PROSPECTUS
The JPM Institutional Bond Fund - Ultra
60 State Street
Boston, Massachusetts 02109
For information call (800) 766-7722
The JPM Institutional Bond Fund - Ultra (the "Fund") seeks to provide a
high total return consistent with moderate risk of capital and maintenance of
liquidity. It is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of short-term
obligations while recognizing the greater price fluctuation of longer term
instruments.
The Fund is a diversified no-load mutual fund for which there are no sales
charges or exchange or redemption fees. The Fund is a series of The JPM
Institutional Funds, an open-end management investment company organized as a
Massachusetts business trust (the "Trust").
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO
OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
ALL OF ITS INVESTABLE ASSETS IN THE U.S. FIXED INCOME PORTFOLIO (THE
"PORTFOLIO"), A CORRESPONDING DIVERSIFIED OPEN-END MANAGEMENT INVESTMENT
COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE FUND. THE FUND INVESTS IN
THE PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER INVESTMENT FUND STRUCTURE. SEE
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE ON PAGE 2.
The Portfolio is advised by Morgan Guaranty Trust Company of New York ("Morgan"
or "Advisor").
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and it should be retained
for future reference. Additional information about the Fund has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated November 21, 1997 (as supplemented from time to time). This information
is incorporated herein by reference and is available without charge upon
written request from the Fund's Distributor, Funds Distributor, Inc. ("FDI"),
60 State Street, Suite 1300, Boston, Massachusetts 02109, Attention: The JPM
Institutional Funds, or by calling (800) 221-7930.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK OR ANY OTHER BANK.
SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN
INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE
INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE
HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 21, 1997
TABLE OF CONTENTS
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Investors for Whom the Fund is Designed.................................... 1
Financial Highlights....................................................... 3
Special Information Concerning Investment Structure........................ 3
Investment Objective and Policies.......................................... 4
Additional Investment Information and Risk Factors......................... 6
Investment Restrictions.................................................... 9
Management of the Trust and the Portfolio.................................. 10
Shareholder Servicing...................................................... 12
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Purchase of Shares......................................................... 12
Redemption of Shares....................................................... 13
Exchange of Shares......................................................... 14
Dividends and Distributions................................................ 14
Net Asset Value............................................................ 15
Organization............................................................... 15
Taxes...................................................................... 16
Additional Information..................................................... 17
Appendix................................................................... A-1
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The JPM Institutional Bond Fund - Ultra
INVESTORS FOR WHOM THE FUND IS DESIGNED
The Fund is designed for investors seeking a higher total return over time than
that generally available from a portfolio of short-term obligations in exchange
for some risk of capital. The Fund seeks to achieve its investment objective by
investing all of its investable assets in The U.S. Fixed Income Portfolio, a
diversified open-end management investment company having the same investment
objective as the Fund. Since the investment characteristics and experience of
the Fund will correspond directly with those of the Portfolio, the discussion
in this Prospectus focuses on the investments and investment policies of the
Portfolio. The net asset value of shares in the Fund fluctuates with changes in
the value of the investments in the Portfolio.
The Portfolio may make various types of investments in seeking its objective.
Among the permissible investments and investment techniques for the Portfolio
are futures contracts, options, forward contracts on foreign currencies and
certain privately placed securities. For further information about these in-
vestments and investment techniques, see Investment Objective and Policies dis-
cussed below.
The Fund requires a minimum initial investment of $20 million. The minimum sub-
sequent investment is $25,000. See Purchase of Shares. If a shareholder reduces
his or her investment in the Fund to less than $20 million for more than 30
days, the investment may be subject to mandatory redemption. See Redemption of
Shares-Mandatory Redemption by the Fund.
This Prospectus describes the financial history, investment objective and poli-
cies, management and operation of the Fund to enable investors to decide if the
Fund suits their needs. The Fund operates in a two-tier master-feeder invest-
ment fund structure. The Trustees believe that the Fund may achieve economies
of scale over time by utilizing this investment structure.
The following table illustrates that investors in the Fund incur no shareholder
transaction expenses; their investment in the Fund is subject only to the oper-
ating expenses set forth below for the Fund and the Portfolio, as a percentage
of average net assets of the Fund. The Trustees of the Trust believe that the
aggregate per share expenses of the Fund and the Portfolio will be approxi-
mately equal to and may be less than the expenses that the Fund would incur if
it retained the services of an investment adviser and invested its assets di-
rectly in portfolio securities. Fund and Portfolio expenses are discussed below
under the headings Management of the Trust and the Portfolio and Shareholder
Servicing.
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SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases*........................................... None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load........................................................ None
Redemption Fees............................................................ None
Exchange Fees.............................................................. None
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* Certain Eligible Institutions (defined below) may impose fees in connection
with the purchase of the Fund's shares through such institutions.
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EXPENSE TABLE
ANNUAL OPERATING EXPENSES*
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Advisory Fees............................................................. 0.30%
Rule 12b-1 Fees........................................................... None
Other Expenses (after expense reimbursement).............................. 0.07%
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Total Operating Expenses (after expense reimbursement).................... 0.37%
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* These expenses are based on the Fund's estimated expenses and estimated
average daily net assets for its fiscal year ending October 31, 1998. If actual
assets are lower than estimated, Total Operating Expenses may, because of the
Portfolio's expenses allocable to the Fund, exceed 0.37%. Morgan has agreed to
limit Total Operating Expenses through at least February 28, 1999 to an amount
which will not be less than 0.35% and will not exceed 0.40% of the average net
assets of the Fund. See Management of the Trust and the Portfolio. Without such
reimbursements, the estimated Other Expenses and Total Operating Expenses would
be 0.29% and 0.59%, respectively, on an annualized basis.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
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1 Year...................................................................... $ 4
3 Years..................................................................... $12
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The above expense table is designed to assist investors in understanding
the various direct and indirect costs and expenses that investors in the Fund
bear. For a complete description of contractual arrangements, and other expenses
applicable to the Fund and Portfolio, see Management of the Trust and the
Portfolio and Shareholder Servicing. THE EXAMPLE IS HYPOTHETICAL; IT IS INCLUDED
SOLELY FOR ILLUSTRATIVE PURPOSES. IT SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own portfo-
lio of securities, the Fund is an open-end management investment company which
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio, a separate registered investment company with the
same investment objective as the Fund. The investment objective of the Fund or
Portfolio may be changed only with the approval of the holders of the out-
standing shares of the Fund and the Portfolio. The master-feeder investment
fund structure has been developed relatively recently, so shareholders should
carefully consider this investment approach.
In addition to selling a beneficial interest to the Fund, the Portfolio may
sell beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures
may result in differences in returns experienced by investors in other funds
that invest in the Portfolio. Such differences in returns are not uncommon and
are present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from Morgan at (800)
766-7722.
The Trust may withdraw the investment of the Fund from the Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same invest-
ment objective and restrictions as the Fund or the retaining of an investment
adviser to manage the Fund's assets in accordance with the investment policies
described below with respect to the Portfolio.
Certain changes in the Portfolio's investment objective, policies or restric-
tions, or a failure by the Fund's shareholders to approve a change in the Port-
folio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a distri-
bution in kind of portfolio securities (as opposed to a cash distribution) from
the Portfolio which may or may not be readily marketable. The distribution in
kind may result in the Fund having a less diversified portfolio of investments
or adversely affect the Fund's liquidity, and the Fund could incur brokerage,
tax or other charges in converting the securities to cash. Notwithstanding the
above, there are other means for meeting shareholder redemption requests, such
as borrowing.
Smaller funds investing in the Portfolio may be materially affected by the ac-
tions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may subsequently experience
higher pro rata operating expenses, thereby producing lower returns. Addition-
ally, because the Portfolio would become smaller, it may become less diversi-
fied, resulting in potentially increased portfolio risk (however, these possi-
bilities also exist for traditionally structured funds which have large or in-
stitutional investors who may withdraw from a fund). Also, funds with a greater
pro rata ownership in the Portfolio could have effective voting control of the
operations of the Portfolio. Whenever the Fund is requested to vote on matters
pertaining to the Portfolio (other than a vote by the Fund to continue the op-
eration of the Portfolio upon the withdrawal of another investor in the Portfo-
lio), the Trust will hold a meeting of shareholders of the Fund and will cast
all of its votes proportionately as instructed by the Fund's shareholders. The
Trust will vote the shares held by Fund shareholders who do not give voting in-
structions in the same proportion as the shares of Fund shareholders who do
give voting instructions. Shareholders of the Fund who do not vote will have no
effect on the outcome of such matters.
