactions and any collateral arrangements, such as letters of credit,
securing the puts written by them. Commercial bank dealers normally will be
members of the Federal Reserve System, and other dealers will be members of the
National Association of Securities Dealers, Inc. or members of a national
securities exchange. In the case of the Tax Exempt Bond and New York Total
Return Bond
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Funds, other put writers will have outstanding debt rated Aa or better by
Moody's Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's
Corporation ("Standard & Poor's") or will be of comparable quality in the
Advisor's opinion or such put writers' obligations will be collateralized and of
comparable quality in the Advisor's opinion. The Trustees have directed the
Advisor not to enter into put transactions with any dealer which in the judgment
of the Advisor becomes more than a minimal credit risk. In the event that a
dealer should default on its obligation to repurchase an underlying security,
the Funds are unable to predict whether all or any portion of any loss sustained
could subsequently be recovered from such dealer.
The Trust has been advised by counsel that the Funds will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Funds. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.
EQUITY INVESTMENTS
As discussed in the Prospectus, the Portfolios for the Selected U.S.
Equity, U.S. Small Company, International Equity and Emerging Markets Equity
Funds and the equity portion of the Diversified Fund (collectively, the "Equity
Portfolios") invest primarily in Equity Securities. The Equity Securities in
which the Equity Portfolios invest include those listed on any domestic or
foreign securities exchange or traded in the over-the-counter market as well as
certain restricted or unlisted securities. A discussion of the various types of
equity investments which may be purchased by these Portfolios appears in the
Prospectus and below. See "Quality and Diversification Requirements".
EQUITY SECURITIES. The Equity Securities in which the Equity Portfolios
may or may not pay dividends and may or may not carry voting rights. Common
stock occupies the most junior position in a company's capital structure.
The convertible securities in which the Equity Portfolios may invest
include any debt securities or preferred stock which may be converted into
common stock or which carry the right to purchase 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.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' 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 convertible preferred stock, the holders' claims on
assets and
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earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
WARRANTS
The Equity Portfolios may invest in warrants, which entitle the holder
to buy common stock from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes is much lower
than the current market price of the underlying securities, yet warrants are
subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
FOREIGN INVESTMENTS
The International Bond, International Equity and Emerging Markets
Equity Funds make substantial investments in foreign countries. The Money
Market, Bond, Short Term Bond, Selected U.S. Equity, U.S. Small Company and
Diversified Funds may invest in certain foreign securities. The Bond, Short Term
Bond, Selected U.S. Equity, U.S. Small Company and Diversified Funds do not
expect to invest more than 25%, 25%, 30%, 30% and 30%, respectively, of their
total assets at the time of purchase in securities of foreign issuers. All
investments of the Money Market Fund must be U.S. dollar-denominated. The
Selected U.S. Equity and U.S. Small Company Funds do not expect more than 10% of
their respective foreign investments to be in securities which are not listed on
a national securities exchange or which are not denominated or principally
traded in the U.S. dollar. In the case of the Money Market, Bond and Short Term
Bond Funds, any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets.
Since investments in foreign securities may involve foreign currencies,
the value of a Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The International Bond, Short Term
Bond, Bond, Selected U.S. Equity, U.S. Small Company, International Equity,
Emerging Markets Equity and Diversified Funds may enter into forward commitments
for the purchase or sale of foreign currencies in connection with the settlement
of foreign securities transactions or to manage the Funds' currency exposure
related to foreign investments. The Funds will not enter into such commitments
for speculative purposes.
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For a description of the risks associated with investing in foreign
securities, see "Additional Investment Information and Risk Factors" in the
Prospectus. To the extent that the Tax Exempt Money Market, Tax Exempt Bond and
New York Total Return Bond Funds invest in municipal bonds and notes backed by
credit support arrangements with foreign financial institutions, the risks
associated with investing in foreign securities may be relevant to these Funds.
INVESTING IN JAPAN. Investing in Japanese securities may involve the
risks associated with investing in foreign securities generally. In addition,
because it invests in Japan, The International Equity Portfolio will be subject
to the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the
Japanese OTC market reached historical peaks (which were later referred to as
the "bubble") as well as historically high trading volumes in 1989 and 1990.
Since then, stock prices in both markets decreased significantly, with listed
stock prices reaching their lowest levels in the third quarter of 1992 and OTC
stock prices reaching their lowest levels in the fourth quarter of 1992. During
the period from January 1, 1989 through December 31, 1994, the highest Nikkei
stock average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively,
and the lowest for each were 14,309.41 and 1,099.32, respectively. There can be
no assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even after
the recent market decline. Differences in accounting methods make it difficult
to compare the earnings of Japanese companies with those of companies in other
countries, especially the United States.
Since The International Equity Portfolio invests in securities
denominated in yen, changes in exchange rates between the U.S. dollar and the
yen affect the U.S. dollar value of The International Equity Portfolio's assets.
Such rate of exchange is determined by forces of supply and demand on the
foreign exchange markets. These forces are in turn affected by the international
balance of payments and other economic, political and financial conditions,
government intervention, speculation and other factors. See Foreign Currency
Exchange Transactions.
Japanese securities held by The International Equity Portfolio are not
registered with the SEC nor are the issuers thereof subject to its reporting
requirements. There may be less publicly available information about issuers of
Japanese securities than about U.S. companies and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject.
Although the Japanese economy has grown substantially over the past
four decades, recently the rate of growth had slowed substantially. During 1991,
1992 and 1993, the Japanese economy grew at rates of 4.3%, 1.1% and 0.1%,
respectively, as measured by real gross domestic product.
Japan's success in exporting its products has generated a sizeable
trade surplus. Such trade surplus has caused tensions at times between Japan and
some of its trading partners. In particular, Japan's trade relations with the
United States have recently been the subject of discussion and negotiation
between the two nations. The United States has imposed certain measures designed
to address trade issues in specific industries. These measures and similar
measures in the future may adversely affect the performance of The International
Equity Portfolio.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates will
continue, and it is likely that a reversal of such factors would adversely
affect the Japanese economy. Moreover, the Japanese economy may differ,
favorably or unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms of the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect The
International Equity Portfolio.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction, reflect the value each day of such securities in determining its
net asset value and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement, a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, each Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If a Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate 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 a Fund, provided however, that a Fund may invest all of
its investable assets in open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, a Fund 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 advisory and other
expenses that a Fund bears directly in connection with its own operations.
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REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. The Portfolio for the Treasury Money Market Fund will only
enter into reverse repurchase agreements involving Treasury securities. For
purposes of the 1940 Act it is also considered as the borrowing of money by the
Portfolio and, therefore, a form of leverage. The Portfolios will invest the
proceeds of borrowings under reverse repurchase agreements. In addition, a
Portfolio will enter into a reverse repurchase agreement only when the interest
income to be earned from the investment of the proceeds is greater than the
interest expense of the transaction. A Portfolio will not invest the proceeds of
a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. A Portfolio may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of the market value of its total
assets, less liabilities other than the obligations created by reverse
repurchase agreements. Each Portfolio will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. If interest rates rise during the term of a reverse repurchase
agreement, entering into the reverse repurchase agreement may have a negative
impact on the Money Market, Tax Exempt Money Market and Treasury Money Market
Funds' ability to maintain a net asset value of $1.00 per share. See "Investment
Restrictions".
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Portfolios for the Short Term
Bond Fund and the Bond Fund may engage in mortgage dollar roll transactions with
respect to mortgage securities issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. In a mortgage dollar roll transaction, the Portfolio sells
a mortgage backed security and simultaneously agrees to repurchase a similar
security on a specified future date at an agreed upon price. During the roll
period, the Portfolio will not be entitled to receive any interest or principal
paid on the securities sold. The Portfolio is compensated for the lost interest
on the securities sold by the difference between the sales price and the lower
price for the future repurchase as well as by the interest earned on the
reinvestment of the sales proceeds. The Portfolio may also be compensated by
receipt of a commitment fee. When the Portfolio enters into a mortgage dollar
roll transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll transactions
are considered reverse repurchase agreements for purposes of the Portfolio's
investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
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the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and no Portfolio will make any loans in excess
of one year. The Portfolios will not lend their securities to any officer,
Trustee, Director, employee or other affiliate of the Portfolios, the Advisor or
the Distributor, unless otherwise permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios
for each of the Funds (except the Treasury Money Market Fund) may invest in
privately placed, restricted, Rule 144A or other unregistered securities as
described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act"), before it may be sold, a Portfolio may be obligated to pay all or part of
the registration expenses, and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolios for the Tax Exempt
Money Market, Tax Exempt Bond and New York Total Return Bond Funds may invest in
certain synthetic variable rate instruments as described in the Prospectus. In
the case of some types of instruments credit enhancement is not provided, and if
certain events, which may include (a) default in the payment of principal or
interest on the underlying bond, (b) downgrading of the bond below investment
grade or (c) a loss of the bond's tax exempt status, occur, then (i) the put
will terminate, (ii) the risk to a Fund will be that of holding a long-term
bond, and (iii) in the case of the Tax Exempt Money Market Fund, the disposition
of the bond may be required which could be at a loss.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Funds, except the New York Total Return Bond and the
International Bond Funds, intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of these Funds is
subject to the following fundamental limitations: (1) the Fund may not invest
more than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (2)
the Fund may not own more than 10% of the outstanding voting securities of any
one issuer. As for the other 25% of the Fund's assets not subject to the
limitation described above, there is no limitation on investment of these assets
under the 1940 Act, so that all of such assets may be invested in securities of
any one issuer, subject to the limitation of any applicable state securities
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laws, or with respect to the Money Market and Treasury Money Market Funds, as
described below. Investments not subject to the limitations described above
could involve an increased risk to a Fund should an issuer, or a state or its
related entities, be unable to make interest or principal payments or should the
market value of such securities decline.
Although the New York Total Return Bond and International Bond Funds
are not limited by the diversification requirements of the 1940 Act, these Funds
will comply with the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. To meet these requirements, each Fund must diversify its
holdings so that, with respect to 50% of the Fund's assets, no more than 5% of
its assets are invested in the securities of any one issuer other than the U.S.
Government at the close of each quarter of the Fund's taxable year. The Fund may
with respect to the remaining 50% of its assets, invest up to 25% of its assets
in the securities of any one issuer (except this limitation does not apply to
U.S. Government Securities).
With respect to the Tax Exempt Money Market and Tax Exempt Bond Funds,
for purposes of diversification and concentration under the 1940 Act,
identification of the issuer of municipal bonds or notes depends on the terms
and conditions of the obligation. With respect to the New York Total Return Bond
Fund, for purposes of diversification under the Code and concentration under the
1940 Act, identification of the issuer of municipal bonds or notes also depends
on the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an industrial development
revenue bond or pollution control revenue bond, if the bond is backed only by
the assets and revenues of the nongovernmental user, the nongovernmental user is
regarded as the sole issuer. If in either case the creating government or
another entity guarantees an obligation, the guaranty is regarded as a separate
security and treated as an issue of such guarantor. Since securities issued or
guaranteed by states or municipalities are not voting securities, there is no
limitation on the percentage of a single issuer's securities which a Fund may
own so long as it does not invest more than 5% of its total assets that are
subject to the diversification limitation in the securities of such issuer,
except obligations issued or guaranteed by the U.S. Government. Consequently,
the Funds may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company which invests in voting
securities. See "Investment Restrictions".
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MONEY MARKET FUND. In order to attain the Money Market Fund's objective
of maintaining a stable net asset value, the Portfolio for the Money Market Fund
will (i) limit its investment in the securities (other than U.S. Government
securities) of any one issuer to no more than 5% of its assets, measured at the
time of purchase, except for investments held for not more than three business
days (subject, however, to the investment restriction No. 4 set forth under
"Investment Restrictions" below); and (ii) limit investments to securities that
present minimal credit risks and securities (other than U.S. Government
securities) that are rated within the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("NRSROs") or
by the only NRSRO that has rated the security. Securities which originally had a
maturity of over one year are subject to more complicated, but generally similar
rating requirements. A description of illustrative credit ratings is set forth
in Appendix A attached to this Statement of Additional Information. The
Portfolio may also purchase unrated securities that are of comparable quality to
the rated securities described above. Additionally, if the issuer of a
particular security has issued other securities of comparable priority and
security and which have been rated in accordance with (ii) above, that security
will be deemed to have the same rating as such other rated securities.
In addition, the Board of Trustees has adopted procedures which (i)
require the Board of Trustees to approve or ratify purchases by the Portfolio of
securities (other than U.S. Government securities) that are rated by only one
NRSRO or that are unrated; (ii) require the Portfolio to maintain a
dollar-weighted average portfolio maturity of not more than 90 days and to
invest only in securities with a remaining maturity of not more than thirteen
months; and (iii) require the Portfolio, in the event of certain downgradings of
or defaults on portfolio holdings, to dispose of the holding, subject in certain
circumstances to a finding by the Trustees that disposing of the holding would
not be in the Portfolio's best interest.
TAX EXEMPT MONEY MARKET FUND. In order to attain the Tax Exempt Money
Market Fund's objective of maintaining a stable net asset value, the Portfolio
for the Tax Exempt Money Market Fund will limit its investments to securities
that present minimal credit risks and securities (other than New York State
municipal notes) that are rated within the highest rating assigned to short-term
debt securities (or, in the case of New York State municipal notes, within one
of the two highest ratings assigned to short-term debt securities) by at least
two NRSROs or by the only NRSRO that has rated the security. Securities which
originally had a maturity of over one year are subject to more complicated, but
generally similar rating requirements. The Portfolio may also purchase unrated
securities that are of comparable quality to the rated securities described
above. Additionally, if the issuer of a particular security has issued other
securities of comparable priority and security and which have been rated in
accordance with the criteria described above that security will be deemed to
have the same rating as such other rated securities.
In addition, the Board of Trustees has adopted procedures which (i)
require the Portfolio to maintain a dollar-weighted average portfolio maturity
of not more than 90 days and to invest only in securities with a remaining
maturity of not more than thirteen months and (ii) require the Portfolio, in the
event of
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certain downgrading of or defaults on portfolio holdings, to dispose of the
holding, subject in certain circumstances to a finding by the Trustees that
disposing of the holding would not be in the Portfolio's best interest.
The credit quality of variable rate demand notes and other municipal
obligations is frequently enhanced by various credit support arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered when investment
quality is evaluated. The rating of credit-enhanced municipal obligations by a
NRSRO may be based primarily or exclusively on the credit support arrangement.
TREASURY MONEY MARKET FUND. In order to attain its objective of
maintaining a stable net asset value, the Treasury Money Market Fund will limit
its investments to direct obligations of the U.S. Treasury including Treasury
bills, notes and bonds with remaining maturities of thirteen months or less at
the time of purchase and will maintain a dollar-weighted average portfolio
maturity of not more than 90 days.
SHORT TERM BOND, BOND, INTERNATIONAL BOND AND DIVERSIFIED FUNDS. The
Short Term Bond, Bond and International Bond Funds and the fixed income portion
of the Diversified Fund invest principally in a diversified portfolio of "high
grade" and "investment grade" securities. Investment grade debt is rated, on the
date of investment, within the four highest ratings of Moody's, currently Aaa,
Aa, A and Baa, or of Standard & Poor's, currently AAA, AA, A and BBB, while high
grade debt is rated, on the date of the investment, within the two highest of
such ratings. The Bond Fund may also invest up to 5% of its total assets in
securities which are "below investment grade". Such securities must be rated, on
the date of investment, Ba by Moody's or BB by Standard & Poor's. The Funds may
invest in debt securities which are not rated or other debt securities to which
these ratings are not applicable, if in the opinion of the Advisor, such
securities are of comparable quality to the rated securities discussed above. In
addition, at the time the Funds invest in any commercial paper, bank obligation
or repurchase agreement, the issuer must have outstanding debt rated A or higher
by Moody's or Standard & Poor's, the issuer's parent corporation, if any, must
have outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
TAX EXEMPT BOND FUND. The Tax Exempt Bond Fund invests principally in a
diversified portfolio of "high grade" and "investment grade" tax exempt
securities. On the date of investment (i) municipal bonds must be rated within
the three highest ratings of Moody's, currently Aaa, Aa and A, or of Standard &
Poor's, currently AAA, AA, and A, (ii) municipal notes must be rated MIG-1 by
Moody's or SP-1 by Standard & Poor's (or, in the case of New York State
municipal notes, MIG-1 or MIG-2 by Moody's or SP-1 or SP-2 by Standard & Poor's)
and (iii) municipal commercial paper must be rated Prime-1 by Moody's or A-1 by
Standard & Poor's or, if not rated by either Moody's or Standard & Poor's,
issued by an issuer either (a) having an outstanding debt issue rated A or
higher by Moody's or Standard & Poor's or (b) having comparable quality in the
opinion of the Advisor. The Fund may invest in other tax exempt securities which
are not rated if, in the opinion of the Advisor, such securities are of
comparable
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quality to the rated securities discussed above. In addition, at the time the
Fund invests in any commercial paper, bank obligation or repurchase agreement,
the issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no
such ratings are available, the investment must be of comparable quality in the
Advisor's opinion.
NEW YORK TOTAL RETURN BOND FUND. The New York Total Return Bond Fund
invests principally in a diversified portfolio of "investment grade" tax exempt
securities. An investment grade bond is rated, on the date of investment within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment within the two highest of such ratings. Investment
grade municipal notes are rated, on the date of investment, MIG-1 or MIG-2 by
Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade municipal
commercial paper is rated, on the date of investment, Prime 1 or Prime 2 by
Moody's and A-1 or A-2 by Standard & Poor's. The New York Total Return Bond Fund
may also invest up to 5% of its total assets in securities which are "below
investment grade". Such securities must be rated, on the date of investment, Ba
by Moody's or BB by Standard & Poor's. The New York Total Return Bond Fund may
invest in debt securities which are not rated or other debt securities to which
these ratings are not applicable, if in the opinion of the Advisor, such
securities are of comparable quality to the rated securities discussed above. In
addition, at the time the Fund invests in any taxable commercial paper, bank
obligation or repurchase agreement, the issuer must have outstanding debt rated
A or higher by Moody's or Standard & Poor's, the issuer's parent corporation, if
any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by
Standard & Poor's, or if no such ratings are available, the investment must be
of comparable quality in the Advisor's opinion.
SELECTED U.S. EQUITY, U.S. SMALL COMPANY, INTERNATIONAL EQUITY,
EMERGING MARKETS EQUITY AND DIVERSIFIED FUNDS. The Selected U.S. Equity, U.S.
Small Company, International Equity, Emerging Markets Equity and Diversified
Funds may invest in convertible debt securities, for which there are no specific
quality requirements. In addition, at the time the Fund invests in any
commercial paper, bank obligation or repurchase agreement, the issuer must have
outstanding debt rated A or higher by Moody's or Standard & Poor's, the issuer's
parent corporation, if any, must have outstanding commercial paper rated Prime-1
by Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Advisor's opinion. At the time
the Fund invests in any other short-term debt securities, they must be rated A
or higher by Moody's or Standard & Poor's, or if unrated, the investment must be
of comparable quality in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
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OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased or sold by
the Portfolios will be traded on a securities exchange or will be purchased or
sold by securities dealers (over-the-counter or OTC options) that meet
creditworthiness standards approved by the Portfolio's Board of Trustees. While
exchange-traded options are obligations of the Options Clearing Corporation, in
the case of OTC options, a Portfolio relies on the dealer from which it
purchased the option to perform if the option is exercised. Thus, when a
Portfolio purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Portfolio as well as loss of the expected benefit of the transaction.