For more information about the Portfolio's investment objective, policies and
restrictions, see Investment Objective and Policies, Additional Investment In-
formation and Risk Factors and Investment Restrictions. For more information
about the Portfolio's management and expenses, see Management of the Trust and
the Portfolio. For more information about changing the investment objective,
policies and restrictions of the Fund or the Portfolio, see Investment Restric-
tions.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund and the Portfolio is described below, to-
gether with the policies they employ in their efforts to achieve this objec-
tive. Additional information about the investment policies of the Fund and the
Portfolio appears in the Statement of Additional Information under Investment
Objectives and Policies. There can be no assurance that the investment objec-
tive of the Fund or the Portfolio will be achieved.
The Fund's investment objective is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses. Although the net asset value of the Fund will fluctuate, the Fund
attempts to preserve the value of its investments to the extent consistent with
its objective. The Fund attempts to achieve its objective by investing all of
its investable assets in The U.S. Fixed Income Portfolio, a diversified open-end
management investment company having the same investment objective as the Fund.
The Fund is designed for investors who seek a total return over time that is
higher than that generally available from a portfolio of shorter-term obliga-
tions while recognizing the greater price fluctuation of longer-term instru-
ments. It may also be a convenient way to add fixed income exposure to diver-
sify an existing portfolio.
Morgan actively manages the Portfolio's duration, the allocation of securities
across market sectors, and the selection of specific securities within sectors.
Based on fundamental, economic and capital markets research, Morgan adjusts the
duration of the Portfolio in light of market conditions and Morgan's interest
rate outlook. For example, if interest rates are expected to fall, the duration
may be lengthened to take advantage of the expected associated increase in bond
prices. Morgan also actively allocates the Portfolio's assets among the broad
sectors of the fixed income market including, but not limited to, U.S. Govern-
ment and agency securities, corporate securities, private placements, asset-
backed and mortgage-related securities. Specific securities which Morgan be-
lieves are undervalued are selected for purchase within the sectors using ad-
vanced quantitative tools, analysis of credit risk, the expertise of a dedi-
cated trading desk, and the judgment of fixed income portfolio managers and
analysts. Under normal circumstances, Morgan intends to keep the Portfolio es-
sentially fully invested with at least 65% of the Portfolio's assets invested
in bonds.
Duration is a measure of the weighted average maturity of the bonds held in the
Portfolio and can be used as a measure of the sensitivity of the Portfolio's
market value to changes in interest rates. Generally, the longer the duration
of the Portfolio, the more sensitive its market value will be to changes in in-
terest rates. Under normal market conditions the Portfolio's duration will
range between one year shorter and one year longer than the duration of the
U.S. investment grade fixed income universe, as represented by Salomon Brothers
Broad Investment Grade Bond Index, the Portfolio's benchmark. Currently, the
benchmark's duration is approximately 4.5 years. The maturities of the individ-
ual securities in the Portfolio may vary widely, however.
The Advisor intends to manage the Portfolio actively in pursuit of its invest-
ment objective. Portfolio transactions are undertaken principally to accomplish
the Portfolio's objective in relation to expected movements in the general
level of interest rates, but the Portfolio may also engage in short-term trad-
ing consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs. See Taxes below.
The portfolio turnover rate for the Portfolio for the fiscal year ended October
31, 1996 was 186%.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt securi-
ties of domestic and foreign issuers. These include debt securities of various
types and maturities, e.g., debentures, notes, mortgage securities, equipment
trust certificates and other collateralized securities and zero coupon securi-
ties. Collateralized securities are backed by a pool of assets such as loans or
receivables which generate cash flow to cover the payments due on the securi-
ties. Collateralized securities are subject to certain risks, including a de-
cline in the value of the collateral backing the security, failure of the col-
lateral to generate the anticipated cash flow or in certain cases more rapid
prepayment because of events affecting the collateral, such as accelerated pre-
payment of mortgages or other loans backing these securities or destruction of
equip-
4
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ment subject to equipment trust certificates. In the event of any such
prepayment the Portfolio will be required to reinvest the proceeds of prepay-
ments at interest rates prevailing at the time of reinvestment, which may be
lower. In addition, the value of zero coupon securities which do not pay inter-
est is more volatile than that of interest bearing debt securities with the
same maturity. The Portfolio does not intend to invest in common stock but may
invest to a limited extent in convertible debt or preferred stock. The Portfo-
lio may invest up to 20% of its total assets in debt securities denominated in
foreign currencies of developed countries. The Portfolio does not expect to in-
vest more than 25% of its assets in securities of foreign issuers. See Addi-
tional Investment Information and Risk Factors for further information on for-
eign investments and convertible securities.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government and backed by the full faith and credit of
the United States. These securities include Treasury securities, obligations
of the Government National Mortgage Association ("GNMA Certificates"), the
Farmers Home Administration and the Export Import Bank. GNMA Certificates are
mortgage-backed securities which evidence an undivided interest in mortgage
pools. These securities are subject to more rapid repayment than their stated
maturity would indicate because prepayments of principal on mortgages in the
pool are passed through to the holder of the securities. During periods of de-
clining interest rates, prepayments of mortgages in the pool can be expected
to increase. The pass-through of these prepayments would have the effect of
reducing the Portfolio's positions in these securities and requiring the Port-
folio to reinvest the prepayments at interest rates prevailing at the time of
reinvestment. The Portfolio may also invest in obligations issued or guaran-
teed by U.S. Government agencies or instrumentalities where the Portfolio must
look principally to the issuing or guaranteeing agency for ultimate repayment;
some examples of agencies or instrumentalities issuing these obligations are
the Federal Farm Credit System, the Federal Home Loan Banks and the Federal
National Mortgage Association. Although these governmental issuers are respon-
sible for payments on their obligations, they do not guarantee their market
value.
The Portfolio may also invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources. How-
ever, the Portfolio will invest only in municipal obligations that have been
issued on a taxable basis or have an attractive yield excluding tax considera-
tions. In addition, the Portfolio may invest in debt securities of foreign
governments and governmental entities denominated in the U.S. dollar and other
currencies. See Additional Investment Information and Risk Factors for further
information on foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market instruments
to invest temporary cash balances or to maintain liquidity to meet withdraw-
als. However, the Portfolio may also invest in money market instruments as a
temporary defensive measure taken during, or in anticipation of, adverse mar-
ket conditions. The money market investments permitted for the Portfolio in-
clude obligations of the U.S. Government and its agencies and instrumentali-
ties, other debt securities, commercial paper, bank obligations and repurchase
agreements. For more detailed information about these money market invest-
ments, see Investment Objectives and Policies in the Statement of Additional
Information.
QUALITY INFORMATION. It is the current policy of the Portfolio that under nor-
mal circumstances at least 75% of total assets will consist of securities that
at the time of purchase are rated Baa or better by Moody's Investors Service,
Inc. ("Moody's') or BBB or better by Standard & Poor's Ratings Group ("Stan-
dard & Poor's), of which at least 65% of total assets will be rated A or bet-
ter. The remaining 25% of total assets may be invested in securities that are
rated B or better by Moody's or Standard & Poor's. In each case, the Portfolio
may invest in securities which are unrated if in Morgan's opinion such securi-
ties are of comparable quality. Securities rated Baa by Moody's or BBB by
Standard & Poor's are considered investment grade, but have some speculative
characteristics. Securities rated Ba or B by Moody's or BB or B by Standard &
Poor's are below investment grade and considered to be speculative with regard
to payment of interest and principal. These standards must be satisfied at the
time an investment is made. If the quality of the investment later declines,
the Portfolio may continue to hold the investment. See Additional Investment
Information and Risk Factors.
5
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The Portfolio may also purchase obligations on a when-issued or delayed deliv-
ery basis, enter into repurchase and reverse repurchase agreements, lend its
portfolio securities, purchase certain privately placed securities and enter
into certain hedging transactions that may involve options on securities and
securities indexes, futures contracts, options on futures contracts and for-
ward contracts on foreign currency. For a discussion of these investments and
investment techniques, see Additional Investment Information and Risk Factors.