The staff of the SEC has taken the position that, in general, purchased
OTC options and the underlying securities used to cover written OTC options are
illiquid securities. However, a Portfolio may treat as liquid the underlying
securities used to cover written OTC options, provided it has arrangements with
certain qualified dealers who agree that the Portfolio may repurchase any option
it writes for a maximum price to be calculated by a predetermined formula. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios permitted to
enter into futures and options transactions may purchase or sell (write) futures
contracts and purchase put and call options including put and call options on
futures contracts. In addition, the Portfolios for the International Bond,
Emerging Markets Equity and Diversified Funds may sell (write) put and call
options, including options on futures. Futures contracts obligate the buyer to
take and the seller to make delivery at a future date of a specified quantity of
a financial instrument or an amount of cash based on the value of a securities
index. Currently, futures contracts are available on various types of fixed
income securities, including but not limited to U.S. Treasury bonds, notes and
bills, Eurodollar certificates of deposit and on indexes of fixed income
securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
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initial margin and any additional collateral required on any options on futures
contracts sold by a Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolios permitted to purchase and write options may
do so in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, certain Portfolios may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a
Portfolio to
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enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require a Portfolio to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Portfolio's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and Over-the-Counter Options" above for a discussion of
the liquidity of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and options
on futures contracts that can be held or controlled by an entity. If an adequate
exemption cannot be obtained, a Portfolio or the Advisor may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Portfolios
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Portfolio can commit assets to
initial margin deposits and option premiums. In addition, the Portfolios will
comply with guidelines established by the SEC with respect to coverage of
options and futures contracts by mutual funds, and if the guidelines so require,
will set aside appropriate liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that segregation
of a large percentage of a Portfolio's assets could impede portfolio management
or the Portfolio's ability to meet redemption requests or other current
obligations.
RISK MANAGEMENT
The Portfolios for the New York Total Return Bond, International Bond,
Diversified and Emerging Markets Equity Funds may employ non-hedging risk
management techniques. Examples of such strategies include synthetically
altering the duration of a portfolio or the mix of securities in a portfolio.
For example, if the Advisor wishes to extend maturities in a fixed income
portfolio in order to take advantage of an anticipated decline in interest
rates, but does not wish to purchase the underlying long term securities, it
might cause the Portfolio to purchase futures contracts on long term debt
securities. Similarly, if the Advisor wishes to decrease fixed income securities
or purchase equities, it could cause the Portfolio to sell futures contracts on
debt securities and purchase futures contracts on a stock index. Such
non-hedging risk management techniques are not speculative, but because they
involve leverage include, as do all leveraged transactions, the possibility of
losses as well as gains that are greater than if these techniques involved the
purchase and sale of the securities themselves rather than their synthetic
derivatives.
SPECIAL FACTORS AFFECTING THE NEW YORK TOTAL RETURN BOND FUND. The New York
Total Return Bond Fund intends to invest a high proportion of its assets in
municipal obligations of the State of New York and its political subdivisions,
municipalities, agencies, instrumentalities and public authorities. Payment of
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interest and preservation of principal is dependent upon the continuing ability
of New York issuers and/or obligators of state, municipal and public authority
debt obligations to meet their obligations thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
For further information concerning New York municipal obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for the purpose of providing a general
description of New York State and New York City credit and financial conditions.
This summary is based on information from an official statement of New York
general obligation municipal obligations and does not purport to be complete.
PORTFOLIO TURNOVER
Set forth below are the portfolio turnover rates for the Portfolios
corresponding to the Funds. A rate of 100% indicates that the equivalent of all
of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.
THE SHORT TERM BOND PORTFOLIO (Short Term Bond Fund) -- For the fiscal year
ended October 31, 1994: 230%
THE TAX EXEMPT BOND PORTFOLIO (Tax Exempt Bond Fund) -- For the fiscal year
ended August 31, 1994: 32.57%
THE NEW YORK TOTAL RETURN BOND PORTFOLIO (New York Total Return Bond Fund) --
For the period April 11, 1994 (commencement of operations) through March 31,
1995: 63%
THE U.S. FIXED INCOME PORTFOLIO (Bond Fund) -- For the fiscal year ended October
31, 1994: 234%
THE SELECTED U.S. EQUITY PORTFOLIO (Selected U.S. Equity Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: 76%
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THE U.S. SMALL COMPANY PORTFOLIO (U.S. Small Company Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: 97%
THE NON-U.S. EQUITY PORTFOLIO (International Equity Fund) -- For the fiscal year
ended October 31, 1994: 56%
THE EMERGING MARKETS EQUITY PORTFOLIO (Emerging Markets Equity Fund) -- For the
fiscal year ended October 31, 1994: 27.48%
THE DIVERSIFIED PORTFOLIO (Diversified Fund) -- For the period July 8, 1993
(commencement of operations) through June 30, 1994: 115%
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding
Portfolio are identical, unless otherwise specified. Accordingly, references
below to a Fund also include the Fund's corresponding Portfolio unless the
context requires otherwise; similarly, references to a Portfolio also include
the corresponding Fund unless the context requires otherwise.
The investment restrictions below have been adopted by the Trust with
respect to each Fund and by each corresponding Portfolio. Except where otherwise
noted, these investment restrictions are "fundamental" policies which, under the
1940 Act, may not be changed without the vote of a majority of the outstanding
voting securities of the Fund or Portfolio, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever a Fund is requested to vote on a change in the
fundamental investment restrictions of its corresponding Portfolio, the Trust
will hold a meeting of Fund shareholders and will cast its votes as instructed
by the Fund's shareholders.
The MONEY MARKET FUND and its corresponding PORTFOLIO may not:
1. Acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with
a duration of over seven calendar days, if as a result thereof,
more than 10% of the market value of the Fund's total assets
would be in investments which are illiquid;
30
<PAGE>
2. Enter into reverse repurchase agreements exceeding in the
aggregate one-third of the market value of the Fund's total
assets, less liabilities other than obligations created by
reverse repurchase agreements;
3. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts not to exceed 10% of the value
of the Fund's total assets, taken at cost, at the time of such
borrowing. Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed
10% of the value of the Fund's net assets at the time of such
borrowing. The Fund will not purchase securities while borrowings
exceed 5% of the Fund's total assets; provided, however, that the
Fund may increase its interest in an open-end management
investment company with the same investment objective and
restrictions as the Fund while such borrowings are outstanding.
This borrowing provision is included to facilitate the orderly
sale of portfolio securities, for example, in the event of
abnormally heavy redemption requests, and is not for investment
purposes and shall not apply to reverse repurchase agreements;
4. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund. This limitation shall not
apply to issues of the U.S. Government, its agencies or
instrumentalities and to permitted investments of up to 25% of
the Fund's total assets;
5. Purchase the securities or other obligations of issuers
conducting their principal business activity in the same industry
if, immediately after such purchase, the value of its investment
in such industry would exceed 25% of the value of the Fund's
total assets; provided, however, that the Fund may invest all or
part of its investable assets in an open-end management
investment company with the same investment objective and
restrictions as the Fund. For purposes of industry concentration,
there is no percentage limitation with respect to investments in
U.S. Government securities, negotiable certificates of deposit,
time deposits, and bankers' acceptances of U.S. branches of U.S.
banks;
6. Make loans, except through purchasing or holding debt
obligations, or entering into repurchase agreements, or loans of
portfolio securities in accordance with the Fund's investment
objective and policies (see "Investment Objectives and
Policies");
7. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real estate, commodities, or commodity
contracts or interests in oil, gas, or mineral exploration or
development programs. However, the Fund may purchase bonds or
commercial paper issued by companies
31
<PAGE>
which invest in real estate or interests therein including real
estate investment trusts;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of
when-issued securities or of securities for delivery at a future
date;
9. Acquire securities of other investment companies, except as
permitted by the 1940 Act; or
10. Act as an underwriter of securities.
The TAX EXEMPT MONEY MARKET FUND and its corresponding PORTFOLIO may
not:
1. Borrow money, except from banks for temporary, extraordinary or
emergency purposes and then only in amounts up to 10% of the
value of the Fund's total assets, taken at cost at the time of
such borrowing; or mortgage, pledge or hypothecate any assets
except in connection with any such borrowing in amounts up to 10%
of the value of the Fund's net assets at the time of such
borrowing. The Fund will not purchase securities while borrowings
exceed 5% of the Fund's total assets, provided, however, that the
Fund may increase its interest in an open-end management
investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding.
This borrowing provision, for example, facilitates the orderly
sale of portfolio securities in the event of abnormally heavy
redemption requests or in the event of redemption requests during
periods of tight market supply. This provision is not for
leveraging purposes;
2. Invest more than 25% of its total assets in securities of
governmental units located in any one state, territory, or
possession of the United States. The Fund may invest more then
25% of its total assets in industrial development and pollution
control obligations whether or not the users of facilities
financed by such obligations are in the same industry;1
3. Purchase industrial revenue bonds if, as a result of such
purchase, more than 5% of total Fund assets would be invested in
industrial revenue bonds where payment of principal and interest
are the responsibility of companies with fewer than three years
of operating history;
--------
1Pursuant to an interpretation of the staff of the SEC, the Fund may
not invest more than 25% of its assets in industrial development bonds in
projects of similar type or in the same state. The Fund shall comply with this
interpretation until such time as it may be modified by the staff or the SEC.
32
<PAGE>
4. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer, provided, however, that the
Fund may invest all or part of its investable assets in open-end
management investment company with the same investment objective
and restrictions as the Fund's. Each state and each political
subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member will be a
separate issuer if the security is backed only by the assets and
revenues of that issuer. If the security is guaranteed by another
entity, the guarantor will be deemed to be the issuer. This
limitation shall not apply to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or to
permitted investments of up to 25% of the Fund's total assets;2
5. Make loans, except through the purchase or holding of debt
obligations, repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof except to the extent that securities subject
to a demand obligation, stand-by commitments and puts may be
purchased (see "Investment Objectives and Policies"); real
estate; commodities; commodity contracts; or interests in oil,
gas, or mineral exploration or development programs. However, the
Fund may purchase municipal bonds, notes or commercial paper
secured by interests in real estate;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of
when-issued securities or of securities for delayed delivery;
8. Acquire securities of other investment companies, except as
permitted by the 1940 Act; or
9. Act as an underwriter of securities.
The TREASURY MONEY MARKET FUND and its corresponding PORTFOLIO may not:
1. Enter into reverse repurchase agreements which together with any
other borrowing exceeds in the aggregate one-third of the market
value of
- --------
2For purposes of interpretation of Investment Restriction No. 4
"guaranteed by another entity" includes credit substitutions, such as letters of
credit or insurance, unless the Advisor determines that the security meets the
Fund's credit standards without regard to the credit substitution.
33
<PAGE>
the Fund's or the Portfolio's total assets, less liabilities
other than the obligations created by reverse repurchase
agreements;
2. Borrow money (not including reverse repurchase agreements),
except from banks for temporary or extraordinary or emergency
purposes and then only in amounts up to 10% of the value of the
Fund's or the Portfolio's total assets, taken at cost at the time
of such borrowing (and provided that such borrowings and reverse
repurchase agreements do not exceed in the aggregate one-third of
the market value of the Fund's and the Portfolio's total assets
less liabilities other than the obligations represented by the
bank borrowings and reverse repurchase agreements). Mortgage,
pledge, or hypothecate any assets except in connection with any
such borrowing and in amounts up to 10% of the value of the
Fund's or the Portfolio's net assets at the time of such
borrowing. The Fund or the Portfolio will not purchase securities
while borrowings exceed 5% of the Fund's or the Portfolio's total
assets, respectively; provided, however, that the Fund may
increase its interest in an open-end management investment
company with the same investment objective and restrictions as
the Fund while such borrowings are outstanding. This borrowing
provision is included to facilitate the orderly sale of portfolio
securities, for example, in the event of abnormally heavy
redemption requests, and is not for investment purposes;
3. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's or the Portfolio's total assets would be invested in
securities or other obligations of any one such issuer; provided,
however, that the Fund may invest all or part of its investable
assets in an open-end management investment company with the same
investment objective and restrictions as the Fund. This
limitation also shall not apply to issues of the U.S. Government
and repurchase agreements related thereto;
4. Purchase the securities or other obligations of issuers
conducting their principal business activity in the same industry
if, immediately after such purchase, the value of its investment
in such industry would exceed 25% of the value of the Fund's or
the Portfolio's total assets; provided, however, that the Fund
may invest all or part of its assets in an open-end management
investment company with the same investment objective and
restrictions as the Fund. For purposes of industry concentration,
there is no percentage limitation with respect to investments in
U.S. Government securities and repurchase agreements related
thereto;
5. Make loans, except through purchasing or holding debt
obligations, repurchase agreements, or loans of portfolio
securities in accordance with the Fund's or the Portfolio's
investment objective and policies (see "Investment Objectives and
Policies");
34
<PAGE>
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real estate, commodities, or commodity
contracts or interests in oil, gas, or mineral exploration or
development programs;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of
when-issued securities or of securities for delivery at a future
date;
8. Acquire securities of other investment companies, except as
permitted by the 1940 Act or in connection with a merger,
consolidation, reorganization, acquisition of assets or an offer
of exchange; provided, however, that nothing in this investment
restriction shall prevent the Trust from investing all or part of
the Fund's assets in an open-end management investment company
with the same investment objective and restrictions as the Fund;
or
9. Act as an underwriter of securities.
The SHORT TERM BOND FUND and its corresponding PORTFOLIO may not:
1. Purchase securities or other obligations of issuers conducting
their principal business activity in the same industry if,
immediately after such purchase the value of its investments in
such industry would exceed 25% of the value of the Fund's total
assets; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment
company with the same investment objective and restrictions as
the Fund's. For purposes of industry concentration, there is no
percentage limitation with respect to investments in U.S.
Government securities;
2. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. This limitation shall
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end
management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply
to permitted investments of up to 25% of the Fund's total assets;
35
<PAGE>
4. Borrow money (not including reverse repurchase agreements),
except banks for temporary or extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Fund's or
the Portfolio's total assets, taken at cost at the time of such
borrowing (and provided that such borrowings and reverse
repurchase agreements do not exceed in the aggregate one-third of
the market value of the Fund's and the Portfolio's total assets
less liabilities other than the obligations represented by the
bank borrowings and reverse repurchase agreements). The Fund will
not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed
30% of the value of the Fund's or the Portfolio's net assets at
the time of such borrowing. The Fund or the Portfolio will not
purchase securities while borrowings exceed 5% of the Fund's
total assets; provided, however, that the Fund may increase its
interest in an open-end management investment company with the
same investment objective and restrictions as the Fund's while
such borrowings are outstanding. Collateral arrangements for
premium and margin payments in connection with the Fund's hedging
activities are not deemed to be a pledge of assets;
5. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the
Fund is permitted to incur pursuant to Investment Restriction No.
4 and except that the Fund may enter into reverse repurchase
agreements, provided that the aggregate of senior securities,
including reverse repurchase agreements, shall not exceed
one-third of the market value of the Fund's total assets, less
liabilities other than obligations created by reverse repurchase
agreements. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and
Policies" shall not be considered senior securities for purposes
hereof;
6. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities) or the
entering into of repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies;
7. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real estate, commodities, or commodity
contracts, except for the Fund's interests in hedging activities
as described under "Investment Objectives and Policies"; or
interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase securities or commercial
paper issued by companies which invest in real estate or
interests therein, including real estate investment trusts, and
purchase instruments secured by real estate or interests therein;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such
short-term credit as necessary for the clearance of purchases and
sales of securities; provided that this restriction shall not be
36
<PAGE>
deemed to be applicable to the purchase or sale of when-issued
securities or delayed delivery securities;
9. Acquire securities of other investment companies, except
as permitted by the 1940 Act or in connection with a
merger, consolidation, reorganization, acquisition of
assets or an offer of exchange; provided, however, that
nothing in this investment restriction shall prevent the
Trust from investing all or part of the Fund's assets in
an open-end management investment company with the same
investment objective and restrictions as the Fund; or
10. Act as an underwriter of securities.
The BOND FUND and its corresponding PORTFOLIO may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the
Fund's total assets, taken at cost at the time of such borrowing
and except in connection with reverse repurchase agreements
permitted by Investment Restriction No. 8. Mortgage, pledge, or
hypothecate any assets except in connection with any such
borrowing in amounts up to 30% of the value of the Fund's net
assets at the time of such borrowing. The Fund will not purchase
securities while borrowings (including reverse repurchase
agreements) exceed 5% of the Fund's total assets; provided,
however, that the Fund may increase its interest in an open-end
management investment company with the same investment objective
and restrictions as the Fund's while such borrowings are
outstanding. This borrowing provision facilitates the orderly
sale of portfolio securities, for example, in the event of
abnormally heavy redemption requests. This provision is not for
investment purposes. Collateral arrangements for premium and
margin payments in connection with the Fund's hedging activities
are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. This limitation shall
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end
management investment company with the same investment objective
and restrictions
37
<PAGE>
as the Fund's. This limitation shall not apply to permitted
investments of up to 25% of the Fund's total assets;
4. Purchase securities or other obligations of issuers conducting
their principal business activity in the same industry if,
immediately after such purchase the value of its investments in
such industry would exceed 25% of the value of the Fund's total
assets; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment
company with the same investment objective and restrictions as
the Fund's. For purposes of industry concentration, there is no
percentage limitation with respect to investments in U.S.
Government securities;
5. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities) or the
entering into of repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies;
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real estate, commodities, commodity
contracts, except for the Fund's interest in hedging activities
as described under "Investment Objectives and Policies"; or
interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase debt obligations secured
by interests in real estate or issued by companies which invest
in real estate or interests therein including real estate
investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of
the Fund's hedging activities, unless at all times when a short
position is open the Fund owns an equal amount of such
securities, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued securities
or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the
Fund is permitted to incur pursuant to Investment Restriction No.
1 and except that the Fund may enter into reverse repurchase
agreements, provided that the aggregate of senior securities,
including reverse repurchase agreements, shall not exceed
one-third of the market value of the Fund's total assets, less
liabilities other than obligations created by reverse repurchase
agreements. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and
Policies" shall not be considered senior securities for purposes
hereof;
9. Acquire securities of other investment companies, except as
permitted by the 1940 Act; or
10. Act as an underwriter of securities.
38
<PAGE>
The TAX EXEMPT BOND FUND and its corresponding PORTFOLIO may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 10% of the value of the
Fund's total assets, taken at cost at the time of such borrowing;
or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing in amounts up to 10% of the
value of the Fund's net assets at the time of such borrowing. The
Fund will not purchase securities while borrowings exceed 5% of
the Fund's total assets; provided, however, that the Fund may
increase its interest in an open-end management investment
company with the same investment objective and restrictions as
the Fund's while such borrowings are outstanding. This borrowing
provision facilitates the orderly sale of portfolio securities,
for example, in the event of abnormally heavy redemption
requests. This provision is not for investment purposes.
Collateral arrangements for premium and margin payments in
connection with the Fund's hedging activities are not deemed to
be a pledge of assets;
2. Purchase securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the
Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. Each state and each
political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member will
be a separate issuer if the security is backed only by the assets
and revenue of that issuer. If the security is guaranteed by
another entity, the guarantor will be deemed to be the issuer.3
This limitation shall not apply to securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the
Fund's total assets;
3. Invest more than 25% of its total assets in securities of
governmental units located in any one state, territory, or
possession of the United States. The Fund may invest more than
25% of its total assets in industrial developments and pollution
control obligations whether or not the users of facilities
financed by such obligations are in that same industry;4
--------
3 For purposes of interpretation of Investment Restriction No. 2,
"guaranteed by another entity" includes credit substitutions, such as letters of
credit or insurance, unless the Advisor determines that the security meets the
Fund's credit standards without regard to the credit substitution.
4Pursuant to an interpretation of the staff of the SEC, the Fund may
not invest more than 25% of its assets in industrial development bonds in
projects of similar type or in the same state. The Fund shall comply with this
interpretation until such time as it may be modified by the staff of the SEC.
39
<PAGE>
4. Purchase industrial revenue bonds if, as a result of such
purchase, more than 5% of total Fund assets would be invested in
industrial revenue bonds where payment of principal and interest
are the responsibility of companies with fewer than three years
of operating history (including predecessors);
5. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities) or the
entering into of repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof except to the extent that securities subject
to a demand obligation, stand-by commitments and puts may be
purchased (see "Investment Objectives and Policies"); real
estate; commodities; commodity contracts, except for the Fund's
interests in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral
exploration or development programs. However, the Fund may
purchase municipal bonds, notes or commercial paper secured by
interests in real estate;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Fund's
hedging activities, unless at all times when a short position is
open the Fund owns an equal amount of such securities or owns
securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short;
provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed
delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
Investment Restriction No. 1. The Fund's arrangements in
connection with its hedging activities as described in
"Investment Objectives and Policies" shall not be considered
senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as
permitted by the 1940 Act; or
10. Act as an underwriter of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof, are amended or modified, the NEW YORK TOTAL
RETURN BOND FUND and its corresponding PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% of the value
of the Fund's total assets would be invested in securities of
issuers
40
<PAGE>
having their principal business activities in the same industry.
This limitation shall not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities;
2. Borrow money, except that the Fund may (i) borrow money from
banks for temporary or emergency purposes (not for leveraging
purposes) and (ii) enter into reverse repurchase agreements for
any purpose; provided that (i) and (ii) in total do not exceed 33
1/3% of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of
the Fund's total assets, the Fund will reduce its borrowings
within three business days to the extent necessary to comply with
the 33 1/3% limitation;
3. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon,
unless acquired as a result of the ownership of securities or
instruments, but the Fund may purchase or sell futures contracts
or options (including options on futures contracts, but excluding
options or futures contracts on physical commodities) and may
enter into foreign currency forward contracts;
5. Purchase or sell real estate, but the Fund may purchase or sell
securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in
real estate;
6. Underwrite securities of other issuers, except to the extent the
Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
7. Issue senior securities, except as permitted under the 1940 Act
or any rule, order or interpretation thereunder; or
8. Notwithstanding any other investment restriction of the Fund, the
Fund may invest all of its investable assets in an open-end
management investment company having the same investment
objective and restrictions as the Fund.
Each of the SELECTED U.S. EQUITY FUND and the U.S. SMALL COMPANY FUND
and their corresponding PORTFOLIOS may not:
1. Purchase the securities or other obligations of issuers
conducting their principal business activity in the same industry
if, immediately after such purchase the value of its investments
in such industry would exceed 25% of the value of the Fund's
total assets; provided, however, that the Fund may invest all or
part of its investable assets in an open-end management
investment company with the same investment
41
<PAGE>
objective and restrictions as the Fund's. For purposes of
industry concentration, there is no percentage limitation with
respect to investments in U.S. Government securities;
2. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts not to exceed 10% of the value
of the Fund's total assets, taken at cost, at the time of such
borrowing. Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed
10% of the value of the Fund's net assets at the time of such
borrowing. The Fund will not purchase securities while borrowings
exceed 5% of the Fund's total assets; provided, however, that the
Fund may increase its interest in an open-end management
investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding.
This borrowing provision is included to facilitate the orderly
sale of portfolio securities, for example, in the event of
abnormally heavy redemption requests, and is not for investment
purposes. Collateral arrangements for premium and margin payments
in connection with the Fund's hedging activities are not deemed
to be a pledge of assets;
3. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. This limitation shall
not apply to issues of the U.S. Government, its agencies or
instrumentalities and to permitted investments of up to 25% of
the Fund's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end
management investment company with the same investment objective
and restrictions as the Fund's;
5. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities), or the
entering into of repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real estate, commodities, or commodity
contracts, except for the Fund's interests in hedging activities
as described under "Investment Objectives and Policies"; or
interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase securities or commercial
paper issued by companies
42
<PAGE>
which invest in real estate or interests therein, including real
estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Fund's
hedging activities, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as
permitted by the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
Investment Restriction No. 2. The Fund's arrangements in
connection with its hedging activities as described in
"Investment Objectives and Policies" shall not be considered
senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Fund would then
have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years.
The DIVERSIFIED FUND and its corresponding PORTFOLIO may not:
1. Purchase the securities or other obligations of issuers
conducting their principal business activity in the same industry
if, immediately after such purchase the value of its investments
in such industry would exceed 25% of the value of the Fund's
total assets; provided, however, that the Fund may invest all or
part of its investable assets in an open-end management
investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry
concentration, there is no percentage limitation with respect to
investments in U.S. Government securities;
2. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. This limitation shall
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
43
<PAGE>
securities of such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end
management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply
to permitted investments of up to 25% of the Fund's total assets;
4. Borrow money (not including reverse repurchase agreements),
except from banks for temporary or extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the
Fund's or the Portfolio's total assets, taken at cost at the time
of such borrowing (and provided that such borrowings and reverse
repurchase agreements do not exceed in the aggregate one-third of
the market value of the Fund's and the Portfolio's total assets
less liabilities other than the obligations represented by the
bank borrowings and reverse repurchase agreements). The Fund will
not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed
30% of the value of the Fund's or the Portfolio's net assets at
the time of such borrowing. The Fund or the Portfolio will not
purchase securities while borrowings exceed 5% of the Fund's
total assets; provided, however, that the Fund may increase its
interest in an open-end management investment company with the
same investment objective and restrictions as the Fund's while
such borrowings are outstanding. This borrowing provision is
included to facilitate the orderly sale of portfolio securities,
for example, in the event of abnormally heavy redemption
requests, and is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with
the Fund's use of futures contracts and options are not deemed to
be a pledge of assets;
5. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the
Fund is permitted to incur pursuant to Investment Restriction No.
4 and except that the Fund may enter into reverse repurchase
agreements, provided that the aggregate of senior securities,
including reverse repurchase agreements, shall not exceed
one-third of the market value of the Fund's total assets, less
liabilities other than obligations created by reverse repurchase
agreements. The Fund's arrangements in connection with its use of
futures contracts and options shall not be considered senior
securities for purposes hereof;
6. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities), or the
entering into of repurchase agreements, or loans of portfolio
securities in accordance with the Fund's investment objective and
policies (see "Investment Objectives and Policies");
7. Purchase or sell commodities or commodity contracts, but this
restriction shall not prohibit the Fund from purchasing or
selling futures contracts or options (including options on
futures contracts, but excluding options or futures contracts on
physical commodities) or entering into foreign currency forward
contracts; or purchase or sell real estate or interests in oil,
gas, or mineral exploration or
44
<PAGE>
development programs. However, the Fund may purchase securities
or commercial paper issued by companies which invest in real
estate or interests therein, including real estate investment
trusts, and purchase instruments secured by real estate or
interests therein;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such
short term credit as necessary for the clearance of purchases and
sales of securities, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or delayed delivery securities or to restrict the
Fund's use of futures contracts or options;
9. Acquire securities of other investment companies, except as
permitted by the 1940 Act or in connection with a merger,
consolidation, reorganization, acquisition of assets or an offer
of exchange; provided, however, that nothing in this investment
restriction shall prevent the Trust from investing all or part of
the Fund's assets in an open-end management investment company
with the same investment objective and restrictions as the Fund;
or
10. Act as an underwriter of securities.
The INTERNATIONAL EQUITY FUND and its corresponding PORTFOLIO may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the
Fund's net assets at the time of borrowing, and except in
connection with reverse repurchase agreements and then only in
amounts up to 33 1/3% of the value of the Fund's net assets; or
purchase securities while borrowings, including reverse
repurchase agreements, exceed 5% of the Fund's total assets;
provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment
objective and restrictions as the Fund's while such borrowings
are outstanding. The Fund will not mortgage, pledge, or
hypothecate any assets except in connection with any such
borrowing and in amounts not to exceed 30% of the value of the
Fund's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer
if, immediately after such purchase, more than 5% of the value of
the Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. This limitation shall
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
45
<PAGE>
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end
management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply
to permitted investments of up to 25% of the Fund's total assets;
4. Purchase the securities or other obligations of issuers
conducting their principal business activity in the same industry
if, immediately after such purchase, the value of its investments
in such industry would exceed 25% of the value of the Fund's
total assets; provided, however, that the Fund may invest all or
part of its investable assets in an open-end management
investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry
concentration, there is no percentage limitation with respect to
investments in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt
obligations (including restricted securities), or the entering
into of repurchase agreements, or loans of portfolio securities
in accordance with the Fund's investment objective and policies,
see "Additional Investment Information" in the Prospectus and
"Investment Objectives and Policies" in this Statement of
Additional Information;
6. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, real property, including limited partnership
interests, commodities, or commodity contracts, except for the
Fund's interests in hedging and foreign exchange activities as
described under "Additional Investment Information" in the
Prospectus; or interests in oil, gas, mineral or other
exploration or development programs or leases. However, the Fund
may purchase securities or commercial paper issued by companies
that invest in real estate or interests therein including real
estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such
short-term credit as necessary for the clearance of purchases and
sales of securities, provided that this restriction shall not be
deemed to apply to the purchase or sale of when-issued securities
or delayed delivery securities;
8. Acquire securities of other investment companies, except as
permitted by the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Fund
may be deemed to be an underwriter under the 1933 Act by virtue
of disposing of portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
Investment Restriction No. 1. The Fund's arrangements in
connection
46
<PAGE>
with its hedging activities as described in "Additional
Investment Information" in the Prospectus shall not be considered
senior securities for purposes hereof.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act, or any SEC or SEC
staff interpretations thereof, are amended or modified, the EMERGING MARKETS
EQUITY FUND and its corresponding PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% of the value
of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry. This limitation shall not apply to obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities;
2. Borrow money, except that the Fund may (i) borrow money from
banks for temporary or emergency purposes (not for leveraging
purposes) and (ii) enter into reverse repurchase agreements for
any purpose; provided that (i) and (ii) in total do not exceed 33
1/3% of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of
the Fund's total assets, the Fund will reduce its borrowings
within three business days to the extent necessary to comply with
the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security
if, as a result, (a) more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations
of any one issuer; or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer. This limitation
shall not apply to Government securities (as defined in the 1940
Act);
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
5. Purchase or sell physical commodities or contracts thereon,
unless acquired as a result of the ownership of securities or
instruments, but the Fund may purchase or sell futures contracts
or options (including options on futures contracts, but excluding
options or futures contracts on physical commodities) and may
enter into foreign currency forward contracts;
6. Purchase or sell real estate, but the Fund may purchase or sell
securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in
real estate;
7. Underwrite securities of other issuers, except to the extent the
Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
47
<PAGE>
8. Issue senior securities, except as permitted under the 1940 Act
or any rule, order or interpretation thereunder; and
9. Notwithstanding any other investment restriction of the Fund, the
Fund may invest all of its investable assets in an open-end
management investment company having the same investment
objective and restrictions as the Fund.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof are amended or modified, the INTERNATIONAL BOND
FUND and its corresponding PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% of the value
of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry. This limitation shall not apply to obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities. In addition, and while subject to changing
interpretations, so long as a single foreign government or
supranational organization is considered to be an "industry" for
the purposes of this 25% limitation, the Portfolio will comply
therewith. The staff of the SEC considers all supranational
organizations (as a group) to be a single industry for
concentration purposes;
2. Borrow money, except that the Fund may (i) borrow money from
banks for temporary or emergency purposes (not for leveraging
purposes) and (ii) enter into reverse repurchase agreements for
any purpose; provided that (i) and (ii) in total do not exceed 33
1/3% of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of
the Fund's total assets, the Fund will reduce its borrowings
within three business days to the extent necessary to comply with
the 33 1/3% limitation;
3. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon,
unless acquired as a result of the ownership of securities or
instruments, but the Fund may purchase or sell futures contracts
or options (including options on futures contracts, but excluding
options or futures contracts on physical commodities) and may
enter into foreign currency forward contracts;
5. Purchase or sell real estate, but the Fund may purchase or sell
securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in
real estate;
48
<PAGE>
6. Underwrite securities of other issuers, except to the extent the
Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
7. Issue senior securities, except as permitted under the 1940 Act
or any rule, order or interpretation thereunder; and
8. Notwithstanding any other investment restriction of the Fund, the
Fund may invest all of its investable assets in an open-end
management investment company having substantially the same
investment objective and restrictions as the Fund.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - TAX EXEMPT MONEY MARKET FUND
AND TREASURY MONEY MARKET FUND. The investment restriction described below is
not a fundamental policy of these Funds or their corresponding Portfolios and
may be changed by their respective Trustees. This non-fundamental investment
policy requires that each such Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with
a duration of over seven calendar days, if as a result thereof,
more than 10% of the market value of the Fund's total assets
would be in investments that are illiquid.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - SHORT TERM BOND FUND, TAX
EXEMPT BOND FUND, BOND FUND, SELECTED U.S. EQUITY FUND, U.S. SMALL COMPANY FUND,
INTERNATIONAL EQUITY FUND AND DIVERSIFIED FUND. The investment restriction
described below is not a fundamental policy of these Funds or their
corresponding Portfolios and may be changed by their respective Trustees. This
non-fundamental investment policy requires that each such Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with
a duration of over seven calendar days, if as a result thereof,
more than 15% of the market value of the Fund's total assets
would be in investments that are illiquid.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - INTERNATIONAL EQUITY FUND AND
DIVERSIFIED FUND. The investment restrictions described below are not
fundamental policies of these Funds or their corresponding Portfolios and may be
changed by their respective Trustees. These non-fundamental investment policies
require that each such Fund may not:
(i) purchase any equity security if, as a result, the Fund would then
have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years;
(ii) invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets or
if, as a result, more than 2% of the Fund's net assets would be
invested in warrants not listed on a recognized United States or
foreign stock exchange, to the extent permitted by applicable
state securities laws; or
49
<PAGE>
(iii) invest in any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is an officer of the Investment
Advisor, if after the Portfolio's purchase of the securities of
such issuer, one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at
market value.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - NEW YORK TOTAL RETURN BOND
FUND. The investment restrictions described below are not fundamental policies
of the New York Total Return Bond Fund and its corresponding Portfolio and may
be changed by their Trustees. These non-fundamental investment policies require
that the New York Total Return Bond Fund and its corresponding Portfolio may
not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with
a duration of over seven calendar days, if as a result thereof,
more than 15% of the market value of the Fund's total assets
would be in investments that are illiquid;
(iii) Sell any security short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities
sold or unless it covers such short sales as required by the
current rules or positions of the SEC or its staff. Transactions
in futures contracts and options shall not constitute selling
securities short; or
(iv) Purchase securities on margin, but the Fund may obtain such short
term credits as may be necessary for the clearance of
transactions.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - SELECTED U.S. EQUITY FUND AND
U.S. SMALL COMPANY FUND. The investment restrictions described below are not
fundamental policies of these Funds or their corresponding Portfolios and may be
50
<PAGE>
changed by their respective Trustees. These non-fundamental investment policies
require that each such Fund may not:
(i) invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets or
if, as a result, more than 2% of the Fund's net assets would be
invested in warrants not listed on a recognized U.S. or foreign
stock exchange, to the extent permitted by applicable state
securities laws; or
(ii) invest in any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is an officer of the Investment
Advisor, if after the Portfolio's purchase of the securities of
such issuer, one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at
market value.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - SELECTED U.S. EQUITY FUND,
U.S. SMALL COMPANY FUND AND DIVERSIFIED FUND. The investment restrictions
described below are not fundamental policies of these Funds or their
corresponding Portfolios and may be changed by their respective Trustees. These
non-fundamental investment policies require that each such Fund may not:
(i) invest in real estate limited partnership interests; or
(ii) invest in oil, gas or other mineral leases.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - EMERGING MARKETS EQUITY FUND.
The investment restrictions described below are not fundamental policies of the
Emerging Markets Equity Fund and its corresponding Portfolio and may be changed
by their Trustees. These non-fundamental investment policies require that the
Emerging Markets Equity Fund and its corresponding Portfolio may not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with
a duration of over seven calendar days, if as a result thereof,
more than 15% of the market value of the Fund's total assets
would be in investments that are illiquid;
51
<PAGE>
(iii) Purchase any security if, as a result, the Fund would then have
more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years;
(iv) Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets or
if, as a result, more than 2% of the Fund's net assets would be
invested in warrants not listed on a recognized U.S. or foreign
stock exchange, to the extent permitted by applicable state
securities laws;
(v) Sell any security short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities
sold or unless it covers such short sales as required by the
current rules or positions of the SEC or its staff. Transactions
in futures contracts and options shall not constitute selling
securities short;
(vi) Purchase securities on margin, but the Fund may obtain such short
term credits as may be necessary for the clearance of
transactions;
(vii) Purchase or retain securities of any issuer if, to the knowledge
of the Fund, any of the Fund's officers or Trustees or any
officer of the Portfolio's investment adviser individually owns
more than 1/2 of 1% of the issuer's outstanding securities and
such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all
taken at market; or
(viii) Invest in real estate limited partnerships or purchase interests
in oil, gas or mineral exploration or development programs or
leases.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - INTERNATIONAL BOND FUND. The
investment restrictions described below are not fundamental policies of the
International Bond Fund and its corresponding Portfolio and may be changed by
their Trustees. These non-fundamental investment policies require that the
International Bond Fund and its corresponding Portfolio may not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange;
52
<PAGE>
(ii) Acquire any illiquid securities if as a result thereof, more than
15% of the market value of the Fund's total assets would be in
investments that are illiquid;
(iii) Purchase any security if, as a result, the Fund would then have
more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years;
(iv) Sell any security short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities
sold or unless it covers such short sales as required by the
current rules or positions of the Securities and Exchange
Commission or its staff. Transactions in futures contracts and
options shall not constitute selling securities short;
(v) Purchase or retain securities of any issuer if, to the knowledge
of the Fund, any of the Fund's officers or Trustees or any
officer of the Portfolio's investment adviser individually owns
more than 1/2 of 1% of the issuer's outstanding securities and
such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all
taken at market; or
(vi) Purchase securities on margin, but the Fund may obtain such short
term credits as may be necessary for the clearance of
transactions;
(vii) Invest in real estate limited partnerships or purchase interests
in oil, gas or mineral exploration or development programs or
leases.