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities of
domestic and, subject to the Portfolio's investment restrictions, foreign is-
suers. The convertible securities in which the Portfolio 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 securi-
ties 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.
BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased by the
Portfolio, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of princi-
pal and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securi-
ties, lower quality fixed income securities involve greater risk of loss of
principal and income, including the possibility of default or bankruptcy of
the issuers of such securities, and have greater price volatility, especially
during periods of economic uncertainty or change. These lower quality fixed
income securities tend to be affected by economic changes and short-term cor-
porate and industry developments to a greater extent than higher quality secu-
rities, which react primarily to fluctuations in the general level of interest
rates. To the extent that the Portfolio invests in such lower quality securi-
ties, the achievement of its investment objective may be more dependent on the
Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's perception
of their credit quality, especially during times of adverse publicity, and the
outlook for economic growth. Economic downturns or an increase in interest
rates may cause a higher incidence of default by the issuers of these securi-
ties, especially issuers that are highly leveraged. The market for these lower
quality fixed income securities is generally less liquid than the market for
investment grade fixed income securities. It may be more difficult to sell
these lower rated securities to meet redemption requests, to respond to
changes in the market, or to value accurately the Portfolio's portfolio secu-
rities for purposes of determining the Fund's net asset value. See Appendix A
in the Statement of Additional Information for more detailed information on
these ratings.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase secu-
rities on a when-issued or delayed delivery basis. Delivery of and payment for
these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market fluc-
tuation during this period and for fixed income securities no interest accrues
to the Portfolio until settlement. At the time of settlement a when-issued se-
curity may be valued at less than its purchase price. The Portfolio maintains
with the Custodian a separate account with a segregated portfolio of securi-
ties in an amount at least equal to these commitments. When entering into a
when-issued or delayed delivery transaction, the Portfolio will rely on the
other party to consummate the transaction; if the other party fails to do so,
the Portfolio may be disadvantaged. It is the current policy of the Portfolio
not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Portfolio's total assets less liabilities other than
the obligations created by these commitments.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement trans-
actions with brokers, dealers or banks that meet the credit guidelines estab-
lished by the Portfolio's Trustees. In a repurchase agreement, the Portfolio
buys a security from a seller that has agreed to repurchase it at a mutually
agreed upon date and price, reflecting the
6
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interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week. A repurchase agreement may be
viewed as a fully collateralized loan of money by the Portfolio to the seller.
The Portfolio always receives securities as collateral with a market value at
least equal to the purchase price plus accrued interest and this value is
maintained during the term of the agreement. If the seller defaults and the
collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the disposition of collateral may be delayed or limited.
Investments in certain repurchase agreements and certain other investments
which may be considered illiquid are limited. See Illiquid Investments;
Privately Placed and other Unregistered Securities below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment restrictions,
the Portfolio is permitted to lend its securities in an amount up to 33 1/3%
of the value of the Portfolio's net assets. The Portfolio may lend its securi-
ties 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 in-
come accruing thereon. Loans will be subject to termination by the Portfolio
in the normal settlement time, generally three 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 the borrowed
securities which occurs during the term of the loan inures to the Portfolio
and its respective investors. The Portfolio may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Portfolio will con-
sider all facts and circumstances, including the creditworthiness of the bor-
rowing financial institution, and the Portfolio will not make any loans in ex-
cess of one year.
Loans of portfolio securities may be considered extensions of credit by the
Portfolio. The risks to the Portfolio with respect to borrowers of its
portfolio securities are similar to the risks to the Portfolio with respect to
sellers in repurchase agreement transactions. See Repurchase Agreements above.
The Portfolio will not lend its securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolio, the Advisor or the Distributor,
unless otherwise permitted by applicable law.
REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into re-
verse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date
and price, reflecting the interest rate effective for the term of the agree-
ment. For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), it is considered a form of borrowing by the Portfolio and, there-
fore, is a form of leverage. Leverage may cause any gains or losses of the
Portfolio to be magnified. See Investment Restrictions for investment limita-
tions applicable to reverse repurchase agreements and other borrowings. For
more information, see Investment Objectives and Policies in the Statement of
Additional Information.
FOREIGN INVESTMENT INFORMATION. The Portfolio may invest in certain foreign
securities denominated in the U.S. dollar and other currencies. Investment in
securities of foreign issuers and in obligations of foreign branches of domes-
tic banks involves somewhat different investment risks from those affecting
securities of U.S. domestic issuers. There may be limited publicly available
information with respect to foreign issuers, and foreign issuers are not gen-
erally subject to uniform accounting, auditing and financial standards and re-
quirements comparable to those applicable to domestic companies. Dividends and
interest paid by foreign issuers may be subject to withholding and other for-
eign taxes which may decrease the net return on foreign investments as com-
pared to dividends and interest paid to the Portfolio by domestic companies.
Investors should realize that the value of the Portfolio's investments in for-
eign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation, na-
tionalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United
7
<PAGE>
States or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or unfavorably affect the Portfolio's operations.
Furthermore, the economies of individual foreign nations may differ from the
U.S. economy, whether favorably or unfavorably, in areas such as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position; it may also be more difficult
to obtain and enforce a judgment against a foreign issuer. Any foreign
investments made by the Portfolio must be made in compliance with U.S. and
foreign currency restrictions and tax laws restricting the amounts and types of
foreign investments.
In addition, while the volume of transactions effected on foreign exchanges
has increased in recent years, in most cases it remains appreciably below that
of domestic security exchanges. Accordingly, the Portfolio's foreign invest-
ments may be less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. Moreover, the settlement periods
for foreign securities, which are often longer than those for securities of U.S.
issuers, may affect portfolio liquidity. In addition, there is generally less
government supervision and regulation of securities exchanges, brokers and
issuers located in foreign countries than in the United States.
The Portfolio may invest in securities of foreign issuers directly or in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") or other similar securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities they
represent. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying foreign securities. Certain such insti-
tutions issuing ADRs may not be sponsored by the issuer of the underlying for-
eign securities. A non-sponsored depository may not provide the same share-
holder information that a sponsored depository is required to provide under
its contractual arrangements with the issuer of the underlying foreign securi-
ties. EDRs are receipts issued by a European financial institution evidencing
a similar arrangement. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets, and EDRs, in bearer form, are designed for
use in European securities markets.
Since the Portfolio's investments in foreign securities involve foreign cur-
rencies, the value of its 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. See Foreign Currency Exchange Trans-
actions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio may buy and sell
securities and receive interest in currencies other than the U.S. dollar, the
Portfolio may enter from time to time into foreign currency exchange transac-
tions. The Portfolio either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange mar-
ket or uses forward contracts to purchase or sell foreign currencies. The cost
of the Portfolio's spot currency exchange transactions is generally the dif-
ference between the bid and offer spot rate of the currency being purchased or
sold.
A forward foreign currency exchange contract is an obligation by the Portfolio
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These con-
tracts are derivative instruments, as their value derives from the spot ex-
change rates of the currencies underlying the contract. These contracts are
entered into in the interbank market directly between currency traders (usu-
ally large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. Neither spot transactions nor forward foreign cur-
rency exchange contracts eliminate fluctuations in the prices of the Portfo-
lio's securities or in foreign exchange rates, or prevent loss if the prices
of these securities should decline.
The Portfolio may enter into foreign currency exchange transactions in an at-
tempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or antici-
pated securities transactions. The Portfolio may also enter into forward con-
tracts to hedge against a change in foreign currency exchange rates that would
cause a decline in the value of existing investments denominated or princi-
pally traded in a foreign
8
<PAGE>
currency. To do this, the Portfolio would enter into a forward contract to
sell the foreign currency in which the investment is denominated or principally
traded in exchange for U.S. dollars or in exchange for another foreign currency.
The Portfolio will only enter into forward contracts to sell a foreign currency
in exchange for another foreign currency if the Advisor expects the foreign
currency purchased to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they limit
any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Portfolio to assume the
risk of fluctuations in the value of the currency purchased against the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES. The
Portfolio may not acquire any illiquid securities if, as a result thereof,
more than 15% of the Portfolio's net assets would be in illiquid investments.