ALL FUNDS. There will be no violation of any investment restriction if
that restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, their business addresses, and their principal occupations during the
past five years are set forth below.
53
<PAGE>
Frederick S. Addy -- Trustee; Retired; Executive Vice President and
Chief Financial Officer from January 1990 to April 1994 , Amoco Corporation;
Director, Ensearch Corp. (natural gas), since 1994. His address is 19129 RR 2147
W. Horseshoe Bay, TX 78654.
William G. Burns -- Trustee; Retired; Limited Partner, Galen Partners
L.P. and Vice Chairman, Galen Associates, since 1990; Chief Executive Officer,
Galen Associates and General Partner, Galen Partners L.P., until 1991. His
address is 4241 S.W. Parkgate Blvd., Palm City, FL 34990.
Arthur C. Eschenlauer -- Trustee; Retired; Senior Vice President,
Morgan Guaranty Trust Company of New York until 1987. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540.
Matthew Healey(*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since 1989; Chairman and Chief Executive
Officer, Execution Services, Inc. until October 1991. His address is Pine Tree
Club Estates, 10286 Saint Andrew Road, Boynton Beach, FL 33436.
Michael P. Mallardi -- Trustee; Senior Vice President, Capital
Cities/ABC, Inc., President, Broadcast Group, since 1986. His address is 77 West
66th Street, New York, NY 10017.
- ------------------
(*) Mr. Healey is an "interested person" of the Trust and each Portfolio as
that term is defined in the 1940 Act.
The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Trust, each of the Portfolios and The Pierpont
Funds, up to and including creating a separate board of trustees.
Each Trustee is paid an annual fee as follows for serving as Trustee of
the Trust, each of the Portfolios, The Series Portfolio and The Pierpont Funds,
and is reimbursed for expenses incurred in connection with service as a Trustee.
The compensation paid to the Trustees in calendar 1994 is set forth below. The
Trustees may hold various other directorships unrelated to these funds.
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION FROM
AGGREGATE RETIREMENT THE TRUST, THE PIERPONT
COMPENSATION BENEFITS ESTIMATED FUNDS AND CORRESPONDING
FROM THE TRUST ACCRUED AS PART ANNUAL BENEFITS PORTFOLIOS PAID
DURING 1994 OF FUND EXPENSES UPON RETIREMENT TO TRUSTEES DURING 1994
<S> <C> <C> <C> <C>
Frederick S. Addy, Trustee $ 4,372 None None $55,000
William G. $ 4,372 None None $55,000
Burns, Trustee
Arthur C. Eschenlauer, Trustee $ 4,372 None None $55,000
Matthew Healey, Trustee(*), $ 4,372 None None $55,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $ 4,372 None None $55,000
<FN>
(*) During 1994, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $130,000, contributed
$19,500 to a defined contribution plan on his behalf and paid $20,000 in
insurance premiums for his benefit.
</FN>
</TABLE>
54
<PAGE>
As of April 1, 1995 the annual fee paid to each Trustee for serving as a
Trustee of the Trust each of the Portfolios, The Series Portfolio and The
Pierpont Funds was adjusted to $65,000.
The Trustees , in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy. On
January 15, 1994 each of the Portfolios and the Trust entered into a Fund
Services Agreement with Pierpont Group, Inc. to assist the Trustees in
exercising their overall supervisory responsibilities over the affairs of the
Portfolios and the Trust. Pierpont Group, Inc. was organized in July 1989 to
provide services for The Pierpont Family of Funds, and the Trustees are the
equal and sole shareholders of Pierpont Group, Inc. The Trust and the Portfolios
have agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during their respective fiscal years completed after
January 15, 1994 are set forth below:
MONEY MARKET FUND--For the fiscal year ended November 30, 1994: $16,147.
THE MONEY MARKET PORTFOLIO--For the fiscal year ended November 30, 1994:
$286,089.
TAX EXEMPT MONEY MARKET FUND -- For the fiscal year ended August 31, 1994:
$1,745.
THE TAX EXEMPT MONEY MARKET PORTFOLIO -- For the fiscal year ended August 31,
1994: $79,046.
TREASURY MONEY MARKET FUND -- For the fiscal year ended October 31, 1994:
$6,211.
THE TREASURY MONEY MARKET PORTFOLIO -- For the fiscal year ended October 31,
1994: $17,104.
SHORT TERM BOND -- For the fiscal year ended October 31, 1994: $3,935.
THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1994:
$4,545.
TAX EXEMPT BOND FUND -- For the fiscal year ended August 31, 1994: $686.
THE TAX EXEMPT BOND PORTFOLIO -- For the fiscal year ended August 31, 1994:
$35,243.
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NEW YORK TOTAL RETURN BOND FUND -- For the period April 11, 1994 through March
31, 1994: $1,297.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO -- For the period April 11, 1994
through March 31, 1994: $4,140.
BOND FUND -- For the fiscal year ended October 31, 1994: $12,989.
THE U.S. FIXED INCOME PORTFOLIO -- For the fiscal year ended October 31, 1994:
$23,028.
SELECTED U.S. EQUITY FUND -- For the period July 19, 1993 through May 31, 1994:
$1,564.
THE SELECTED U.S. EQUITY PORTFOLIO -- For the period July 19, 1993 through May
31, 1994: $20,385.
U.S. SMALL COMPANY FUND -- For the period July 19, 1993 through May 31, 1994:
$3,005.
THE U.S. SMALL COMPANY PORTFOLIO -- For the period July 19, 1993 through May 31,
1994: $33,435.
INTERNATIONAL EQUITY FUND -- For the fiscal year ended October 31, 1994:
$13,902.
THE NON-U.S. EQUITY PORTFOLIO -- For the fiscal year ended October 31, 1994:
$32,512.
EMERGING MARKETS EQUITY FUND -- For the fiscal year ended October 31, 1994:
$8,326.
THE EMERGING MARKETS EQUITY PORTFOLIO -- For the fiscal year ended October 31,
1994: $42,764.
DIVERSIFIED FUND -- For the period July 8, 1993 through June 30, 1994: $2,959.
THE DIVERSIFIED PORTFOLIO -- For the period July 8, 1993 through June 30, 1994:
$3,434.
As of the date of this Statement of Additional Information, neither the
International Bond Fund nor its corresponding Portfolio had completed its
initial fiscal year.
The Trust's and Portfolios' executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Signature
Broker-Dealer Services, Inc. ("SBDS"), a wholly owned subsidiary of Signature
Financial Group, Inc. ("Signature"). The officers conduct and supervise the
business operations of the Trust and the Portfolios. The Trust and the
Portfolios have no employees .
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OFFICERS
The officers of the Trust and the Portfolios and their principal
occupations during the past five years are set forth below. Unless otherwise
specified, each officer holds the same position with the Trust and each
Portfolio. The business address of each of the officers unless otherwise noted
is Signature Broker-Dealer Services, Inc., 6 St. James Avenue, Boston,
Massachusetts 02116.
Matthew Healey; Chief Executive Officer; Chairman, Pierpont Group,
Inc., since 1989; Chairman and Chief Executive Officer, Execution Services, Inc.
until October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrew
Road, Boynton Beach, FL 33436.
Philip W. Coolidge; President; Chairman, Chief Executive Officer and
President, Signature since December 1988 and SBDS since April 1989.
James B. Craver; Treasurer and Secretary; Senior Vice President and
General Counsel, Signature since January 1991; Secretary, SBDS since February
1991; Partner, Baker & Hostetler prior to January 1991.
James E. Hoolahan; Vice President; Senior Vice President, Signature
since December 1989.
Thomas M. Lenz; Assistant Secretary; Vice President and Associate
General Counsel, Signature since November 1989; Assistant Secretary, SBDS since
February 1991.
Molly S. Mugler; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since December 1988; Assistant Secretary, SBDS since April
1989.
Susan Jakuboski; Assistant Secretary and Assistant Treasurer of the
Portfolios only; Manager and Senior Fund Administrator, SFG and Signature
(Cayman) (since August 1994); Assistant Treasurer, SBDS (since September 1994);
Fund Compliance Administrator, Concord Financial Group, Inc. (from November 1990
to August 1994); Senior Fund Accountant, Neuberger & Berman Management
Incorporated (since prior to 1990). Her address is P.O. Box 2494, Elizabethan
Square, George Town, Grand Cayman, Cayman Islands, B.W.I.
Daniel E. Shea; Assistant Treasurer; Assistant Manager of Fund
Administration, Signature since November 1993; Supervisor and Senior Technical
Advisor, Putnam Investments since prior to 1990.
Messrs. Coolidge, Craver, Hoolahan, Lenz and Shea and Mss. Mugler and
Jakuboski hold similar positions for other investment companies for which SBDS
or an affiliate serves as principal underwriter.
INVESTMENT ADVISOR
The investment advisor to the Portfolios is Morgan Guaranty Trust
Company of New York, a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws
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of the State of Delaware. Morgan, whose principal offices are at 60 Wall Street,
New York, New York 10260, is a New York trust company which conducts a general
banking and trust business. Morgan is subject to regulation by the New York
State Banking Department and is a member bank of the Federal Reserve System.
Through offices in New York City and abroad, Morgan offers a wide range of
services, primarily to governmental, institutional, corporate and high net worth
individual customers in the United States and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of $150 billion (of which the Advisor advises over $30 billion).
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of Morgan's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns for individual companies through the use of a
dividend discount model. These returns are projected for 2 to 5 years to enable
analysts to take a longer term view. These returns, or normalized earnings, are
used to establish relative values among stocks in each industrial sector. These
values may not be the same as the markets' current valuations of these
companies. This provides the basis for ranking the attractiveness of the
companies in an industry according to five distinct quintiles or rankings. This
ranking is one of the factors considered in determining the stocks purchased and
sold in each sector. The Advisor's fixed income investment process is based on
analysis of real rates, sector diversification and quantitative and credit
analysis.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions ".
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Sector weightings are generally similar to a fund's benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmarks for the Portfolios in which the Funds
invest are currently: The Money Market Portfolio and The Treasury Money Market
Portfolio--IBC/Donoghue's Money Fund Average; The Tax Exempt Money Market
Portfolio--IBC/Donoghue's Tax Exempt Money Fund Average; The Short Term Bond
Portfolio--Merrill Lynch 1-3 Year Treasury Index; The U.S. Fixed Income
Portfolio--Salomon Brothers Broad Investment Grade Bond Index; The Tax Exempt
Bond Portfolio--Lehman Brothers Quality Intermediate Municipal Bond Index; The
Selected U.S. Equity Portfolio--S&P 500 Index; The U.S. Small Company
Portfolio--Russell 2500 Index; The Non-U.S. Equity Portfolio--EAFE Index; The
Emerging Markets Equity Portfolio--IFC Emerging Markets Index; The Diversified
Portfolio--diversified benchmark (52% S&P 500, 35% Solomon Brothers Broad
Investment Grade Bond, 3% Russell 2000 and 10% EAFE indexes).
J.P. Morgan Investment Management Inc., a wholly-owned subsidiary of
J.P. Morgan , is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolios are managed by officers of the Advisor who, in acting
for their customers, including the Portfolios, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel
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of other divisions of the Advisor or with any of its affiliated persons, with
the exception of J.P. Morgan Investment Management Inc. See "Portfolio
Transactions" below for a description of services provided to the Portfolios by
J.P. Morgan Investment Management Inc.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio corresponding to each Fund has agreed to pay the
Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.
MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net assets in
excess of $1 Billion
TAX EXEMPT MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net
assets in excess of $1 Billion
TREASURY MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net
assets in excess of $1 Billion
SHORT TERM BOND: 0.25%
U.S. FIXED INCOME: 0.30%
TAX EXEMPT BOND: 0.30%
NEW YORK TOTAL RETURN BOND: 0.30%
NON-U.S. FIXED INCOME: 0.35%
SELECTED U.S. EQUITY: 0.40%
U.S. SMALL COMPANY: 0.60%
NON-U.S. EQUITY: 0.60%
EMERGING MARKETS EQUITY: 1.00%
DIVERSIFIED: 0.55%
Below are set forth for each Fund listed the advisory fees paid by its
corresponding Portfolio to Morgan for the fiscal periods indicated. See
"Expenses" in the Prospectus and below for applicable expense limitations.
THE MONEY MARKET PORTFOLIO (Money Market Fund) -- For the period July 12, 1993
(commencement of operations) through November 30, 1993: $1,370,552. For the
fiscal year ended November 30, 1994: $3,423,576.
THE TAX EXEMPT MONEY MARKET PORTFOLIO (Tax Exempt Money Market Fund) -- For the
period July 12, 1993 (commencement of operations) through August 31, 1993:
$271,454. For the fiscal year ended August 31, 1994: $2,021,476.
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THE TREASURY MONEY MARKET PORTFOLIO (Treasury Money Market Fund) -- For the
period January 4, 1993 (commencement of operations) through October 31, 1993:
$93,370. For the fiscal year ended October 31, 1994: $339,521.
THE SHORT TERM BOND PORTFOLIO (Short Term Bond Fund) -- For the period July 8,
1993 (commencement of operations) through October 31, 1993: $10,427. For the
fiscal year ended October 31, 1994:
$113,379.
THE U.S. FIXED INCOME PORTFOLIO (Bond Fund) -- For the period July 12, 1993
(commencement of operations) through October 31, 1993: $119,488. For the fiscal
year ended October 31, 1994: $699,081.
THE TAX EXEMPT BOND PORTFOLIO (Tax Exempt Bond Fund) -- For the period July 12,
1993 (commencement of operations) through August 31, 1993: $200,272. For the
fiscal year ended August 31, 1994: $1,383,986.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO (New York Total Return Bond Fund) --
For the period April 11, 1994 (commencement of operations) through March 31,
1995: $120,281.
THE SELECTED U.S. EQUITY PORTFOLIO (Selected U.S. Equity Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: $1,263,048.
THE U.S. SMALL COMPANY PORTFOLIO (U.S. Small Company Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: $2,912,670.
THE NON-U.S. EQUITY PORTFOLIO (International Equity Fund) -- For the period
October 4, 1993 (commencement of operations) through October 31, 1993: $78,550.
For the fiscal year ended October 31, 1994: $1,911,202.
THE EMERGING MARKETS EQUITY PORTFOLIO (Emerging Markets Equity Fund) -- For the
period November 15, 1993 (commencement of operations) through October 31, 1994:
$4,122,465.
THE DIVERSIFIED PORTFOLIO (Diversified Fund) -- For the period July 8, 1993
(commencement of operations) through June 30, 1994: $197,026.
As of this Statement of Additional Information, The Non-U.S. Fixed
Income Portfolio had not completed its initial fiscal year.
The Investment Advisory Agreements provide that they will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Administrator and Distributor" below. Each of the Investment Advisory
Agreements will terminate automatically if assigned and is terminable at any
time without penalty by a vote of a majority of the Portfolio's Trustees , or by
a vote of the holders of a majority of the Portfolio's outstanding voting
securities, on 60 days' written notice to the Advisor and by the Advisor on 90
days' written notice to the Portfolio. See "Additional Information".
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The Glass-Steagall Act and other applicable laws generally prohibit
banks such as Morgan from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Trust. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. Morgan believes that it may perform the services for the
Portfolios contemplated by the Advisory Agreements without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent Morgan from continuing to perform such services for the
Portfolios.
If Morgan were prohibited from acting as investment advisor to any
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
nvestors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Morgan also receives compensation from the Trust and the Portfolios in
its capacity as Services Agent to them (see "Services Agent") and receives
compensation from the Fund as shareholder servicing agent (see "Shareholder
Servicing").
ADMINISTRATOR AND DISTRIBUTOR
SBDS serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for each Fund's shares. In that capacity,
SBDS has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of each Fund's shares in accordance with the terms of
the Distribution Agreement between the Trust and SBDS. The Distribution
Agreement shall continue in effect with respect to each Fund for a period of two
years after execution only if it is approved at least annually thereafter (i) by
a vote of the holders of a majority of the Fund's outstanding shares or by its
Trustees and (ii) by a vote of a majority of the Trustees of the Trust who are
not "interested persons" (as defined by the 1940 Act) of the parties to the
Distribution Agreement , cast in person at a meeting called for the purpose of
voting on such approval (see "Trustees and Officers"). The Distribution
Agreement will terminate automatically if assigned by either party thereto and
is terminable at any time without penalty by a vote of a majority of the
Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares as defined under "Additional Information", in any
case without payment of any penalty on not more than 60 days' nor less than 30
days' written notice to the other party. The
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principal office of the SBDS is located at 6 St. James Avenue, Boston,
Massachusetts 02116.
SBDS also serves as the Trust's and the Portfolios' Administrator and
in that capacity administers and manages all aspects of the Funds' and the
Portfolios' day-to-day operations subject to the supervision of the Trustees,
except as set forth under Investment Advisor, Services Agent, Custodian, and
Shareholder Services. In connection with its responsibilities as Administrator,
SBDS (i) furnishes ordinary clerical and related services for day-to-day
operations including certain record keeping responsibilities; (ii) takes
responsibility for compliance with all applicable federal and state securities
and other regulatory requirements including, without limitation, preparing and
mailing and filing (but not paying for) registration statements, prospectuses,
statements of additional information, and proxy statements and all required
reports to the Trust's shareholders, the SEC, the Secretary of The Commonwealth
of Massachusetts, and state securities commissions (but not the Trust's federal
and state tax returns); (iii) is responsible for the registration of sufficient
Fund shares under federal and state securities laws; (iv) takes responsibility
for monitoring each Fund's status as a regulated investment company under the
Code ; and (v) performs such administrative and managerial oversight of the
activities of the Trust's and the Portfolios' custodian and transfer agent as
the Trustees may direct from time to time.
Under the Trust's Administration Agreement, the annual administration
fee rate is calculated based on the aggregate daily net assets of The JPM
Institutional Funds, as well as The Pierpont Funds and The JPM Advisor Funds,
which are two other families of mutual funds investing in the Portfolios. The
fee rate is calculated daily in accordance with the following schedule: 0.040%
of the first $1 billion of these funds' aggregate daily net assets, 0.032% of
the next $2 billion of these funds' aggregate daily net assets, 0.024% of the
next $2 billion of these funds' aggregate daily net assets and 0.016% of these
funds' aggregate daily net assets in excess of $5 billion. This fee rate is then
applied to the net assets of each Fund. The Administrator may voluntarily waive
a portion of its fees.