Subject to this non-fundamental policy limitation, the Portfolio may acquire
investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), and cannot be offered for public sale in
the United States without first being registered under the 1933 Act. An illiq-
uid investment is any investment that cannot be disposed of within seven days
in the normal course of business at approximately the amount at which it is
valued by the Portfolio. The price the Portfolio pays for illiquid securities
or receives upon resale may be lower than the price paid or received for simi-
lar securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to institutional in-
vestors without registration under the 1933 Act. These securities may be de-
termined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's imple-
mentation of these guidelines on a periodic basis.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio is permitted to enter into the
futures and options transactions described in the Appendix to this Prospectus
for hedging purposes.
INVESTMENT RESTRICTIONS
As a diversified investment company, 75% of the assets of the Portfolio are
subject to the following fundamental limitations: (a) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except U.S. Government securities, and (b) the Portfolio may not own more than
10% of the outstanding voting securities of any one issuer.
The investment objective of the Fund and the Portfolio, together with the in-
vestment restrictions described below and in the Statement of Additional In-
formation, except as noted, are deemed fundamental policies, i.e., they may be
changed only with the approval of the holders of a majority of the outstanding
voting securities of the Fund and the Portfolio. The Fund has the same invest-
ment restrictions as the Portfolio, except that the Fund may invest all of its
investable assets in another open-end investment company with the same invest-
ment objective and restrictions (such as the Portfolio). References below to
the Portfolio's investment restrictions also include the Fund's investment re-
strictions.
The Portfolio may not (i) purchase securities or other obligations of issuers
conducting their principal business activity in the same industry if its in-
vestments in such industry would exceed 25% of the value of the Portfolio's
total assets, except
9
<PAGE>
this limitation shall not apply to investments in U.S. Government
securities; (ii) enter into reverse repurchase agreements and other permitted
borrowings which constitute senior securities under the 1940 Act, exceeding in
the aggregate one-third of the market value of the Portfolio's total assets,
less certain liabilities; or (iii) borrow money, except from banks for
extraordinary or emergency purposes and then only in amounts up to 30% of the
value of the Portfolio's total assets taken at cost at the time of borrowing and
except in connection with reverse repurchase agreements, or purchase
securities while borrowings, including reverse repurchase agreements, exceed 5%
of its total assets; or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing in amounts up to 30% of the value of the
Portfolio's net assets at the time of borrowing.
For a more detailed discussion of the above investment restrictions, as well
as a description of certain other investment restrictions, see Investment Re-
strictions in the Statement of Additional Information.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO
TRUSTEES. Pursuant to the Declarations of Trust for the Trust and for the
Portfolio, the Trustees decide upon matters of general policy and review the
actions of the Advisor and other service providers. The Trustees of the Trust
and of the Portfolio are identified below.
<TABLE>
<S> <C>
Frederick S. Addy................... Former Executive Vice President and Chief
Financial Officer, Amoco Corporation
William G. Burns.................... Former Vice Chairman of the Board and Chief
Financial Officer, NYNEX Corporation
Arthur C. Eschenlauer............... Former Senior Vice President, Morgan
Guaranty Trust Company of New York
Matthew Healey...................... Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc.
Michael P. Mallardi................. Former Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast
Group
</TABLE>
A majority of the disinterested Trustees have adopted written procedures rea-
sonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, the Portfolio
and The JPM Pierpont Funds, up to and including creating a separate board of
trustees. See Trustees and Officers in the Statement of Additional Information
for more information about the Trustees and Officers of the Fund and the Port-
folio.
The Portfolio and the Trust have each entered into a Fund Services Agreement
with Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's and the Trust's affairs. The
fees to be paid under the agreements approximate the reasonable cost of Pier-
pont Group, Inc. in providing these services to the Trust, the Portfolio and
certain other registered investment companies subject to similar agreements
with Pierpont Group, Inc. Pierpont Group, Inc. was organized in 1989 at the
request of the Trustees of The Pierpont Family of Funds for the purpose of
providing these services at cost to these funds. See Trustees and Officers in
the Statement of Additional Information. The principal offices of Pierpont
Group, Inc. are located at 461 Fifth Avenue, New York, New York 10017.
ADVISOR. The Fund has not retained the services of an investment adviser be-
cause the Fund seeks to achieve its investment objective by investing all of
its investable assets in the Portfolio. The Portfolio has retained the serv-
ices of Morgan as Investment Advisor. Morgan, with principal offices at 60
Wall Street, New York, New York 10260, is a New York trust company which con-
ducts a general banking and trust business. Morgan is a wholly owned subsidi-
ary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company
organized under the laws of Delaware. Through offices in
10
<PAGE>
New York City and abroad, J.P. Morgan, through the Advisor and other
subsidiaries, offers a wide range of services to governmental, institutional,
corporate and individual customers and acts as investment adviser to individual
and institutional clients with combined assets under management of over $234
billion (of which the Advisor advises over $30 billion). Morgan provides
investment advice and portfolio management services to the Portfolio. Subject
to the supervision of the Portfolio's Trustees, Morgan makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. See Investment
Advisor in the Statement of Additional Information.
Morgan uses a sophisticated, disciplined, collaborative process for managing
all asset classes. For fixed income portfolios, this process focuses on the
systematic analysis of real interest rates, sector diversification and quanti-
tative and credit analysis. Morgan has managed portfolios of domestic fixed
income securities on behalf of its clients for over fifty years. The portfolio
managers making investments in domestic fixed income securities work in con-
junction with fixed income, credit, capital market and economic research ana-
lysts, as well as traders and administrative officers.
The following persons are primarily responsible for the day-to-day management
and implementation of Morgan's process for the Portfolio (the inception date
of each person's responsibility for the Portfolio and his or her business ex-
perience for the past five years is indicated parenthetically): William G.
Tennille, Vice President (since January, 1994, employed by Morgan since March,
1992, previously Managing Director, Manufacturers Hanover Trust Company) and
Connie J. Plaehn, Managing Director (since January, 1994, employed by Morgan
since prior to 1992).
As compensation for the services rendered and related expenses borne by Morgan
under the Investment Advisory Agreement with the Portfolio, the Portfolio has
agreed to pay Morgan a fee, which is computed daily and may be paid monthly,
at the annual rate of 0.30% of the Portfolio's average daily net assets.
Under separate agreements, Morgan also provides administrative and related
services to the Fund and the Portfolio and shareholder services to sharehold-
ers of the Fund. See Administrative Services Agent and Shareholder Servicing
below. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK OR ANY OTHER
BANK.
CO-ADMINISTRATOR. Pursuant to Co-Administration Agreements with the Trust and
the Portfolio, Funds Distributor, Inc. ("FDI") serves as the Co-Administrator
for the Fund and the Portfolio. FDI (i) provides office space, equipment and
clerical personnel for maintaining the organization and books and records of
the Fund and the Portfolio; (ii) provides officers for the Trust and the Port-
folio; (iii) prepares and files documents required for notification of state
securities administrators; (iv) reviews and files marketing and sales litera-
ture; (v) files Portfolio regulatory documents and mails Portfolio communica-
tions to Trustees and investors; and (vi) maintains related books and records.
For its services under the Co-Administration Agreements, each of the Fund and
the Portfolio has agreed to pay FDI fees equal to its allocable share of an
annual complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The
amount allocable to the Fund or the Portfolio is based on the ratio of its net
assets to the aggregate net assets of the Trust and certain other
investment companies subject to similar agreements with FDI.
ADMINISTRATIVE SERVICES AGENT. Pursuant to Administrative Services Agreements
with the Trust and the Portfolio, Morgan provides administrative and related
services to the Fund and the Portfolio, including services related to tax com-
pliance, preparation of financial statements, calculation of performance data,
oversight of service providers and certain regulatory and Board of Trustees
matters.
Under the Administrative Services Agreements, each of the Fund and the Portfo-
lio has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate
net assets of the Trust and certain other registered investment companies man-
aged by the Advisor in accordance with the following annual schedule: 0.09% on
the first $7 billion of their aggregate average daily net assets and 0.04% of
their aggregate average daily net assets in excess of $7 billion, less the
complex-wide fees payable to FDI.
11
<PAGE>
DISTRIBUTOR. FDI, a registered broker-dealer, also serves as the Distributor
of shares of the Fund and as exclusive placement agent for the Portfolio. FDI
is a wholly owned indirect subsidiary of Boston Institutional Group, Inc.