Under the Portfolios' Administration Agreements, the annual
administration fee rate is calculated based on the aggregate average daily net
assets of the Portfolios, as well as all of the other portfolios in which series
of The Pierpont Funds and The JPM Advisor Funds invest. The fee rate is
calculated daily in accordance with the following schedule: 0.010% of the first
$1 billion of the portfolios aggregate daily net assets, 0.008% of the next $2
billion of these Portfolios' aggregate daily net assets, 0.006% of the next $2
billion of these Portfolios' aggregate daily net assets and 0.004% of these
Portfolios' aggregate daily net assets in excess of $5 billion. This fee rate is
then applied to the net assets of each Portfolio. The Administrator may
voluntarily waive a portion of its fees.
Below are set forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to the Administrator for the fiscal
periods indicated. See "Expenses" in the Prospectus and below for applicable
expense limitations.
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THE MONEY MARKET PORTFOLIO -- For the period July 12, 1993 (commencement of
operations) through November 30, 1993: $32,869. For the fiscal year ended
November 30, 1994: $165,519.
MONEY MARKET FUND -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $ 1,380. For the fiscal year ended November 30, 1994:
$52,168.
THE TAX EXEMPT MONEY MARKET PORTFOLIO -- for the period July 12, 1993
(commencement of operations) through August 31, 1993: $0. For the fiscal year
ended August 31, 1994: $62,565.
TAX EXEMPT MONEY MARKET FUND -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $982. For the fiscal year ended August 31,
1994: $5,854.
THE TREASURY MONEY MARKET PORTFOLIO -- For the period January 4, 1993
(commencement of operations) through October 31, 1993: $677. For the fiscal year
ended October 31, 1994: $11,777.
TREASURY MONEY MARKET FUND -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $2,480. For the fiscal year ended October
31, 1994: $17,006.
THE SHORT TERM BOND PORTFOLIO -- For the period July 8, 1993 (commencement of
operations) through October 31, 1993: $210. For the fiscal year ended October
31, 1994: $3,149.
SHORT TERM BOND FUND -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $1,077. For the fiscal year ended October 31, 1994:
$12,264.
THE U.S. FIXED INCOME PORTFOLIO -- For the period July 12, 1993 (commencement of
operations) through October 31, 1993: $950. For the fiscal year ended October
31, 1994: $16,107.
BOND FUND -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $3,625. For the fiscal year ended October 31, 1994: $36,809.
THE TAX EXEMPT BOND PORTFOLIO -- For the fiscal year ended August 31, 1994:
$28,345.
TAX EXEMPT BOND FUND -- For the fiscal year ended August 31, 1994: $1,859.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO -- For the period April 11, 1994
(commencement of operations) through March 31, 1995: $2,563.
NEW YORK TOTAL RETURN BOND FUND -- For the period April 11, 1994 (commencement
of operations) through March 31, 1995: $3,042.
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THE SELECTED U.S. EQUITY PORTFOLIO -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $19,348.
SELECTED U.S. EQUITY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $4,845.
THE U.S. SMALL COMPANY PORTFOLIO -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $30,420.
U.S. SMALL COMPANY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $8,177.
THE NON-U.S. EQUITY PORTFOLIO -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $1,005. For the fiscal year ended October
31, 1994: $22,024.
INTERNATIONAL EQUITY FUND -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $105. For the fiscal year ended October
31, 1994: $37,065.
THE EMERGING MARKETS EQUITY PORTFOLIO -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $30,828.
EMERGING MARKETS EQUITY FUND -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994: $22,572.
THE DIVERSIFIED PORTFOLIO -- For the period July 8, 1993 (commencement of
operations) through June 30, 1994: $2,423.
DIVERSIFIED FUND -- For the period July 8, 1993 (commencement of operations)
through June 30, 1994: $10,086.
As of the date of this Statement of Additional Information, neither the
International Bond Fund nor its corresponding Portfolio had completed its
initial fiscal year.
The Administration Agreements may be renewed or amended by the
respective Trustees without a shareholder vote. The Administration Agreements
are terminable at any time without penalty by a vote of a majority of the
Trustees of the Trust or the Portfolios, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Administrator may subcontract for the performance of its obligations under
the Administration Agreements only if the Trustees approve such subcontract and
find the subcontracting party to be qualified to perform the obligations sought
to be subcontracted, provided, however, that unless the Trust or the Portfolios,
as applicable, expressly agrees in writing, the Administrator shall be fully
responsible for the acts and omissions of any subcontractor as it would for its
own acts or omissions.
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SERVICES AGENT
The Trust, on behalf of each Fund, and the Portfolios have entered into
Financial and Fund Accounting Services Agreements with Morgan pursuant to which
Morgan provides two types of services to the Funds and the Portfolios. First,
Morgan is responsible for certain financial and fund accounting services
provided to each Fund and each Portfolio. The services to be provided by Morgan
under these agreements include, but are not limited to, monitoring the fund and
shareholder accounting activities of the Custodian; assisting the Administrator
in preparing tax returns, reviewing financial reports, coordinating annual
audits, assisting in the development of budgets, overseeing preparation of tax
information for Fund shareholders; monitoring the fund accounting activities and
daily partnership allocation; and providing other related services.
Second, Morgan is responsible for the annual costs both to the Funds
and to the Portfolios of certain usual and customary expenses incurred by the
Funds and the Portfolios (the "expense undertakings"). The expenses covered by
the expense undertakings include, but are not limited to, transfer, registrar,
and dividend disbursing costs, legal and accounting expenses, the fees of the
Administrator, the cost of any liability insurance or fidelity bonds, the
compensation and expenses of the Trustees, the expenses of printing and mailing
reports, notices and proxies to Fund shareholders, interest charges, membership
dues in the Investment Company Institute, shareholder meeting fees and
registration fees under federal or state securities laws. The Funds and the
Portfolios will pay these expenses directly and such amounts will be deducted
from the fees to be paid to Morgan under these agreements. If such amounts are
more than the amount of Morgan's fees under any of these agreements, Morgan will
reimburse the applicable Fund or Portfolio, as appropriate, for such excess
amounts.
Under the Trust's Financial and Fund Accounting Services Agreement, the
administration and operation expenses of each Fund not covered by the expense
undertakings and for which each Fund is responsible, include the fees of
Pierpont Group, Inc., shareholder servicing fees, the services agent fee,
organization expenses and extraordinary expenses as defined in the agreement,
which includes litigation and indemnification expenses and material increases in
expenses due to occurrences such as significant increases in the fee schedules
of service providers or significant decreases in a Fund's asset level due to
changes in tax or other laws or other extraordinary occurrences outside of the
ordinary course of a Fund's business. Under the Portfolios' agreements, the
administration and operation expenses of the Portfolios not covered by the
expense undertakings, and for which the Portfolios are responsible, include the
fees of Pierpont Group, Inc., the services agent fee, custodian fees, advisory
fees or expenses otherwise incurred in connection with the management and
reinvestment of a Portfolio's assets, expenses connected with the execution,
recording, and settlement of portfolio security transactions, organization
expenses and extraordinary expenses as defined in these agreements (and as set
forth above).
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The Trust's agreement provides for each Fund to pay Morgan a fee for
these services which is computed daily and may be paid monthly at the annual
rate of 0.05% of each Fund's average daily net assets. The Portfolios'
agreements provide for each of the Portfolios to pay Morgan a fee for these
services which is computed daily and may be paid monthly at the following annual
rates of average daily net assets: Money Market, Tax Exempt Money Market and
Treasury Money Market Portfolios, 0.03%; Short Term Bond Portfolio, 0.05% on the
first $200 million and 0.03% thereafter; U.S. Fixed Income, Tax Exempt Bond, New
York Total Return Bond, Selected U.S. Equity, U.S. Small Company and Diversified
Portfolios, 0.10% on the first $200 million, 0.05% on the next $200 million and
0.03% thereafter; Non-U.S. Equity and Emerging Markets Equity Portfolios, 0.15%
on the first $200 million, 0.10% on the next $200 million, 0.05% on the next
$200 million and 0.03% thereafter; and Non-U.S. Fixed Income Portfolio, 0.12% on
the first $200 million, 0.08% on the next $200 million and 0.04% thereafter. As
noted immediately above, both of these fee levels reflect payments made directly
to third parties by each of the Funds and the Portfolios for expenses covered by
the expense undertakings, as well as payments to Morgan for services rendered
under the agreements. The Trustees regularly review amounts paid to and
accounted for by Morgan pursuant to these agreements. Under the agreements,
Morgan may delegate one or more of its responsibilities to other entities,
including SBDS, at Morgan's expense. The agreements may be terminated at any
time, without penalty, by the Trustees or Morgan, in each case on not more than
60 days' nor less than 30 days' written notice to the other party.
Below are set forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, under
the Financial and Fund Accounting Services Agreements for the fiscal periods
indicated. See "Expenses" in the Prospectus and below for applicable expense
limitations.
THE MONEY MARKET PORTFOLIO -- For the period July 12, 1993 (commencement of
operations) through November 30, 1993: $193,980. For the fiscal year ended
November 30, 1994: $385,012.
MONEY MARKET FUND -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $(41,186)*. For the fiscal year ended November 30,
1994: $(265,806)*.
THE TAX EXEMPT MONEY MARKET PORTFOLIO -- For the period July 12, 1993
(commencement of operations) through August 31, 1993: $(5,756)* For the fiscal
year ended August 31, 1994: $153,204.
TAX EXEMPT MONEY MARKET FUND -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $(25,168)*. For the fiscal year ended
August 31, 1994: $(103,541)*.
THE TREASURY MONEY MARKET PORTFOLIO -- For the period January 4, 1993
(commencement of operations) through October 31, 1993: $(30,702)*. For the
fiscal year ended October 31, 1994: $(13,844)*.
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TREASURY MONEY MARKET FUND -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $(28,435)*. For the fiscal year ended
October 31, 1994: $(118,050)*.
THE SHORT TERM BOND PORTFOLIO -- For the period July 8, 1993 (commencement of
operations) through October 31, 1993: $(39,290)*. For the fiscal year ended
October 31, 1994: $(22,054)*.
SHORT TERM BOND FUND -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $(24,299)*. For the fiscal year ended October 31,
1994: $(89,141)*.
THE U.S. FIXED INCOME PORTFOLIO -- For the period July 12, 1993 (commencement of
operations) through October 31, 1993: $7,691. For the fiscal year ended October
31, 1994: $140,493.
BOND FUND -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $(29,422)*. For the fiscal year ended October 31, 1994:
$(141,179)*.
THE TAX EXEMPT BOND PORTFOLIO -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $(1,816)*. For the fiscal year ended August
31, 1994: $210,795.
TAX EXEMPT BOND FUND -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $(9,011)*. For the fiscal year ended August
31, 1994: $(82,093)*.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO -- For the period April 11, 1994
(commencement of operations) through March 31, 1995: $(11,830)*.
THE NEW YORK TOTAL RETURN BOND FUND -- For the Period April 11, 1994
(commencement of operations) through March 31, 1995: $(49,096)*.
THE SELECTED U.S. EQUITY PORTFOLIO-- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $155,348.
SELECTED U.S. EQUITY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $(56,520)*.
THE U.S. SMALL COMPANY PORTFOLIO -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $203,764.
U.S. SMALL COMPANY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $(55,233)*.
THE NON-U.S. EQUITY PORTFOLIO -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $(22,160)*. For the fiscal year ended
October 31, 1994: $327,569.
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INTERNATIONAL EQUITY FUND -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $(7,383)*. For the fiscal year ended
October 31, 1994: $(118,900)*.
THE EMERGING MARKETS EQUITY PORTFOLIO -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $347,925.
EMERGING MARKETS EQUITY FUND -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994:
$(120,061)*.
THE DIVERSIFIED PORTFOLIO -- For the period July 8, 1993 (commencement of
operations) through June 30, 1994: $(17,807)*.
DIVERSIFIED FUND -- For the period July 8, 1993 (commencement of operations)
through June 30, 1994: $(100,039)*.
- ------------------------------------
(*) Indicates a reimbursement by Morgan for excess expenses under a Financial
and Fund Accounting Services Agreement. No fees were paid for the fiscal period.
As of the date of this Statement of Additional Information, neither the
International Bond Fund nor its corresponding Portfolio had completed its
initial fiscal year.
CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02101, serves as the Trust's and each of the
Portfolio's Custodian and Transfer and Dividend Disbursing Agent. Pursuant to
the Custodian Contract with each of the Portfolios, it is responsible for
maintaining the books and records of portfolio transactions and holding
portfolio securities and cash. In the case of the Portfolios for the Money
Market, Tax Exempt Money Market, Short Term Bond, Bond, Tax Exempt Bond, New
York Total Return Bond, Selected U.S. Equity, U.S. Small Company and Diversified
Funds, the Custodian has entered into subcustodian agreements with Morgan for
the purpose of holding participations in master demand obligations .
In addition, the Custodian has also entered into subcustodian
agreements on behalf of the Portfolios for the Tax Exempt Money Market, Tax
Exempt Bond and New York Total Return Bond Funds with Bankers Trust Company for
the purpose of holding TENR Notes and with Bank of New York and Chemical Bank,
N.A. for the purpose of holding certain variable rate demand notes. In the case
of foreign assets held outside the United States, the Custodian employs various
subcustodians who were approved by the Trustees of the Portfolios in accordance
with the regulations of the SEC. The Custodian maintains portfolio transaction
records. As Transfer Agent and Dividend Disbursing Agent, State Street is
responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts. Under
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the terms of the Financial and Fund Accounting Services Agreements between the
Trust and Morgan, Morgan is responsible for the usual and customary fees of the
Custodian for each Fund (see "Services Agent"); the corresponding Portfolio is
responsible for the fees of the Custodian for the Portfolio (see "Services
Agent").
SHAREHOLDER SERVICING
The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of an Eligible Institution. Under this agreement, Morgan is responsible for
performing shareholder account administrative and servicing functions, which
includes but is not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rates (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent): Money
Market, Treasury Money Market and Tax Exempt Money Market Funds, 0.11%; Short
Term Bond, Bond, Tax Exempt Bond, New York Total Return Bond, International
Bond, Selected U.S. Equity, U.S. Small Company, International Equity, Emerging
Markets Equity and Diversified Funds, 0.05%. Morgan acts as shareholder
servicing agent for all shareholders.
Below are set forth for each Fund listed the shareholder servicing fees
paid by each Fund to Morgan, net of fee waivers and reimbursements, for the
fiscal periods indicated. See "Expenses" in the Prospectus and below for
applicable expense limitations.
MONEY MARKET FUND -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $4,720. For the fiscal year ended November 30, 1994:
$200,287.
TAX EXEMPT MONEY MARKET FUND -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $ 2,803. For the fiscal year ended August
31, 1994: $22,282.
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TREASURY MONEY MARKET FUND -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $4,147. For the fiscal year ended October
31, 1994: $64,191.
SHORT TERM BOND FUND -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $1,642. For the fiscal year ended October 31, 1994:
$19,528.
BOND FUND -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $4,942. For the fiscal year ended October 31, 1994: $63,383.
TAX EXEMPT BOND FUND -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $0. For the fiscal year ended August 31,
1994: $3,172.
NEW YORK TOTAL RETURN BOND FUND -- For the period April 11, 1994 (commencement
of operations) through March 31, 1995: $6,116.
SELECTED U.S. EQUITY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $8,191.
U.S. SMALL COMPANY FUND -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $13,854.
INTERNATIONAL EQUITY FUND -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $0. For the fiscal year ended October 31,
1994: $63,751.
EMERGING MARKETS EQUITY FUND -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994: $39,124.
DIVERSIFIED FUND -- For the period July 8, 1993 (commencement of operations)
through June 30, 1994: $16,798.
As of the date of this Statement of Additional Information, the
International Bond Fund had not completed its initial fiscal year.
As discussed under "Investment Advisor", the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing financial and accounting services to the Funds and the Portfolios
under the Financial and Fund Accounting Services Agreements and in acting as
Advisor to the Portfolios under the Investment Advisory Agreements, may raise
issues under these laws. However, Morgan believes that it may properly perform
these services and the other activities described in the Prospectus without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
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If Morgan were prohibited from providing any of the services under the
Shareholder Servicing and Financial and Fund Accounting Services Agreements, the
Trustees would seek an alternative provider of such services. In such event,
changes in the operation of the Funds or the Portfolios might occur and a
shareholder might no longer be able to avail himself or herself of any services
then being provided to shareholders by Morgan.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolios are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of each of
the Funds and the Portfolios, assists in the preparation and/or review of each
of the Fund's and the Portfolio's federal and state income tax returns and
consults with the Funds and the Portfolios as to matters of accounting and
federal and state income taxation.
EXPENSES
Each Fund is responsible for Morgan's fees as shareholder servicing
agent and Services Agent for the Fund, the fees of Pierpont Group, Inc., and any
fees or expenses not covered by the Financial and Fund Accounting Services
Agreement with the Trust on behalf of the Fund (see "Services Agent" above). In
addition, each Portfolio is responsible for Morgan's fees as Investment Advisor
and Services Agent for the Portfolio, the fees of the Custodian for the
Portfolio, and any fees or expenses not covered by the Financial and Fund
Accounting Services Agreement with the Portfolio (see "Services Agent" above).
Morgan has agreed that if in any fiscal year the sum of any Fund's
expenses exceeds the limits set by applicable regulations of state securities
commissions, the fees payable by the Fund to Morgan for that year shall be
reduced as specified by agreement with the Trust on behalf of the Fund.
Currently, Morgan believes that the most restrictive expense limitation of state
securities commissions limits expenses to 2.5% of the first $30 million of
average net assets, 2% of the next $70 million of such net assets and 1.5% of
such net assets in excess of $100 million for any fiscal year. For additional
information regarding waivers or expense subsidies, see "Management of the Trust
and the Portfolio(s)" in the Prospectus.
The Administrator paid the organization expenses and expenses incurred
in the initial offering of shares of the Trust.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus under "Purchase of Shares". References in the Prospectus and this
Statement of Additional Information to customers of Morgan or an Eligible
Institution include customers of their affiliates and references to transactions
by customers with Morgan or an Eligible Institution include transactions with
their affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of a Fund may make transactions in shares of a Fund.
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<PAGE>
Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in are valued by the method described in Net
Asset Value as of the day the Fund receives the securities. This is a taxable
transaction to the shareholder. Securities may be accepted in payment for shares
only if they are, in the judgment of Morgan, appropriate investments for the
Fund's corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for
investment and not for resale (other than for resale to the Fund's corresponding
Portfolio); (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iv) if stock, have a value which is
readily ascertainable as evidenced by a listing on a stock exchange, over the
counter market or by readily available market quotations from a dealer in such
securities. Each Fund reserves the right to accept or reject at its own option
any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of an
Eligible Institution, and the Eligible Institution may charge the investor a fee
for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus under
"Redemption of Shares". Shareholders redeeming shares of the Money Market, Tax
Exempt Money Market or Treasury Money Market Funds should be aware that these
Funds attempt to maintain a stable net asset value of $1.00 per share; however,
there can be no assurance that they will be able to continue to do so, and in
that case the net asset value of the Funds' shares might deviate from $1.00 per
share. Accordingly, a redemption request might result in payment of a dollar
amount which differs from the number of shares redeemed. See "Net Asset Value"
in the Prospectus and below.
If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust on behalf of all of the Funds and their corresponding
Portfolios (except The Non-U.S. Fixed Income Portfolio) have elected to be
governed by Rule 18f-1 under the 1940 Act pursuant to which the Funds and the
corresponding Portfolios are obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90 day period for any one shareholder. The Trust will redeem Fund shares in kind
only if it has received a redemption in kind from the corresponding Portfolio
and therefore shareholders of the Fund that receive redemptions in kind will
receive securities of the Portfolio. The
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<PAGE>
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. The Trust, on behalf of a Fund , and
the Portfolios reserve the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: (i) for up to seven
days, (ii) during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency , as determined by the SEC, which exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any JPM Institutional Fund into
any other JPM Institutional Fund or Pierpont Fund, as described under "Exchange
of Shares" in the Prospectus. For complete information, the Prospectus as it
relates to the Fund into which a transfer is being made should be read prior to
the transfer. Requests for exchange are made in the same manner as requests for
redemptions. See "Redemption of Shares". Shares of the Fund to be acquired are
purchased for settlement when the proceeds from redemption become available. In
the case of investors in certain states, state securities laws may restrict the
availability of the exchange privilege. The Trust reserves the right to
discontinue, alter or limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Net investment income of the Money Market, Tax Exempt Money Market and
Treasury Money Market Funds consists of accrued interest or discount and
amortized premium, less the accrued expenses of the Fund applicable to that
dividend period including the fees payable to Morgan. See "Net Asset Value".
Determination of the net income for Money Market, Tax Exempt Money
Market, Treasury Money Market, Short Term Bond, Bond, Tax Exempt Bond,
International Bond and New York Total Return Bond Funds is made at the times
described in the Prospectus; in addition, net investment income for days other
than business days is determined at the time net asset value is determined on
the prior business day.
NET ASSET VALUE
Each of the Funds computes its net asset value once daily on Monday
through Friday as described under "Net Asset Value" in the Prospectus. The net
asset value will not be computed on a day in which no orders to purchase or
redeem Fund shares have been received or on the day the following legal holidays
are
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observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On days when
U.S. trading markets close early in observance of these holidays, the Funds and
the Portfolios would expect to close for purchases and redemptions at the same
time. The days on which net asset value is determined are the Funds' business
days.
The net asset value of each Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolios corresponding to each Fund in valuing their assets.
MONEY MARKET, TAX EXEMPT MONEY MARKET AND TREASURY MONEY MARKET FUNDS.
In the case of the Portfolios for the Money Market, Tax Exempt Money Market and
Treasury Money Market Funds, all portfolio securities are valued by the
amortized cost method. The purpose of this method of calculation is to attempt
to maintain a constant net asset value per share of the Fund of $1.00. No
assurances can be given that this goal can be attained. The amortized cost
method of valuation values a security at its cost at the time of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. If a difference of more than 1/2 of 1% occurs between
valuation based on the amortized cost method and valuation based on market
value, the Trustees will take steps necessary to reduce such deviation, such as
changing the Fund's dividend policy, shortening the average portfolio maturity,
realizing gains or losses, or reducing the number of outstanding Fund shares.
Any reduction of outstanding shares will be effected by having each shareholder
contribute to a Fund's capital the necessary shares on a pro rata basis. Each
shareholder will be deemed to have agreed to such contribution in these
circumstances by his investment in the Funds. See "Taxes".
BOND, TAX EXEMPT BOND, NEW YORK TOTAL RETURN BOND, SHORT TERM BOND,
INTERNATIONAL BOND AND DIVERSIFIED FUNDS. In the case of the Bond, Tax Exempt
Bond, New York Total Return Bond, International Bond and Short Term Bond Funds,
and the fixed income portion of the Diversified Fund, portfolio securities with
a maturity of 60 days or more, including securities that are listed on an
exchange or traded over the counter, are valued using prices supplied daily by
an independent pricing service or services that (i) are based on the last sale
price on a national securities exchange or, in the absence of recorded sales, at
the readily available closing bid price on such exchange or at the quoted bid
price in the over-the-counter market, if such exchange or market constitutes the
broadest and most representative market for the security and (ii) in other
cases, take into account various factors affecting market value, including
yields and prices of comparable securities, indication as to value from dealers
and general market conditions. If such prices are not supplied by the
Portfolio's independent pricing service, such securities are priced in
accordance with procedures adopted by the Trustees. All portfolio securities
with a remaining maturity of less than 60 days are valued by the amortized cost
method.
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Securities listed on a foreign exchange are valued at the last quoted sale price
available before the time when net assets are valued. Because of the large
number of municipal bond issues outstanding and the varying maturity dates,
coupons and risk factors applicable to each issuer's books, no readily available
market quotations exist for most municipal securities.
Trading in securities in most foreign markets is normally completed
before trading in U.S. markets and may also take place on days on which the U.S.
markets are closed. If events materially affecting the value of securities occur
between the time when the market in which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
SELECTED U.S. EQUITY, U.S. SMALL COMPANY, INTERNATIONAL EQUITY,
EMERGING MARKETS EQUITY AND DIVERSIFIED FUNDS. In the case of the Equity
Portfolios the value of investments listed on a domestic securities exchange,
other than options on stock indexes, is based on the last sale prices on the New
York Stock Exchange at 4:00 P.M. or, in the absence of recorded sales, at the
average of readily available closing bid and asked prices on such exchange.
Securities listed on a foreign exchange are valued at the last quoted sale price
available before the time when net assets are valued. Unlisted securities are
valued at the average of the quoted bid and asked prices in the over-the-counter
market. The value of each security for which readily available market quotations
exist is based on a decision as to the broadest and most representative market
for such security. For purposes of calculating net asset value all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the prevailing market rates available at the time of valuation.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the
Portfolio was more than 60 days, unless this is determined not to represent fair
value by the Trustees.
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Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is closed.
If events materially affecting the value of securities occur between the time
when the exchange on which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities will be valued at
fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See "Additional
Information" in the Prospectus.
YIELD QUOTATIONS. As required by regulations of the SEC, current yield
for the Money Market, Tax Exempt Money Market and Treasury Money Market Funds is
computed by determining the net change exclusive of capital changes in the value
of a hypothetical pre-existing account having a balance of one share at the
beginning of a seven-day calendar period, dividing the net change in account
value of the account at the beginning of the period, and multiplying the return
over the seven-day period by 365/7. For purposes of the calculation, net change
in account value reflects the value of additional shares purchased with
dividends from the original share and dividends declared on both the original
share and any such additional shares, but does not reflect realized gains or
losses or unrealized appreciation or depreciation. Effective yield for the Money
Market, Tax Exempt Money Market and Treasury Money Market Funds is computed by
annualizing the seven-day return with all dividends reinvested in additional
Fund shares. In the case of the Tax Exempt Money Market Fund, the tax equivalent
yield is computed by first computing the yield as discussed above. Then the
portion of the yield attributable to securities the income of which was exempt
for federal income tax purposes is determined. This portion of the yield is then
divided by one minus the stated assumed federal income tax rate for individuals
and then added to the portion of the yield that is not attributable to
securities, the income of which was not tax exempt.
As required by regulations of the SEC, the annualized yield for the
Bond, Tax Exempt Bond, International Bond, New York Total Return Bond and Short
Term Bond Funds is computed by dividing each Fund's net investment income per
share earned during a 30-day period by the net asset value on the last day of
the period. The average daily number of shares outstanding during the period
that are eligible to receive dividends is used in determining the net investment
income per share. Income is computed by totaling the interest earned on all debt
obligations during the period and subtracting from that amount the total of all
recurring expenses incurred during the period. The 30-day yield is then
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income, as described under "Additional
Information" in the Prospectus.
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The table that follows sets forth historical yield information for the
periods indicated:
<TABLE>
<CAPTION>
YORK
TAX TOTAL
MONEY TREASURY TAX EXEMPT SHORT TERM EXEMPT RETURN
MARKET MONEY MARKET MONEY MARKET BOND BOND BOND BOND
<S> <C> <C> <C> <C> <C> <C> <C>
Period End 11/30/94 10/31/94 8/31/94 10/31/94 10/31/94 8/31/94 3/31/95
7-Day Current
Yield 5.41% 4.62% 2.98% N/A N/A N/A N/A
7-Day Tax Equivalent
Yield at 39% Tax Rate N/A N/A 4.93% N/A N/A N/A N/A
7-Day Effective
Yield 5.56% 4.73% 3.02% N/A N/A N/A N/A
30-Day Yield N/A N/A N/A 5.68% 6.54% 4.86% 5.22%
30-Day
Tax Equivalent Yield at
39% Tax Rate N/A N/A N/A N/A N/A 7.97% 8.56%
</TABLE>
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
annualized total return of the Bond, Tax Exempt Bond, New York Total Return
Bond, Short Term Bond, International Bond, Selected U.S. Equity, U.S. Small
Company, International Equity, Emerging Markets Equity and Diversified Funds for
a period is computed by assuming a hypothetical initial payment of $1,000. It is
then assumed that all of the dividends and distributions by the Fund over the
period are reinvested. It is then assumed that at the end of the period, the
entire amount is redeemed. The annualized total return is then calculated by
determining the annual rate required for the initial payment to grow to the
amount which would have been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance information for any period or portion thereof
prior to the establishment of a Fund will be that of its corresponding
predecessor Pierpont Fund, as permitted by applicable SEC staff interpretations,
if the Pierpont Fund commenced operations before its corresponding JPM
Institutional Fund. The applicable financial information in the registration
statement for The Pierpont Funds (Registration Nos. 33-54632 and 811-7340) is
hereby incorporated by reference. The table that follows sets forth historical
return information for the periods indicated:
78
<PAGE>
<TABLE>
<CAPTION>
SELECTED INTERNA- EMERGING
U.S. SHORT U.S. SMALL TIONAL DIVERSI- MARKETS
EQUITY TERM BOND COMPANY EQUITY FIED EQUITY
<S> <C> <C> <C> <C> <C> <C>
Period ended: 5/31/94 10/31/94 5/31/94 10/31/94 6/30/94 10/31/94
Average Annual Total
RETURN
1-Year: 8.80% 0.87% 1.21% 6.18% (0.56)% N/A
5-Year: 13.34% N/A 9.01% N/A N/A N/A
Commencement of
Operations Date
to Period End:* 14.20% 1.44% 11.95% 4.68% (0.56)% 24.70%
Aggregate Total
RETURN
1-Year: 8.80% 0.87% 1.21% 6.18% (0.56)% N/A
5-Year: 87.02% N/A 53.95% N/A N/A N/A
Commencement of
Operations Date
to Period End:* 226.87% 1.89% 174.39% 22.36% (0.56)% 24.70%
NEW YORK
TREASURY TAX EXEMPT TOTAL
MONEY MONEY MONEY RETURN TAX EXEMPT
MARKET MARKET MARKET BOND BOND BOND
Period ended: 10/31/94 11/30/94 8/31/94 10/31/94 3/31/95 8/31/94
Average Annual Total
RETURN
1-Year: 3.61% 3.92% 2.30% (3.33%) 5.49% 1.61%
5-Year: N/A 4.99% 3.60% 7.52% N/A 7.40%
Commencement of
Operations Date
to Period End:* 3.21% 6.77% 4.27% 7.37% 5.49% 8.13%
Aggregate Total RETURN
1-Year: 3.61% 3.92% 2.30% (3.33)% 5.49% 1.61%
5-Year: N/A 27.56% 19.35% 43.65% N/A 42.31%
Commencement of
Operations Date
to Period End:* 5.92% 118.38% 60.02% 60.38% 5.49% 117.95%
<FN>
- --------------------
*The Treasury Money Market , Short Term Bond, Diversified,
Emerging Markets Equity and New York Total Return Bond Funds commenced
operations on January 4, 1993 , July 8, 1993, July 8, 1993, November
15, 1993 and April 11, 1994, respectively. The predecessor Pierpont
Money Market, Tax Exempt Money Market, Bond, Tax Exempt Bond, Equity,
Capital Appreciation and International Equity Funds commenced
operations on October 1, 1982, September 12, 1983, March 11, 1988,
October 3, 1984, June 27, 1985, June 27, 1985 and June 1, 1990,
respectively.
</FN>
</TABLE>
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<PAGE>
GENERAL. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including data from Lipper Analytical Services,
Inc., Micropal, Inc., Ibbotson Associates, Morningstar Inc., the S&P 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Frank Russell
Indexes, The EAFE Index, The IFC-JPM Emerging Markets Index and other industry
publications. The Money Market and Treasury Money Market Funds may compare their
performance to IBC/Donoghue's Money Market fund average and the Tax Exempt Money
Market Fund may compare its performance to IBC/Donoghue's Tax Free Money Market
fund average, respectively.
In order to illustrate the benefits of balanced investing across asset
classes over longer periods of time, the Diversified Fund may use performance
data that will be based on the return of, as appropriate, the S&P 500 Index, the
Salomon Broad Investment Grade Bond Index, the Frank Russell 2000 and 2500
Indexes, and the EAFE Index. The quoted performance will illustrate what results
could have been achieved had the Fund invested specified percentages of the
Fund's assets in classes of securities that would have produced a return equal
to the relevant index over the time period at issue.
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return, or capital appreciation in reports, sales
literature, and advertisements published by the Funds. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See "Additional
Information" in the Prospectus.
PORTFOLIO TRANSACTIONS
J.P. Morgan Investment Management Inc., acting as agent for Morgan,
places orders for all Portfolios for all purchases and sales of portfolio
securities. Morgan enters into repurchase agreements and reverse repurchase
agreements and executes loans of portfolio securities on behalf of all the
Portfolios. See "Investment Objectives and Policies".
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at
80 (no pages 81-82)
<PAGE>
a fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
MONEY MARKET, TAX EXEMPT MONEY MARKET, TREASURY MONEYMARKET, BOND,
SHORT TERM BOND, TAX EXEMPT BOND, NEW YORK TOTAL RETURN BOND AND INTERNATIONAL
BOND FUNDS. Portfolio transactions for the Portfolios corresponding to the Money
Market, Tax Exempt Money Market, Treasury Money Market, Bond, Short Term Bond,
Tax Exempt Bond, New York Total Return Bond and International Bond Funds will be
undertaken principally to accomplish a Portfolio's objective in relation to
expected movements in the general level of interest rates. The Portfolios
corresponding to the Money Market, Treasury Money Market, Bond, Tax Exempt Bond,
New York Total Return Bond, Short Term Bond and International Bond Funds may
engage in short-term trading consistent with their objectives. The Tax Exempt
Money Market Portfolio will not seek profits through short-term trading, but the
Portfolio may dispose of any portfolio security prior to its maturity if it
believes such disposition is appropriate even if this action realizes profits or
losses.
In connection with portfolio transactions for the Portfolios, J.P.
Morgan Investment Management Inc. intends to seek best price and execution on a
competitive basis for both purchases and sales of securities.
The Portfolios corresponding to the Money Market, Tax Exempt Money
Market and Treasury Money Market Funds have a policy of investing only in
securities with maturities of less than thirteen months, which policy will
result in high portfolio turnovers. The Portfolio corresponding to the Short
Term Bond Fund has a policy of maintaining a short duration, which policy will
also result in a high portfolio turnover. Since brokerage commissions are not
normally paid on investments which the Portfolios make, turnover resulting from
such investments should not adversely affect the net asset value or net income
of the Portfolios.
SELECTED U.S. EQUITY, U.S. SMALL COMPANY, INTERNATIONAL EQUITY,
EMERGING MARKETS EQUITY AND DIVERSIFIED FUNDS. In connection with portfolio
transactions for the Equity Portfolios , the overriding objective is to obtain
the best possible execution of purchase and sale orders. The estimated portfolio
turnover rate for each of the Equity Portfolio's generally should not exceed
100%.
In selecting a broker, J.P. Morgan Investment Management Inc. considers
a number of factors including: the price per unit of the security; the broker's
reliability for prompt, accurate confirmations and on-time delivery of
securities; the firm's financial condition; as well as the commissions charged.
A broker may be paid a brokerage commission in excess of that which another
broker might have charged for effecting the same transaction if, after
considering the foregoing factors, J.P. Morgan
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<PAGE>
Investment Management Inc. decides that the broker chosen will provide the best
possible execution. J.P. Morgan Investment Management Inc. and Morgan monitor
the reasonableness of the brokerage commissions paid in light of the execution
received. The Trustees of each Portfolio review regularly the reasonableness of
commissions and other transaction costs incurred by the Portfolios in light of
facts and circumstances deemed relevant from time to time, and, in that
connection, will receive reports from the Advisor and published data concerning
transaction costs incurred by institutional investors generally. Research
services provided by brokers to which J.P. Morgan Investment Management Inc. has
allocated brokerage business in the past include economic statistics and
forecasting services, industry and company analyses, portfolio strategy
services, quantitative data, and consulting services from economists and
political analysts. Research services furnished by brokers are used for the
benefit of all the Advisor's clients and not solely or necessarily for the
benefit of an individual Portfolio. The Advisor believes that the value of
research services received is not determinable and does not significantly reduce
its expenses. The Portfolios do not reduce their fee to the Advisor by any
amount that might be attributable to the value of such services.
The Portfolios or their predecessors corresponding to the Selected U.S.
Equity, U.S. Small Company, International Equity, Emerging Markets Equity and
Diversified Funds paid the following approximate brokerage commissions for the
indicated fiscal years:
<TABLE>
<CAPTION>
Selected Emerging
U.S. U.S. Small Non-U.S. Markets
Equity Company Equity Equity Diversified
FYE (MAY) (MAY) (OCTOBER) (OCTOBER) (JUNE)
<S> <C> <C> <C> <C> <C>
1994 $744,676 $1,760,320 $1,413,238 $1,262,905 $78,737
1993 $293,698 $142,310 $639,000 N/A N/A
1992 $182,000 $42,000 $157,000 N/A N/A
</TABLE>
The increases in brokerage commissions reflected above were due to
increased portfolio activity and an increase in net investments in the Portfolio
or its predecessor .
Subject to the overriding objective of obtaining the best possible
execution of orders, J.P. Morgan Investment Management Inc. may allocate a
portion of a Portfolio's brokerage transactions to affiliates of Morgan. In
order for affiliates of Morgan to effect any portfolio transactions for a
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of each Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
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<PAGE>
Portfolio securities will not be purchased from or through or sold to
or through the Portfolios' Administrator, Distributor or Advisor or any
"affiliated person" (as defined in the 1940 Act ) of the Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolios will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when Morgan deems the purchase or sale of a security
to be in the best interests of a Portfolio as well as other customers including
other Portfolios, J.P. Morgan Investment Management Inc. to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for a Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including lower
brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by J.P. Morgan Investment Management Inc. in the manner
it considers to be most equitable and consistent with Morgan's fiduciary
obligations to a Portfolio. In some instances, this procedure might adversely
affect a Portfolio.
If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which each Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
85
<PAGE>
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of a Fund is liable to a
Fund or to a shareholder, and that no Trustee, officer, employee, or agent is
liable to any third persons in connection with the affairs of a Fund, except as
such liability may arise from his or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or its duties to such third
persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of a
Fund. With the exceptions stated, the Trust's Declaration of Trust provides that
a Trustee, officer, employee, or agent is entitled to be indemnified against all
liability in connection with the affairs of a Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust".