FDI's principal business address is 60 State Street, Suite 1300, Boston, Mas-
sachusetts 02109.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Fund's and the Portfolio's
custodian and fund accounting and transfer agent and the Fund's dividend dis-
bursing agent. State Street also keeps the books of account for the Fund and
the Portfolio.
EXPENSES. In addition to the fees payable to Morgan, FDI and Pierpont Group,
Inc. under the various agreements discussed under Trustees, Advisor, Co-Admin-
istrator and Administrative Services Agent above and Shareholder Servicing
below, the Fund and the Portfolio are responsible for usual and customary ex-
penses associated with their respective operations. Such expenses include or-
ganization expenses, legal fees, accounting and audit expenses, insurance
costs, the compensation and expenses of the Trustees, registration fees under
federal securities laws, and extraordinary expenses applicable to the Fund or
the Portfolio. For the Fund, such expenses also include transfer, registrar
and dividend disbursement costs, the expenses of printing and mailing reports,
notices and proxy statements to Fund shareholders, and filing fees under state
securities laws. For the Portfolio, such expenses also include registration
fees under foreign securities laws, custodian fees and brokerage expenses.
Morgan has agreed that it will reimburse the Fund through at least February
28, 1999 to the extent necessary to maintain the Fund's total operating ex-
penses as described on page 2. This limit does not cover extraordinary expenses
during the period. There is no assurance that Morgan will continue this waiver
beyond the specified period.
SHAREHOLDER SERVICING
Pursuant to a Shareholder Servicing Agreement with the Trust, Morgan acts as
shareholder servicing agent for its customers and other Fund investors who are
customers of an eligible institution which is a customer of Morgan (an "Eligi-
ble Institution"). The Fund pays Morgan for these services at an annual rate
(expressed as a percentage of the average daily net asset value of Fund shares
owned by or for shareholders for whom Morgan is acting as shareholder servic-
ing agent) of 0.05% of the Fund's average daily net assets. Under the terms
of the Shareholder Servicing Agreement with the Fund, Morgan may delegate one
or more of its responsibilities to other entities at Morgan's expense.
The Fund may be sold to or through Eligible Institutions, including financial
institutions and broker-dealers, that may be paid fees by Morgan or its affil-
iates for services provided to their clients that invest in the Fund. See Eli-
gible Institutions. Organizations that provide recordkeeping or other services
to certain employee benefit or retirement plans that include the Fund as an
investment alternative may also be paid a fee.
Shareholders should address all inquiries to J.P. Morgan Funds Services, Mor-
gan Guaranty Trust Company of New York, 522 Fifth Avenue, New York, New York
10036 or call (800) 766-7722.
The business days of the Fund and the Portfolio are the days the New York
Stock Exchange is open.
PURCHASE OF SHARES
METHOD OF PURCHASE. Investors may open accounts with the Fund only through the
Distributor. All purchase transactions in Fund accounts are processed by Mor-
gan as shareholder servicing agent and the Fund is authorized to accept any
instructions relating to a Fund account from Morgan as shareholder servicing
agent for the customer. All purchase orders must be accepted by the Distribu-
tor. Investors must be either customers of Morgan or of an Eligible Institu-
tion or employer-sponsored retirement plans that have designated the Fund as
an investment option for the plans. Prospective investors who are not already
customers of Morgan may apply to become customers of Morgan for the sole pur-
pose of Fund
12
<PAGE>
transactions. There are no charges associated with becoming a
Morgan customer for this purpose. Morgan reserves the right to determine the
customers that it will accept, and the Trust reserves the right to determine
the purchase orders that it will accept.
The Fund requires a minimum initial investment of $20 million and a minimum
subsequent investment of $25,000. These minimum investment requirements may be
waived for certain investors, including investors for whom the Advisor is a
fiduciary, who maintain related accounts with the Fund, other JPM Institu-
tional Funds or the Advisor, who make investments for a group of clients, such
as financial advisors, trust companies and investment advisors, or who main-
tain retirement accounts with the Funds.
PURCHASE PRICE AND SETTLEMENT. The Fund's shares are sold on a continuous ba-
sis without a sales charge at the net asset value per share next determined
after receipt of an order. Prospective investors may purchase shares with the
assistance of an Eligible Institution that may establish its own terms, condi-
tions and charges.
To purchase shares in the Fund, investors should request their Morgan
representative (or a representative of their Eligible Institution) to assist
them in placing a purchase order with the Fund's Distributor and to transfer
immediately available funds to the Fund's Distributor on the next business day.
Any shareholder may also call J.P. Morgan Funds Services at (800) 766-7722 for
assistance with placing an order for Fund shares. If the Fund or its agent
receives a purchase order prior to 4:00 P.M. New York time on any business day,
the purchase of Fund shares is effective and is made at the net asset value
determined that day. If the Fund or its agent receives a purchase order after
4:00 P.M. New York time, the purchase is effective and is made at net asset
value determined on the next business day. All purchase orders for Fund
shares must be accompanied by instructions to Morgan (or an Eligible
Institution) to transfer immediately available funds to the Fund's Distributor
on settlement date. The settlement date is generally the business day after the
purchase is effective. The purchaser will begin to receive the daily dividends
on the settlement date. See Dividends and Distributions.
ELIGIBLE INSTITUTIONS. The services provided by Eligible Institutions may in-
clude establishing and maintaining shareholder accounts, processing purchase
and redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting
clients in changing dividend options, account designations and addresses, pro-
viding periodic statements showing the client's account balance and integrat-
ing these statements with those of other transactions and balances in the cli-
ent's other accounts serviced by the Eligible Institution, transmitting proxy
statements, periodic reports, updated prospectuses and other communications to
shareholders and, with respect to meetings of shareholders, collecting, tabu-
lating and forwarding executed proxies and obtaining such other information
and performing such other services as Morgan or the Eligible Institution's
clients may reasonably request and agree upon with the Eligible Institution.
Although there is no sales charge levied directly by the Fund, Eligible Insti-
tutions may establish their own terms and conditions for providing their serv-
ices and may charge investors a transaction-based or other fee for their serv-
ices. Such charges may vary among Eligible Institutions but in all cases will
be retained by the Eligible Institution and not remitted to the Fund or Mor-
gan.
REDEMPTION OF SHARES
METHOD OF REDEMPTION. To redeem shares in the Fund, an investor may instruct
Morgan or his or her Eligible Institution, as appropriate, to submit a redemp-
tion request to the Fund or may telephone J.P. Morgan Funds Services directly
at (800) 766-7722 and give the Shareholder Service Representative a preas-
signed shareholder Personal Identification Number and the amount of the re-
demption. The Fund executes effective redemption requests at the next deter-
mined net asset value per share. See Net Asset Value. See Additional Informa-
tion below for an explanation of the telephone redemption policy of The JPM
Institutional Funds.
13
<PAGE>
A redemption request received by the Fund or its agent prior to 4:00 P.M. New
York time is effective on that day. A redemption request received after that
time becomes effective on the next business day. Proceeds of an effective re-
demption are generally deposited on settlement date in immediately available
funds to the shareholder's account at Morgan or at his or her Eligible Insti-
tution or, in the case of certain Morgan customers, are mailed by check or
wire transferred in accordance with the customer's instructions. The redeemer
will continue to receive dividends on these shares through the day before the
settlement date. The settlement date is generally the next business day after a
redemption is effective and, subject to Further Redemption Information below,
in any event is within seven days. See Dividends and Distributions.
MANDATORY REDEMPTION BY THE FUND. If the value of a shareholder's holdings in
the Fund falls below the Fund's initial investment amount of $20 million for
more than 30 days because of a redemption of shares, the Fund may redeem
the remaining shares in the account 60 days after written notice to the share-
holder unless the account is increased to the minimum investment amount or
more.
FURTHER REDEMPTION INFORMATION. Investors should be aware that redemptions from
the Fund may not be processed if a redemption request is not submitted in
proper form. To be in proper form, the Fund must have received the sharehold-
er's taxpayer identification number and address. As discussed under Taxes be-
low, the Fund may be required to impose "back-up" withholding of federal income
tax on dividends, distributions and redemption proceeds when non-corporate in-
vestors have not provided a certified taxpayer identification number. In addi-
tion, if a shareholder sends a check for the purchase of Fund shares and shares
are purchased before the check has cleared, the transmittal of redemption pro-
ceeds from the shares will occur upon clearance of the check which may take up
to 15 days.