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in a Fund (or in the assets of other series, if applicable). To
date shares of the thirteen series described in this Statement of Additional
Information have been authorized and are available for sale to the public. Each
share represents an equal proportional interest in a Fund with each other share.
Upon liquidation of a Fund, holders are entitled to share pro rata in the net
assets of a Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of a Fund have no preemptive or conversion rights
and are fully paid and nonassessable. The rights of redemption and
86
<PAGE>
exchange are described in the Prospectus and elsewhere in this Statement of
Additional Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, PROVIDED, HOWEVER, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
87
<PAGE>
that all objections so sustained have been met, and shall enter an order so
declaring, the Trustees shall mail copies of such material to all shareholders
with reasonable promptness after the entry of such order and the renewal of such
tender.
The Trustees have authorized the issuance and sale to the public of
shares of thirteen series of the Trust. The Trustees have no current intention
to create any classes within the initial series or any subsequent series. The
Trustees may, however, authorize the issuance of shares of additional series and
the creation of classes of shares within any series with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The proceeds from the issuance of any additional series would be
invested in separate, independently managed portfolios with distinct investment
objectives, policies and restrictions, and share purchase, redemption and net
asset valuation procedures. Any additional classes would be used to distinguish
among the rights of different categories of shareholders, as might be required
by future regulations or other unforeseen circumstances. All consideration
received by the Trust for shares of any additional series or class, and all
assets in which such consideration is invested, would belong to that series or
class, subject only to the rights of creditors of the Trust and would be subject
to the liabilities related thereto. Shareholders of any additional series or
class will approve the adoption of any management contract or distribution plan
relating to such series or class and of any changes in the investment policies
related thereto, to the extent required by the 1940 Act.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares" in the Prospectus.
As of June 13, 1995, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
Money Market Fund-- Welsh Carson Anderson & Stowe (7%), Bennett
Restructuring Fund LP (6%), Motion Picture Association of America
(14%), J.H. Henry Trust U/A/D/ 7/27/90 (6%);
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<PAGE>
Tax Exempt Money Market Fund--W.B. Ruger (21%), Morgan as Agent for
G.L. Dick (11%), Morgan as Agent for Kemajo Family Limited Partnership
(8%), T. Mottola (7%), M. Carey - Rye Songs (9%), Morgan as Agent for
estate of J.P. Grace (19%)
Treasury Money Market Fund--Morgan Guaranty Trust as Agent for One Penn
Plaza (21%), Bank of New York as Series 1993-1 Collateral A/C (13%),
Bank of New York as Series 1993-3 Collateral A/C (20%), Bank of New
York as Series 1992-1 Collateral A/C (14%), Bank of New York as Series
1993-2 Collateral A/C (13%);
Bond Fund--Morgan as Agent for Retirement Trust Fund for The Sisters of
St. Joseph of Peace (5%), Schering Plough Corporate-SERP Trust (5%),
J.P. Morgan as Agent for Ohio Wesleyan University (5%), J.P. Morgan as
Agent for The United Hospital Fund (5%), J.P. Morgan as Agent for
Charles Engelhard Foundation (7%), J.P. Morgan as Agent for Roymere
Investments/LTD (5%);
Short Term Bond Fund--United Gaming, Inc. (24%); Alcatel Network
Systems, Inc. Retirement Savings Plan (75%);
Tax Exempt Bond Fund--Morgan as Agent for D. Belfer (10%), Morgan as
Agent for E. Nef (5%), Morgan as Agent for Engelhard Hanovia, Inc.
(22%), Wachovia Bank of NC TTEE Newmont Gold Pension (8%);
New York Total Return Bond Fund--Morgan as Agent for Shubert
Organization (32%), Morgan as Agent for J. Corry (5%), Morgan as Agent
for R. Weintraub (13%), Morgan as Agent for L. Casseel (7%), Morgan as
Agent for G. & J.
Lieber (5%), Morgan as Agent for IJ Friedman Desc Trust (6%), Morgan as
Agent for Trust U/W of L.H.P. Klotz and R. Klotz (7%);
International Bond Fund--Morgan as Agent for C.Y. Bluhdorn (7%), Morgan
as Agent of E & W Kaplan (11%), Morgan as Agent for Rice Family
Foundation (12%), J.P. Morgan as Agent for General Motors Savings Plan
(42%), J.P. Morgan as Agent of Community Funds Inc. Dewitt Wallace
Readers Digest (21%);
Selected U.S. Equity Fund--Schering Plough Corporate-SERP Trust (13%),
Morgan as Agent for Major League Baseball Master Pension Trust (10%),
Holnam, Inc. Pension Plan Trust (7%), Wachovia Bank NC Trustee for
Newmont Gold Co. Master Pension Trust (10%), LaCross and Company (7%),
Mac & Co. A/C 857-354 Mellon Bank (7%);
International Equity Fund--Morgan as Agent for Three M Operating Subs
Ltd. (5%);
Emerging Markets Equity Fund--The Nature Conservancy (5%), Bartus & Co.
(5%), Morgan as Agent for Alfred P. Sloan Foundation (12%); and
Diversified Fund--Alcatel Network Systems Retirement Savings Plan
(18%), Morgan as Agent for Faber Castell Retirement Plan (14%), J.P.
Morgan as Agent for UNIFI, Inc. Profit Sharing Plan (10%), Westinghouse
Personal Investment Plan (6%), Vanguard Fiduciary Trust Company (5%),
Celtic Insurance Co. Ltd. (7%) BG Sulzie, Inc. Employee Pension (5%),
Boston Foundation Inc. (10%).
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<PAGE>
Unless otherwise noted, the address of each owner listed above is c/o
Morgan, 9 West 57th Street, New York, New York, 10019. As of the date of this
Statement of Additional Information, the officers and Trustees as a group owned
less than 1% of the shares of each Fund. Shareholders owning 25% or more of the
outstanding shares of a Fund may take actions without the approval of any other
investor in that Fund.
TAXES
Each Fund qualifies and intends to remain qualified as a regulated
investment company under Subchapter M of the Code . As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
foreign currency and other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies), but
only if such currencies (or options, futures or forward contracts on foreign
currencies) are not directly related to a Fund's principal business of investing
in stocks or securities (or options and futures with respect to stocks or
securities); and (c) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash, U.S. Government securities,investments in other regulated investment
companies and other securities limited, in respect of any one issuer, to an
amount not greater than
90
<PAGE>
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities). As a regulated investment company, a Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gains that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gains in excess of net long-term capital losses for the taxable year is
distributed.
Under the Code, a Fund will be subject to a 4% excise tax on a portion
of its undistributed income if it fails to meet certain distribution
requirements by the end of the calendar year. Each Fund intends to make
distributions in a timely manner and accordingly does not expect to be subject
to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will generally be
taxable to a shareholder in the year declared rather than the year paid.
The Tax Exempt Money Market, Tax Exempt Bond and New York Total Return
Bond Funds intend to qualify to pay exempt-interest dividends to their
respective shareholders by having, at the close of each quarter of their
respective taxable years, at least 50% of the value of their respective total
assets consist of tax exempt securities. An exempt-interest dividend is that
part of dividend distributions made by the Funds which consists of interest
received by the Funds on tax exempt securities. Shareholders will not incur any
federal income tax on the amount of exempt-interest dividends received by them
from the Funds. In view of each Fund's investment policies, it is expected that
a substantial portion of all dividends will be exempt-interest dividends,
although the Funds may from time to time realize and distribute net short-term
capital gains and may invest limited amounts in taxable securities under certain
circumstances. See "Investment Objective(s) and Policies" in the Prospectus.
Distributions of net investment income and realized net short-term
capital gains in excess of net long-term capital losses (other than exempt
interest dividends) are generally taxable to shareholders of the Funds as
ordinary income whether such distributions are taken in cash or reinvested in
additional shares. The Selected U.S. Equity, U.S. Small Company and Diversified
Funds expect that a portion of these distributions to corporate shareholders
will be eligible for the dividends-received deduction. Distributions to
corporate shareholders of the Money Market, Tax Exempt Money Market,
Treasury Money Market, Tax Exempt Bond, New York Total Return Bond, Bond, Short
Term Bond, International Bond, International Equity and Emerging Markets Equity
Funds are not eligible for the dividends received deduction. Distributions of
net long-term capital gains (i.e., net long-term capital gains in excess of net
short-term capital losses) are taxable to shareholders of a Fund as long-term
capital gains, regardless of whether such distributions are taken in cash or
reinvested in additional shares and regardless of how long a shareholder has
held shares in the Fund. See "Taxes" in the Prospectus for a discussion of the
federal income tax treatment
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of any gain or loss realized on the redemption or exchange of a Fund's shares.
Additionally, any loss realized on a redemption or exchange of shares of a Fund
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.
To maintain a constant $1.00 per share net asset value, the Trustees of
the Money Market, Tax Exempt Money Market and Treasury Money Market Funds may
direct that the number of outstanding shares be reduced pro rata. If this
adjustment is made, it will reflect the lower market value of portfolio
securities and not realized losses. The adjustment may result in a shareholder
having more dividend income than net income in his account for a period. When
the number of outstanding shares of a Fund is reduced, the shareholder's basis
in the shares of the Fund may be adjusted to reflect the difference between
taxable income and net dividends actually distributed. This difference may be
realized as a capital loss when the shares are liquidated.
See "Net Asset Value".
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale, lapse
or other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by a Portfolio lapses
or is terminated through a closing transaction, such as a repurchase by the
Portfolio of the option from its holder, the Portfolio will realize a short-term
capital gain or loss, depending on whether the premium income is greater or less
than the amount paid by the Portfolio in the closing transaction. If securities
are purchased by a Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Under the Code, gains or losses attributable to disposition of foreign
currency or to foreign currency contracts, or to fluctuations in exchange rates
between the time a Portfolio accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time a Portfolio actually
collects such income or pays such liabilities, are treated as ordinary income or
ordinary loss. Similarly, gains or losses on the disposition of debt securities
held by a Portfolio, if any, denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and
disposition dates are also treated as ordinary income or loss.
Forward currency contracts, options and futures contracts entered into
by a Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, a Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
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Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
The Equity Portfolios may invest in Equity Securities of foreign
issuers. If a Portfolio purchases shares in certain foreign investment funds
(referred to as passive foreign investment companies ("PFICs") under the Code),
the Portfolio may be subject to federal income tax on a portion of an "excess
distribution" from such foreign investment fund or gain from the disposition of
such shares, even though such income may have to be distributed as a taxable
dividend by the Fund to its shareholders. In addition, certain interest charges
may be imposed on a Fund or its shareholders in respect of unpaid taxes arising
from such distributions or gains. Alternatively, a Fund may each year include in
its income and distribute to shareholders a pro rata portion of the foreign
investment fund's income, whether or not distributed to the Fund.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Portfolios would be entitled to elect to mark to market
their stock in certain PFICs. Marking to market in this context means
recognizing as gain for each taxable year the excess, as of the end of that
year, of the fair market value of each PFIC's stock over the owner's adjusted
basis in that stock (including mark to market gains of a prior year for which an
election was in effect).
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gains in excess of net long-term losses
to a shareholder who, as to the United States, is a nonresident alien
individual, fiduciary of a foreign trust or estate, foreign corporation or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) unless the dividends
are effectively connected with a U.S. trade or business of the shareholder, in
which case the dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic corporations.
Distributions of net long term capital gains to foreign shareholders will not be
subject to U.S. tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder was present
in the United States for more than 182 days during the taxable year and certain
other conditions are met.
In the case of a foreign shareholder who is a nonresident alien
individual and who is not otherwise subject to withholding as described above, a
Fund may be required to withhold U.S. federal income tax at the rate of 31%
unless IRS
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Form W-8 is provided. See "Taxes" in the Prospectus. Transfers by gift of shares
of a Fund by a foreign shareholder who is a nonresident alien individual will
not be subject to U.S. federal gift tax, but the value of shares of the Fund
held by such a shareholder at his or her death will be includible in his or her
gross estate for U.S. federal estate tax purposes.
FOREIGN TAXES. It is expected that the International Bond, Selected
U.S. Equity, U.S. Small Company, International Equity, Emerging Markets Equity
and Diversified Funds may be subject to foreign withholding taxes with respect
to income received from sources within foreign countries. In the case of the
International Bond, International Equity and Emerging Markets Equity Funds, so
long as more than 50% in value of the total assets of the Fund's corresponding
Portfolio at the close of any taxable year consists of stock or securities of
foreign corporations, the Fund may elect to treat any foreign income taxes paid
by it as paid directly by its shareholders. These Funds will make such an
election only if they deem it to be in the best interest of their respective
shareholders. The Funds will notify their respective shareholders in writing
each year if they make the election and of the amount of foreign income taxes,
if any, to be treated as paid by the shareholders. If a Fund makes the election,
each shareholder will be required to include in his income his proportionate
share of the amount of foreign income taxes paid by the Fund and will be
entitled to claim either a credit (subject to the limitations discussed below)
or, if he itemizes deductions, a deduction for his share of the foreign income
taxes in computing federal income tax liability. (No deduction will be permitted
in computing an individual's alternative minimum tax liability.) A shareholder
who is a nonresident alien individual or a foreign corporation may be subject to
U.S. withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholder's U.S. tax (determined without regard to the availability of the
credit) attributable to his or her total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by each of the
International Bond, International Equity and Emerging Markets Equity Funds from
its foreign source net investment income will be treated as foreign source
income. Each of these Funds' gains and losses from the sale of securities will
generally be treated as derived from U.S. sources, however, and certain foreign
currency gains and losses likewise will be treated as derived from U.S. sources.
The limitation on the foreign tax credit is applied separately to foreign source
"passive income", such as the portion of dividends received from the Fund which
qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, shareholders may be
unable to claim a credit for the full amount of their proportionate shares of
the foreign income taxes paid by the International Bond, International Equity
and Emerging Markets Equity Funds.
STATE AND LOCAL TAXES. Each Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
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the treatment of a Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
OTHER TAXATION. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Portfolios are organized as New York trusts. The Portfolios are
not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by a Fund
in its corresponding Portfolio does not cause the Fund to be liable for any
income or franchise tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares are present or represented by proxy, or (ii) more than 50% of
the Fund's outstanding shares or the Portfolio's outstanding voting securities,
whichever is less.
Telephone calls to the Funds , Morgan or Eligible Institutions as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectuses do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectuses concerning the contents of any contract or other document are
not necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectuses and this Statement of Additional Information, in connection with
the offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities
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offered hereby in any jurisdiction to any person to whom it is unlawful for the
Fund or the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
Each of The JPM Institutional Funds' current reports to shareholders
filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder are hereby incorporated herein by reference. A copy of each such
report will be provided, without charge, to each person receiving this Statement
of Additional Information.
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APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
SHORT-TERM TAX-EXEMPT NOTES
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
A-1
<PAGE>
MOODY'S
CORPORATE AND MUNICIPAL BONDS
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
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
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.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries. - High rates of
return on funds employed. - Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation. - Well established access to a range of financial
markets and assured sources of alternate liquidity.
A-2
<PAGE>
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
A-3
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APPENDIX B
ADDITIONAL INFORMATION CONCERNING NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by New York State (the "State") and certain of its
municipalities and public authorities. It does not purport to be a complete
description and is based on information from official statements relating to
securities offerings of New York issuers.
NEW YORK STATE. The financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities but also by entities that are not under the control of the
State. Adverse developments affecting the State's financing activities, its
authorities, the City of New York (the "City") or other localities could
adversely affect the State's financial condition.
There are a number of methods by which the State may incur debt. Under
the State Constitution, the State may not, with limited exceptions for
emergencies, undertake long-term borrowing (I.E., borrowing for more than one
year) unless the borrowing is authorized in a specific amount for a single work
or purpose by the Legislature and approved by the voters. There is no limitation
on the amount of long-term debt that may be so authorized and subsequently
incurred by the State. The total amount of long-term State general obligation
debt authorized but not issued as of March 31, 1994 was approximately $2.039
billion.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State also employs two other types of long-term financing
mechanisms that are State-supported but do not result in general obligations of
the State: moral obligation and lease-purchase or contractual-obligation
financing.
Payments for principal and interest due on general obligation bonds,
interest due on bond anticipation notes and on tax and revenue anticipation
notes, and contractual-obligation and lease-purchase payments were $1.783
billion and $2.045 billion in the aggregate for the State's 1991-92 and 1992-93
fiscal years, respectively, and were estimated to be $2.326 billion for the
State's 1993-94 fiscal year. These figures do not include the interest payable
on either State General Obligation Refunding Bonds issued in July 1992
("Refunding Bonds") to the extent that such interest is to be paid from an
escrow
B-1
<PAGE>
fund established with the proceeds of such Refunding Bonds or the State's
installment payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees. There has never been a default on any moral
obligation debt of any Authority.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating the New York Local Government Assistance Corporation ("LGAC"),
a public benefit corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded through New York
State's annual seasonal borrowing. The legislation empowered LGAC to issue its
bonds and notes in an amount not in excess of $4.7 billion (exclusive of certain
refunding bonds) plus certain other amounts. Over a period of years, the
issuance of those long-term obligations, which will be amortized over no more
than 30 years, is expected to result in eliminating the need for continuing
short-term seasonal borrowing for those purposes. The legislation also imposed a
cap on the annual seasonal borrowing of the State at $4.7 billion, less net
proceeds of bonds issued by LGAC and bonds issued to provide for capitalized
interest, except in cases where the Governor and the legislative leaders have
certified both the need for additional borrowing and provided a schedule for
reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. To date, LGAC has issued its bonds to
provide net proceeds of $3.856 billion and has been authorized to issue its
bonds to provide net proceeds of up to an additional $315 million during the
State's 1994-95 fiscal year.
In April 1993, legislation was also enacted providing for significant
changes in the long-term financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would
permit the State, without a voter referendum but within a formula-based cap, to
issue revenue bonds, which would be debt of the State secured solely by a pledge
of certain State tax receipts (including those allocated to State funds
dedicated for transportation purposes), and not by the full faith and credit of
the State. In addition, the proposed amendment would require that State debt be
incurred only for capital projects included in a multi-year capital financing
plan and would prohibit lease-purchase and contractual-obligation financing
mechanisms for State facilities. The Governor and the Legislative leaders have
indicated that public hearings will be held on the proposed constitutional
amendment. Before becoming effective, the proposed constitutional amendment must
first be passed again by the next separately elected Legislature and then
approved by the voters at a general election, so that it could not become
effective until after the general election in November 1995.
On March 26, 1990, S&P downgraded the State's (i) general obligation
bonds from "AA-" to "A" and (ii) commercial paper from "A-1+" to "A-1." S&P also
downgraded certain of the State's variously rated moral obligation, lease
purchase, guaranteed and contractual obligation debt, including debt issued by
certain State agencies. On August 27, 1990, S&P affirmed these ratings without
B-2
<PAGE>
change. On June 6, 1990, Moody's downgraded the State's general obligation debt
from "A1" to "A," confirmed its rating of the State's limited liability lease
and contractual obligations at "A," and assigned a rating of "MIG-2" to the
State's tax and revenue anticipation notes issued in June 1990 and March 1990.