The Fund reserves the right to suspend the right of redemption and to postpone
the date of payment upon redemption for up to seven days and for such other pe-
riods as the 1940 Act or the Securities and Exchange Commission may permit. See
Redemption of Shares in the Statement of Additional Information.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into any other JPM Institutional
Fund, JPM Pierpont Fund or shares of JPM Series Trust without charge. An ex-
change may be made so long as after the exchange the investor has shares, in
each fund in which he or she remains an investor, with a value of at least that
fund's minimum investment amount. Shareholders should read the prospectus of
the fund into which they are exchanging and may only exchange between fund ac-
counts that are registered in the same name, address and taxpayer identifica-
tion number. Shares are exchanged on the basis of relative net asset value per
share. Exchanges are in effect redemptions from one fund and purchases of an-
other fund and the usual purchase and redemption procedures and requirements
are applicable to exchanges. See Purchase of Shares and Redemption of Shares in
this Prospectus and in the prospectuses for the other JPM Institutional Funds,
The JPM Pierpont Funds and JPM Series Trust. See Additional Information below
for an explanation of the telephone redemption policy of The JPM Institutional
Funds.
Shareholders subject to federal income tax who exchange shares in one fund for
shares in another fund may recognize capital gain or loss for federal income
tax purposes. The Fund reserves the right to discontinue, alter or limit its
exchange privilege at any time. For investors in certain states, state securi-
ties laws may restrict the availability of the exchange privilege.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment income.
The net investment income of the Fund is declared as a dividend daily immedi-
ately prior to the determination of the net asset value of the Fund on that day
and paid monthly. If an investor's shares are redeemed during a month, accrued
but unpaid dividends are paid with the
14
<PAGE>
redemption proceeds. The net investment income of the Fund for dividend
purposes consists of its pro rata share of the net income of the Portfolio less
the Fund's expenses. Expenses of the Fund and the Portfolio, including the fees
payable to Morgan, are accrued daily. Shares will accrue dividends as long as
they are issued and outstanding. Shares are issued and outstanding as of the
settlement date of a purchase order to the settlement date of a redemption
order.
Substantially all the realized net capital gains of the Fund are declared and
paid on an annual basis, except that an additional capital gains distribution
may be made in a given year to the extent necessary to avoid the imposition of
federal excise tax on the Fund. Dividends and distributions will be payable to
shareholders of record on the record date. The Fund's dividends and
distributions are paid in additional Fund shares unless the shareholder elects
to have them paid in cash. The tax treatment of dividends and distributions
is the same whether they are paid in shares or cash. Cash dividends and
distributions are either (1) credited to the shareholder's account at Morgan
or the shareholder's Eligible Institution or (2) in the case of certain Morgan
clients, paid by a check mailed in accordance with the client's instructions.
NET ASSET VALUE
Net asset value per share for the Fund is determined by subtracting from
the value of the Fund's total assets (i.e., the value of its investment in the
Portfolio and other assets) the amount of its liabilities and dividing the re-
mainder by the number of its outstanding shares, rounded to the nearest cent.
Expenses, including the fees payable to Morgan, are accrued daily. See Net
Asset Value in the Statement of Additional Information for information on
valuation of portfolio securities for the Portfolio.
The Fund computes its net asset value once daily at 4:15 P.M. New York time on
Monday through Friday, except that the net asset value is not computed for the
Fund on the holidays listed under Net Asset Value in the Statement of Addi-
tional Information.
ORGANIZATION
The Trust was organized on November 4, 1992 as an unincorporated business
trust under Massachusetts law and is an entity commonly known as a
"Massachusetts business 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. To date, shares of 28 series have been authorized, of which
25 are available for sale to the public. Only shares of the Fund are offered
through this Prospectus. No series of shares has any preference over any other
series of shares. See Massachusetts Trust in the Statement of Additional
Information.
The Declaration of Trust for the Trust provides that no Trustee, shareholder,
officer, employee, or agent of the Fund shall be held to any personal liabili-
ty, nor shall resort be had to their private property for the satisfaction of
any obligation or claim or otherwise in connection with the affairs of the
Fund, but that the Trust property only shall be liable.
Shareholders of the Fund are entitled to one vote for each share and to the ap-
propriate fractional vote for each fractional share. There is no cumulative
voting. Shares have no preemptive or conversion rights. Shares are fully paid
and nonassessable by the Fund. The Trust does not intend to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for ac-
tion by shareholder vote as may be required by either the 1940 Act or the Dec-
laration of Trust. The Trustees will call a meeting of shareholders to vote on
removal of a Trustee upon the written request of the record holders of ten per-
cent of Trust shares and will assist shareholders in communicating with each
other as prescribed in Section 16(c) of the 1940 Act. For further organization
information, including certain shareholder rights, see Description of Shares in
the Statement of Additional Information.
The Portfolio is organized as a trust under the laws of the State of New York.
The Portfolio's Declaration of Trust provides that the Fund and other entities
investing in the Portfolio (e.g., other investment companies, insurance company
15
<PAGE>
separate accounts and common and commingled trust funds) will each be liable
for all obligations of the Portfolio. However, the risk of the Fund incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance existed and the Portfolio itself was unable to
meet its obligations. Accordingly, the Trustees of the Trust believe that nei-
ther the Fund nor its shareholders will be adversely affected by reason of the
Fund's investing in the Portfolio.
TAXES
The following discussion of tax consequences is based on U.S. federal tax laws
in effect on the date of this Prospectus. These laws and regulations are sub-
ject to change by legislative or administrative action. Investors are urged to
consult their own tax advisors with respect to specific questions as to feder-
al, state or local taxes. See Taxes in the Statement of Additional Information.
Annual statements as to the current federal tax status of distributions, if ap-
plicable, are mailed to shareholders after the end of the taxable year for the
Fund.
The Trust intends that the Fund will continue to qualify as a separate
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. For the Fund to qualify as a regulated investment company, the
Portfolio, in addition to other requirements, limits its investments so that at
the close of each quarter of its taxable year (a) no more than 25% of its total
assets are invested in the securities of any one issuer, except U.S. Government
securities, and (b) with regard to 50% to its total assets, no more that 5% of
its total assets are invested in the securities of a single issuer, except U.S.
Government securities. As a regulated investment company, the Fund should not be
subject to federal income taxes or federal excise taxes if all of its net
investment income and capital gains less any available capital loss
carryforwards are distributed to shareholders within allowable time limits. The
Portfolio intends to qualify as an association treated as a partnership for
federal income tax purposes. As such, the Portfolio should not be subject to
tax. The Fund's status as a regulated investment company is dependent on, among
other things, the Portfolio's continued qualification as a partnership for
federal income tax purposes.
If a correct and certified taxpayer identification number is not on file, the
Fund is required, subject to certain exemptions, to withhold 31% of certain
payments made or distributions declared to non-corporate shareholders.
Distributions of net investment income and realized net short-term capital
gains in excess of net long-term capital losses are taxable as ordinary income
to shareholders of the Fund whether such distributions are taken in cash or re-
invested in additional shares. Distributions of this type to corporate share-
holders of the Fund are not eligible for the dividends- received deduction.
Distributions of net long-term capital gains in excess of net short-term capi-
tal losses are taxable to shareholders of the Fund as long-term capital gains
regardless of how long a shareholder has held shares in the Fund and regardless
of whether taken in cash or reinvested in additional shares. Long-term capital
gains distributions to corporate shareholders are not eligible for the divi-
dends-received deduction. As a result of the enactment of the Taxpayer Relief
Act of 1997 (the "Act"), long-term capital gain of an individual is generally
subject to a maximum rate of 28% in respect of a capital asset held directly by
such individual for more than one year but not more than eighteen months. The
maximum rate is reduced to 20% in respect of a capital asset held in excess of
eighteen months. The Act authorizes the Treasury department to promulgate
regulations that would apply these rules in the case of capital gains by the
Fund.
Any distribution of capital gains will have the effect of reducing the net as-
set value of Fund shares held by a shareholder by the same amount as the dis-
tribution. If the net asset value of the shares is reduced below a sharehold-
er's cost as a result of such a distribution, the distribution, although con-
stituting a return of capital to the shareholder, will be taxable as described
above.
Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term cap-
ital gain or loss if the shares have been held for more than one year, and oth-
erwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain
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distributions received by the shareholder with respect to such shares. In
addition, no loss will be allowed on the redemption or exchange of shares of
the Fund if, within a period beginning 30 days before the date of such
redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
ADDITIONAL INFORMATION
The Fund sends to its shareholders annual and semi-annual reports. The finan-
cial statements appearing in annual reports are audited by independent accoun-
tants. Shareholders also will be sent confirmations of each purchase and re-
demption and monthly statements, reflecting all other account activity, includ-
ing dividends and any distributions reinvested in additional shares or credited
as cash.
All shareholders are given the privilege to initiate transactions automatically
by telephone upon opening an account. However, an investor should be aware that
a transaction authorized by telephone and reasonably believed to be genuine by
the Fund, Morgan, his Eligible Institution or the Distributor may subject the
investor to risk of loss if such instruction is subsequently found not to be
genuine. The Fund will employ reasonable procedures, including requiring in-
vestors to give their Personal Identification Number and tape recording of tel-
ephone instructions, to confirm that instructions communicated from investors
by telephone are genuine; if it does not, the Fund, the Shareholder Servicing
Agent or a shareholder's Eligible Institution may be liable for any losses due
to unauthorized or fraudulent instructions.
The Fund may make historical performance information available and may compare
its performance to other investments or relevant indexes, including data from
Lipper Analytical Services, Inc., Micropal Inc., Morningstar Inc., Ibbotson
Associates and other industry publications. The Fund may advertise "yield".
Yield refers to the net income generated by an investment in the Fund over a
stated 30-day period. This income is then annualized--i.e., the amount of in-
come generated by the investment during the 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period.
The Fund may advertise "total return" and non-standardized total return data.
The total return shows what an investment in the Fund would have earned over a
specified period of time (one, five or ten years or since commencement of op-
erations, if less) assuming that all distributions and dividends by the Fund
were reinvested on the reinvestment dates during the period and less all re-
curring fees. These methods of calculating yield and total return are required
by regulations of the Securities and Exchange Commission. Yield and total re-
turn data similarly calculated, unless otherwise indicated, over other speci-
fied periods of time may also be used. See Performance Data in the Statement
of Additional Information. All performance figures are based on historical
earnings and are not intended to indicate future performance. Shareholders may
obtain performance information by calling Morgan at (800) 766-7722.
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<PAGE>
APPENDIX
The Portfolio may (a) purchase exchange traded and over-the-counter (OTC) put
and call options on fixed income securities and indexes of fixed income securi-
ties, (b) purchase and sell futures contracts on fixed income securities and
indexes of fixed income securities and (c) purchase put and call options on
futures contracts on fixed income securities and indexes of fixed income secu-
rities.
The Portfolio may use futures contracts and options for hedging purposes. The
Portfolio may not use futures contracts and options for speculation.
The Portfolio may utilize options and futures contracts to manage its exposure
to changing interest rates and/or security prices. Some options and futures
strategies, including selling futures contracts and buying puts, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies, in-
cluding buying futures contracts and buying calls, tend to increase market ex-
posure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of the
Portfolio's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Portfolio's objective and policies. Because combined op-
tions positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase the Portfolio's return. While the use of these instruments by the
Portfolio may reduce certain risks associated with owning its portfolio securi-
ties, these techniques themselves entail certain other risks. If the Advisor
applies a strategy at an inappropriate time or judges market conditions or
trends incorrectly, options and futures strategies may lower the Portfolio's
return. Certain strategies limit the Portfolio's possibilities to realize gains
as well as limiting its exposure to losses. The Portfolio could also experience
losses if the prices of its options and futures positions were poorly corre-
lated with its other investments, or if it could not close out its positions
because of an illiquid secondary market. In addition, the Portfolio will incur
transaction costs, including trading commissions and option premiums, in con-
nection with its futures and options transactions and these transactions could
significantly increase the Portfolio's turnover rate.
The Portfolio may purchase put and call options on securities, indexes of secu-
rities and futures contracts, or purchase and sell futures contracts, only if
such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Portfolio's net assets, and (ii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of the Port-
folio's total assets.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Portfolio ob-
tains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Portfolio pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities,
indexes of securities, indexes of securities prices, and futures contracts. The
Portfolio may terminate its position in a put option it has purchased by al-
lowing it to expire or by exercising the option. The Portfolio may also close
out a put option position by entering into an offsetting transaction, if a liq-
uid market exists. If the option is allowed to expire, the Portfolio will lose
the entire premium it paid. If the Portfolio exercises a put option on a secu-
rity, it will sell the instrument underlying the option at the strike price. If
the Portfolio exercises an option on an index, settlement is in cash and does
not involve the actual sale of securities. If an option is American style, it
may be exercised on any day up to its expiration date. A European style option
may be exercised only on its expiration date.
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The buyer of a typical put option can expect to realize a gain if the price of
the underlying instrument falls substantially. However, if the price of the in-
strument underlying the option does not fall enough to offset the cost of pur-
chasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase,
rather than sell, the instrument underlying the option at the option's strike
price. A call buyer typically attempts to participate in potential price in-
creases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect
to suffer a loss if security prices do not rise sufficiently to offset the cost
of the option.
OPTIONS ON INDEXES. The Portfolio may purchase put and call options on any se-
curities index based on securities in which the Portfolio may invest. Options
on securities indexes are similar to options on securities, except that the ex-
ercise of securities index options is settled by cash payment and does not in-
volve the actual purchase or sale of securities. In addition, these options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security. The
Portfolio, in purchasing index options, is subject to the risk that the value
of its portfolio securities may not change as much as an index because the
Portfolio's investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus the Portfolio
may not be able to close out an option position that it has previously entered
into. When the Portfolio purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Portfolio may incur additional
losses if the counterparty is unable to perform.
FUTURES CONTRACTS
When the Portfolio purchases a futures contract, it agrees to purchase a speci-
fied quantity of an underlying instrument at a specified future date or to make
a cash payment based on the value of a securities index. When the Portfolio
sells a futures contract, it agrees to sell a specified quantity of the under-
lying instrument at a specified future date or to receive a cash payment based
on the value of a securities index. The price at which the purchase and sale
will take place is fixed when the Portfolio enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Portfolio wishes to close out a particular position.
When the Portfolio purchases a futures contract, the value of the futures con-
tract tends to increase and decrease in tandem with the value of its underlying
instrument. Therefore, purchasing futures contracts will tend to increase the
Portfolio's exposure to positive and negative price fluctuations in the under-
lying instrument, much as if it had purchased the underlying instrument direct-
ly. When the Portfolio sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to off-
set both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, when the Portfolio buys or sells a futures contract it will be
required to deposit "initial margin" with its Custodian in a segregated account
in the name of its futures broker, known as a futures commission merchant
(FCM). Initial margin deposits are typically equal to a small percentage of the
contract's value. If the value of either party's position declines, that party
will be required to make additional "variation margin" payments equal to the
change in value on a daily basis. The party that has a gain may be entitled to
receive all or a portion of this amount. The Portfolio may be obligated to make
payments of variation margin at a time when it is disadvantageous to
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do so. Furthermore, it may not always be possible for the Portfolio to close
out its futures positions. Until it closes out a futures position, the Portfo-
lio will be obligated to continue to pay variation margin. Initial and varia-
tion margin payments do not constitute purchasing on margin for purposes of the
Portfolio's investment restrictions. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Portfolio, the Portfolio may be entitled to
return of margin owed to it only in proportion to the amount received by the
FCM's other customers, potentially resulting in losses to the Portfolio.
The Portfolio will segregate liquid, high quality assets in connection with its
use of options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. 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 the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
For further information about the Portfolio's use of futures and options and a
more detailed discussion of associated risks, see Investment Objectives and
Policies in the Statement of Additional Information.
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---------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied
upon as having been authorized by the Trust or the Distributor. This Prospectus
does not constitute an offer by the Trust or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Trust or the
Distributor to make such offer in such jurisdiction.