On January 6, 1992, Moody's lowered from "A" to "Baa1" its rating of those New
York State bonds that are backed by annual legislative appropriations. The
downgrade affected two-thirds of the State's outstanding debt. Moody's
attributed the downgrade to the inability of State officials to agree on a plan
to fill the $875 million gap in 1992's $30 billion general fund budget. Moody's
also placed its "A" rating of the State's general obligation bonds under review
for possible downgrading in the coming months. On January 13, 1992, S&P lowered
its rating of the State's $4.8 billion in general obligation bonds from "A" to
"A-." S&P maintained its ratings on outstanding short-term borrowings because it
believes the State is still generating more than enough cash to meet its
obligations. Moody's and S&P variously cited the State's continued economic
deterioration, chronic operating deficits, and the legislative stalemate in
closing the budget gap, as factors contributing to the downgrades.
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures for the ensuing fiscal year and all moneys and revenues estimated
to be available therefor, accompanied by bills containing all proposed
appropriations or reappropriation and any new or modified revenue measures to be
enacted in connection with the Executive Budget. The entire plan constitutes the
proposed State financial plan for that fiscal year. The Governor submits to the
Legislature, on at least a quarterly basis, reports of actual receipts,
revenues, disbursements, expenditures, tax refunds and reimbursements, and
repayment of advances in form suitable for comparison with the State financial
plan, together with explanations of deviations from the State financial plan. At
such time, the Governor is required to submit any amendments to the State
financial plan necessitated by such deviations. The State issued the first of
the three required quarterly updates to the 1994-95 cash-basis State Financial
Plan on July 29, 1994. The major uncertainties in the State Financial Plan
continue to be those related to the economy and tax collections, and could
produce either favorable or unfavorable variances during the balance of the
year. Continued turmoil in the financial, currency and commodity markets could
adversely affect the profit structures of key industries in the State, as well
as provoke cautious attitudes among businesses and consumers. Conversely,
stronger than expected employment and income levels, and continued moderate
inflation, could produce higher sales and income tax receipts in the months
ahead.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. The recommended 1994-95 State Financial Plan projects a balanced General
Fund. Total General Fund receipts are projected to be $34.321 billion, an
increase of $2.092 billion over total receipts in the prior fiscal year.
Disbursements are projected to be $34.248 billion, an increase of $2.351 billion
over the total amount disbursed and transferred in the prior fiscal year.
The 1994-95 State Financial Plan formulated on June 16, 1994 (the
"1994-95 State Financial Plan"), following enactment of the State's 1994-95
budget,
B-3
<PAGE>
projected General Fund receipts and transfers from other funds at $34.321
billion and disbursements and transfers to other funds at $34.248 billion.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. The recession has
been more severe in the State, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. The State's economy has also been slower to recover than in the
rest of the nation. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1994-95 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
The State anticipates that its borrowings for capital purposes in its
1994-95 fiscal year will consist of approximately $374 million in general
obligation bonds and $140 million in new commercial paper issuances. In
addition, it is anticipated that the State will issue $140 million in general
obligation bonds for the purpose of redeeming outstanding bond anticipation
notes. The Legislature has also authorized the issuance of up to $69 million in
certificates of participation for equipment purchases during the State's 1994-95
fiscal year. The projection of the State regarding its borrowings for the
1993-94 fiscal year may change if actual receipts fall short of State
projections or if other circumstances require.
AUTHORITIES. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the incurrence
of debt that apply to the State itself and may issue bonds and notes within the
amounts of, and as otherwise restricted by, their legislative authorization. As
of September 30, 1993, the latest data available, 18 Authorities had outstanding
debt of $100 million or more. The aggregate outstanding debt, including
refunding bonds, of these 18 Authorities was $63.5 billion as of September 30,
1993. As of March 31, 1994, aggregate public authority debt outstanding as
State-supported debt was $21.1 billion and as State-related debt was $29.4
billion.
In recent years the State has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain of the 18
Authorities for operating and other expenses and in fulfillment of its
commitments on moral obligation indebtedness or otherwise, for debt service.
During the 1992-93 fiscal year, the State provided operating assistance of
$935.6 million for the Metropolitan Transportation Authority (the "MTA") and
$19.9 million for four non-transit Authorities (i.e., the Housing Finance Agency
(the
B-4
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"HFA"), the Urban Development Corporation (the "UDC"), the Energy Research and
Development Authority and the Environmental Facilities Corporation). For the
1993-94 fiscal year, $1.078 billion and $18.1 million are estimated to be
provided to the MTA and the four non-transit Authorities, respectively. For the
1994-95 State fiscal year, total State assistance to the MTA is estimated at
approximately $1.3 billion. This operating assistance (possibly in increasing
amounts) is expected to continue to be required in future years. The State's
experience has been that if an Authority suffers serious financial difficulties,
both the ability of the State and the Authorities to obtain financing in the
public credit markets and the market price of the State's outstanding bonds and
notes may be adversely affected.
The MTA oversees the operation of the City's bus and subway systems by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA") and, through
subsidiaries, operates certain commuter rail and bus lines. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare revenues
are not sufficient to finance the mass transit portion of these operations, the
MTA has depended, and will continue to depend, for operating support upon a
system of State, local government and TBTA support, and, to the extent
available, Federal operating assistance, including loans, grants and subsidies.
The TA and the commuter railroads ended fiscal year 1992 with their
budgets balanced on a cash basis. The TA had an estimated closing cash balance
of approximately $25 million, and the commuter railroads had a closing cash
balance of approximately $237 million, which includes dedicated tax monies held
by the State. For 1993, the TA originally projected a budget gap of
approximately $266 million. An increase in TBTA tolls which took effect in
January 1993, and other developments, reduced the projected gap to approximately
$241 million. Legislation passed in April 1993 relating to the MTA's 1992-1996
Capital Program reflected a plan for closing this gap without raising fares. If
any of the assumptions used in making these projections prove incorrect, the
TA's gap could grow, and the TA would be required to seek additional State
assistance, raise fares or take other action.
NEW YORK CITY AND MUNICIPAL ASSISTANCE CORPORATION. The fiscal health
of the State of New York is closely related to the fiscal health of its
localities, particularly the City of New York, which has required and continues
to require significant financial assistance from New York State. The City's
independently audited operating results for each of its 1981 through 1993 fiscal
years, which end on June 30, show a General Fund surplus reported in accordance
with GAAP. The City has eliminated the cumulative deficit in its net General
Fund position. In addition, the City's financial statements for the 1993 fiscal
year received an unqualified opinion from the City's independent auditors, the
eleventh consecutive year the City has received such an opinion.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and the State. In that year the City lost
access to public credit markets and was not able to sell debt to the public
again until 1979. In response to the City's fiscal crisis, the State created the
Municipal Assistance Corporation ("MAC") to provide financing assistance for the
City, and
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the New York State Financial Control Board (the "Control Board") to exercise
certain oversight and review functions with respect to the City's financing.
Prior to 1985, MAC had the authority to issue bonds and notes and to pay or lend
the proceeds to the City. Since 1985 MAC has been authorized to issue bonds and
notes only to refund its outstanding bonds and notes. MAC also has the authority
to exchange its obligations for City obligations. MAC bonds are payable from
appropriations of certain State sales and use taxes imposed by the City, the
State stock transfer tax and per capita State aid to the City. The State is not,
however, obligated to continue these taxes, continue to appropriate revenue from
these taxes or continue the appropriation of per capita State aid to pay MAC
obligations. MAC does not have taxing powers and its bonds are not obligations
enforceable against either the City or the State.
On February 11, 1991, Moody's lowered its rating on the City's general
obligation bonds to "Baa1" from "A". Moody's expressed doubts about whether the
City's January 16, 1991 financial plan presented a "reasonable program to
achieve budget balance in fiscal 1991 and 1992 and assure long-term structural
integrity." Moody's stated that "the enormity of the current problem, the
severity of required expenditure cuts, the substantial revenue enhancements that
will be required to achieve balance, the vulnerability to exogenous factors, and
the extremely short time frame within which all this must be accomplished
introduce substantial new risk to the City's short and long-term credit
outlook." On April 29, 1991, S&P downgraded New York City's outstanding $1.3
billion of general obligation revenue and anticipation notes from "SP-1" to
"SP-2". S&P also announced a rating of "SP-2" for the City's offering of $1.25
billion of general obligation revenue anticipation notes. The lower ratings of
S&P "reflect the City's aggravated short-term cash position for fiscal 1991, the
unusually high level of total revenue anticipation note exposure resulting from
the State's delay in passing its budget and distributing fiscal aid, and
continued pressure on revenues and expenditures due to prevailing economic
conditions." On April 30, 1991, Moody's assigned a rating of "MIG-2" to the same
offering of $1.25 billion of general obligation revenue anticipation notes.
Moody's stated that "although an increasingly strained financial outlook for
both the City and the State complicates the State budget adoption process, this
rating on revenue anticipation notes relies explicitly on the expectation that
the State is fully cognizant of the consequences of further untimely delays in
state budget adoption and will act responsibly. Failure of the State to find a
timely resolution to the budget process will have severe implications for the
normal financial performance of New York City and other local governments in New
York State." On October 7, 1991, Moody's again assigned a "MIG-2" rating to New
York City's $1.25 billion of revenue anticipation notes, fiscal 1992, Series A.
Moody's stated in its January 6, 1992 downgrade of certain New York
State obligations that while such action did not directly affect the bond
ratings of local governments in New York State, the impact of the State's fiscal
stringency on local government bond ratings will be assessed on a case-by-case
basis. On June 22, 1992, Moody's gave its "MIG-1" rating to the City's $1.4
billion revenue anticipation notes and tax anticipation notes citing New York
City's "markedly improved" short-term credit position.
On July 6, 1993, S&P reaffirmed the City's "A-" rating on $20.4 billion
of general obligation bonds stating that "[t]he City has identified additional
gap-
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closing measures that have recurring value and will reduce next year's budget
gap . . . by approximately $400 million." Officials at Moody's also indicated
that there were no plans to alter its "Baa1" rating on the City's general
obligation bonds.
The Mayor is responsible for preparing the City's four-year financial
plan. On February 10, 1994 the City released a financial plan for the 1994
through 1997 fiscal years (the "1994-1997 Financial Plan" or "Financial Plan").
The City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing
and pace of any regional and local economic recovery, the impact on real estate
tax revenues of the current downturn in the real estate market, wage increases
for City employees consistent with those assumed in the Financial Plan,
employment growth, the ability to implement proposed reductions in City
personnel and other cost reduction initiatives which may require in certain
cases the cooperation of the City's municipal unions and MAC, provision of State
and Federal aid and mandate relief, adoption of the budget by the City Council
in substantially the form submitted by the Mayor and the impact on the New York
City region of the tax increases contained in President Clinton's economic plan.
The 1994-1997 Financial Plan projects revenues and expenditures for the
1994 fiscal year balanced in accordance with GAAP. The 1994-1997 Financial Plan
sets forth actions, which were outlined in the City's August Financial Plan, to
close a previously projected gap of approximately $2.0 billion in the 1994
fiscal year. The gap-closing actions for the 1994 fiscal year included
substantial productivity savings and savings from restructuring the delivery of
City services, service reductions, and the sale of delinquent real property tax
receivables for $215 million. The proposed sale of real property tax receivables
requires authorization by the City Council.
The Financial Plan also sets forth projections for the 1995 through
1997 fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $2.3 billion, $3.2 billion and $3.3 billion for the 1995 through
1997 fiscal years, respectively. The projections include the continuation of the
personal income tax surcharge, resulting in revenues of $415 million, $443
million and $470 million in the 1995, 1996 and 1997 fiscal years, respectively,
and reflect a decline in the property tax forecasted for each of the 1995
through 1997 fiscal years. The proposed gap-closing actions include City actions
aggregating $1.9 billion, $1.8 billion and $1.6 billion in the 1995 through 1997
fiscal years, respectively; $275 million, $525 million and $705 million in
proposed State actions in the 1995 through 1997 fiscal years, respectively; $125
million, $200 million and $250 million in proposed additional Federal assistance
in the 1995 through 1997 fiscal years, respectively; and other unspecified
Federal, State or City actions of $629 million and $740 million in the 1996 and
1997 fiscal years, respectively.
The $2.3 billion budget gap for the 1995 fiscal year is the largest
budget gap which has been projected for the next succeeding fiscal year at this
stage of the budget planning process for the last four years. It can be expected
that
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the proposals contained in the Financial Plan to close the projected budget gap
for the 1995 fiscal year will engender substantial public debate, and that
public debate relating to the 1995 fiscal year budget will continue through the
time the budget is scheduled to be adopted in June 1994.
On March 1, 1994, the City Comptroller issued a report on the state of
the City's economy. The report concluded that, while the City's long recession
is over, moderate growth is the best the City can expect. The report projects
that total tax revenues for the 1994, 1995 and 1996 fiscal years will be
slightly higher than projected in the Financial Plan, and that tax revenues for
the 1997 fiscal year will be slightly below the Financial Plan projections. The
report identified revenue risks for the 1994 through 1997 fiscal years totaling
$9 million, $134 million, $184 million and $184 million, respectively, relating
to the proposed video lottery and certain audit initiatives and other revenues.
On March 21, 1994, the City Comptroller issued a report on the Financial Plan.
In the report, the City Comptroller identified as risks for the 1995 fiscal year
the proposals in the Financial Plan that are uncertain because they depend on
actions by organizations other than City government, including the State
Legislature and municipal unions. The City Comptroller stated that if none of
the uncertain proposals are implemented, the total risk could be as much as
$1.15 billion to $1.53 billion. The City Comptroller noted that there are a
number of additional issues, the impact of which cannot be currently quantified.
On March 22, 1994, the Office of the State Deputy Comptroller for the
City of New York ("OSDC") issued a report reviewing the Financial Plan. The
report concluded that a balanced budget is achievable for the 1994 fiscal year.
The report noted that expenditures for the 1994 fiscal year may be higher than
projected by $176 million, due primarily to possible overspending at BOE,
revenue shortfalls at HHC and overtime costs in the uniformed agencies; however,
the City has initiated a program that is intended to reduce nonpersonnel costs
by up to $150 million. In addition, the report noted that the Financial Plan
includes a general reserve of $198 million and assumes savings of $117 million
from the implementation of the proposed severance program for the 1994 fiscal
year. While the City intends to transfer $234 million of these resources to help
balance the 1995 fiscal year budget, the report concluded that most of these
resources will be needed to maintain budget balance in the 1994 fiscal year.
With respect to each of the 1995 through 1997 fiscal years, the report
noted the potential for a budget gap of approximately $300 million greater than
shown in the Financial Plan, primarily due to possible shortfalls in projected
HHC revenues, greater than anticipated spending at BOE and overtime costs in the
uniformed agencies. Additional risks for such years include the potential for
increased recycling costs due to a recent court decision, lower than anticipated
revenues from the renegotiation of certain Port Authority leases, and greater
personnel costs, since the Financial Plan makes no provision for wage increases
after the expiration of current contracts. For the 1996 and 1997 fiscal years,
the report identified the extension of the resident personal income tax
surcharge as an additional risk.
With respect to the City's $2.3 billion gap-closing program for the
1995 fiscal year, the report noted that approximately $1.4 billion of the
gap-closing initiatives must be considered as high risk because the initiatives
are outside
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the Mayor's direct control to implement. The report noted that the City will
need to obtain the approval and cooperation of the municipal labor unions, the
City Actuary, certain Covered Organizations, the City Council and the State and
Federal governments, and that if the necessary approvals are not obtained, the
City will have only a few months to develop alternative solutions.
On March 23, 1994, the staff of the Control Board issued its report on
the Financial Plan. The report states that, while the Financial Plan moves the
City in the direction of structural balance, the Financial Plan has more risks
and fewer details than are desirable and does not set forth contingency plans or
other protections to assist the City if unknown but inevitable impediments
emerge.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's financial plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from New York State.
OTHER LOCALITIES. The cities, towns, villages and school districts of
the State are political subdivisions of the State with the powers granted by the
State Constitution and statutes. As the sovereign, the State retains broad
powers and responsibilities with respect to the finances and welfare of these
subdivisions, especially in education and social services.
In recent years, the State has been called upon to provide financial
assistance to certain localities. To the extent that the State is constrained by
its financial condition, State assistance to localities may be further reduced,
compounding the serious fiscal constraints already experienced by many local
governments. Localities also face anticipated and potential problems resulting
from pending litigation (including challenges to local property tax
assessments), judicial decisions and socio-economic trends.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance during the
State's 1994-95 fiscal year and thereafter. The potential impact on the State of
such requests by localities is not included in the projections of the State
receipts and disbursements in the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
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Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1992, the total indebtedness of all
localities in New York State other than New York City was approximately $15.7
billion, a small portion (approximately $71.6 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
From time to time, Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If New York State, New York City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within New York State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. The longer-range
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect localities and require increasing New
York State assistance in the future.
LITIGATION. Certain litigation pending against the State, its
subdivisions and their officers and employees could have a substantial and
long-term adverse effect on State finances. The State is a party to numerous
legal proceedings, many of which normally recur in governmental operations.
Because of the prospective nature of these proceedings, no estimate of the
potential loss can be made.
Among the more significant of these cases are those that involve: (i)
the validity and fairness of agreements and treaties by which various Indian
tribes transferred title to the State of approximately six million acres of land
in central New York; (ii) certain aspects of the State's Medicaid policies and
its rates and regulations, including reimbursements to providers of mandatory
and optional Medicaid services; (iii) contamination in the Love Canal area of
Niagara Falls; (iv) alleged employment discrimination by the State of New York
and its agencies; (v) a challenge to the practice of reimbursing certain Office
of Mental Health patient care expenses from the client's Social Security
benefits; (vi) a challenge to the methods by which the State reimburses
localities for the administrative costs of food stamp programs; (vii) an action
in which the State is a third party defendant for injunctive or other
appropriate relief concerning liability for the maintenance of stone groins
constructed along certain areas of Long Island's shoreline; (viii) an action
against New York State and New York City officials alleging inadequate shelter
allowances to maintain proper housing; (ix) the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems; (x) action by school districts and their employees
challenging the constitutionality of Chapter 175 of the Laws of 1990 which
deferred school district contributions to the public retirement system and
reduced by like amount state aid to the school districts;
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(xi) the constitutionality of various public authority financing programs; and
(xii) the constitutionality of bridge and mass transportation bonding programs
of the New York State Thruway Authority and the Metropolitan Transportation
Authority authorized by Chapter 56 of the Laws of 1993.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State in the
1994-95 fiscal year or thereafter. Adverse developments in these proceedings or
the initiation of new proceedings could affect the ability of the State to
maintain a balanced 1994-95 State Financial Plan. An adverse decision in any of
these proceedings could exceed the amount of the 1994-95 State Financial Plan
reserve for the payment of judgments and, therefore, could affect the ability of
the State to maintain a balanced 1994-95 State Financial Plan. In its audited
financial statements for the 1992-93 fiscal year, the State reported its
estimated liability for awarded and anticipated unfavorable judgments to be $489
million. The State has stated its belief that the 1994-95 State Financial Plan
includes sufficient reserves for the payment of judgments that may be required
during the 1994-95 fiscal year.
JPM421E
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