PROS391-9711
The JPM Institutional Bond Fund - Ultra
PROSPECTUS
November 21, 1997
<PAGE>
THE JPM INSTITUTIONAL FUNDS
THE JPM INSTITUTIONAL BOND FUND - ULTRA
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 21, 1997
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 LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY BE
OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: THE JPM
INSTITUTIONAL FUNDS (800) 221-7930.
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objectives and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 14
Trustees and Officers . . . . . . . . . . . . 16
Investment Advisor . . . . . . . . . . . . . . 21
Distributor . . . . . . . . . . . . . . . . . 24
Co-Administrator . . . . . . . . . . . . . . . 24
Services Agent . . . . . . . . . . . . . . . . 25
Custodian and Transfer Agent . . . . . . . . . 26
Shareholder Servicing . . . . . . . . . . . . 26
Independent Accountants . . . . . . . . . . . 27
Expenses . . . . . . . . . . . . . . . . . . . 27
Purchase of Shares . . . . . . . . . . . . . . 27
Redemption of Shares . . . . . . . . . . . . . 28
Exchange of Shares . . . . . . . . . . . . . . 29
Dividends and Distributions . . . . . . . . . 29
Net Asset Value . . . . . . . . . . . . . . . 29
Performance Data . . . . . . . . . . . . . . . 30
Portfolio Transactions . . . . . . . . . . . . 32
Massachusetts Trust . . . . . . . . . . . . . 33
Description of Shares . . . . . . . . . . . . 34
Taxes . . . . . . . . . . . . . . . . . . . . 36
Additional Information . . . . . . . . . . . 38
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1
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GENERAL
This Statement of Additional Information relates only to The JPM
Institutional Bond Fund - Ultra (the "Fund"). The Fund is a series of shares of
beneficial interest of The JPM Institutional Funds, an open-end management
investment company formed as a Massachusetts business trust (the "Trust"). In
addition to the Fund, the Trust consists of other series representing separate
investment funds (each a "JPM Institutional Fund"). The other JPM Institutional
Funds are covered by separate Statements of Additional Information.
This Statement of Additional Information describes the investment
objectives and policies, management and operation of the Fund. The Fund operates
through a two-tier master-feeder investment fund structure.
This Statement of Additional Information provides additional
information with respect to the Fund and should be read in conjunction with the
Fund's current Prospectus (the "Prospectus"). Capitalized terms not otherwise
defined herein have the meanings accorded to them in the Prospectus. The Fund's
executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
INVESTMENT OBJECTIVES AND POLICIES
The 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 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 Fund will fluctuate, the Fund attempts to conserve
the value of its investments to the extent consistent with its objective. The
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 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 for the U.S. Fixed Income Portfolio
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 in 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. Morgan typically limits the overall duration of the
Portfolio to
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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 analysts 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 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 following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective by the Portfolio as set forth above and in the Prospectus. The
investment objectives of the Fund and the Portfolio are identical. Accordingly,
references below to the Fund also include the Portfolio; similarly, references
to the Portfolio also include the Fund unless the context requires otherwise.
Money Market Instruments
As discussed in the Prospectus, the 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 Fund appears below. Also see "Quality and Diversification
Requirements."
U.S. Treasury Securities. The Fund 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.
Additional U.S. Government Obligations. The 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. 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. In the case of securities not backed by the full faith and credit of the
United States, the 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
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its commitments. Securities in which the Fund may invest that are not backed by
the full faith and credit of the United States include, but are not limited to:
(i) obligations of the Tennessee Valley Authority, the Federal Home Loan
Mortgage Corporation, the Federal Home Loan Banks and the U.S. Postal Service,
each of which has the right to borrow from the U.S. Treasury to meet its
obligations; (ii) securities issued by the Federal National Mortgage
Association, which are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and (iii) obligations of the
Federal Farm Credit System and the Student Loan Marketing Association, each of
whose obligations may be satisfied only by the individual credits of the issuing
agency.
Foreign Government Obligations. The Fund, subject to its 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
another currency. See "Foreign Investments."
Bank Obligations. The 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). See "Foreign
Investments." The Fund will not invest in obligations for which the Advisor, or
any of its affiliated persons, is the ultimate obligor or accepting bank. The
Fund 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).
Commercial Paper. The 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 Portfolio 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
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rating agencies, the 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 Fund to be liquid
because they are payable upon demand. The Fund does not have any specific
percentage limitation on investments in master demand obligations. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
Repurchase Agreements. The Fund, unless otherwise noted in the
Prospectus or below, may enter into repurchase agreements with brokers, dealers
or banks that meet the credit guidelines approved by the Fund's 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 Fund 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 Fund 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 Fund in each agreement
plus accrued interest, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the Custodian. If the seller defaults, the 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 the Fund may be delayed or
limited.
The 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.
Corporate Bonds and Other Debt Securities
As discussed in the Prospectus, the Fund may invest in bonds and other
debt securities of domestic and foreign issuers to the extent consistent with
its 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."
Mortgage-Backed Securities. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists
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of mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first lien
on owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
Government Guaranteed Mortgage-Backed Securities. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
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CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Fund does not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of the Fund's limitation on investments in
illiquid securities in accordance with procedures adopted by the Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. While
interest payments are not made on such securities, holders of such securities
are deemed to have received "phantom income." Because a Fund will distribute
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Portfolio will have fewer assets with which to purchase income
producing securities.
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 or other asset-backed securities collateralized by such
assets. 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
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securities in which the 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, in certain circumstances the Fund may
invest in tax exempt obligations to the extent consistent with the Fund's
investment objective and policies. A description of the various types of tax
exempt obligations which may be purchased by the Fund 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.
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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 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 the 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 the 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, excluded from gross income for federal
income tax purposes. 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 the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
Additional Investments
When-Issued and Delayed Delivery Securities. The Portfolio 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 for money market instruments and other fixed income securities
no interest accrues to the Portfolio until settlement takes place. At the time
the 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
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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, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
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 the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund and the Portfolio 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 the 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 the
Fund, provided however, that the Fund may invest all of its investable assets in
an open-end investment company that has the same investment objective as the
Fund (the Portfolio). As a shareholder of another investment company, the Fund
or Portfolio 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 the Fund or
Portfolio bears directly in connection with its own operations. The Fund and the
Portfolio have applied for exemptive relief from the SEC to permit the Portfolio
to invest in affiliated investment companies. If the requested relief is
granted, the Portfolio would then be permitted to invest in affiliated Funds,
subject to certain conditions specified in the applicable order.
Reverse Repurchase Agreements. The Portfolio, unless otherwise noted in
the Prospectus or below, 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. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Portfolio and, therefore, a form of leverage. The
Portfolio will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the 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. The Portfolio
will not invest the proceeds of a reverse repurchase agreement for a period
which exceeds the duration of the reverse repurchase agreement. The 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. See "Investment
Restrictions" for each Portfolio's limitations on reverse repurchase agreements
and bank borrowings.
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Mortgage Dollar Roll Transactions. The Portfolio 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. The Portfolio 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 Portfolio in the normal
settlement time, generally three 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 the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
respective investors. The Portfolio may pay reasonable finders' and custodial
fees in connection with a loan. In addition, the Portfolio will consider all
facts and circumstances including the creditworthiness of the borrowing
financial institution, and will not make any loans in excess of one year. The
Portfolio will not lend securities to any officer, Trustee, Director, employee
or other affiliate of the Portfolio, the Advisor or the Distributor, unless
otherwise permitted by applicable law.
Privately Placed and Certain Unregistered Securities. The Portfolio may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.
As to illiquid investments, the 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, the 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.
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Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940
Act. To meet these requirements, 75% of the assets of the Fund 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 laws. Investments
not subject to the limitations described above could involve an increased risk
to the 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.
The Fund 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. See "Taxes."
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 the 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 Fund 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.
The Fund invests in a diversified portfolio of securities with the
quality ratings described in the Prospectus. These securities are considered
"high grade," "investment grade" and "below investment grade" as described in
Appendix A. 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.
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Options and Futures Transactions
Exchange Traded and OTC Options. All options purchased by the Portfolio will be
traded on a securities exchange or will be purchased by securities dealers (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, the Portfolio relies on the
dealer from which it purchased the option to perform if the option is exercised.
Thus, when the 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.
Futures Contracts and Options on Futures Contracts. The Portfolio may purchase
or sell (write) futures contracts and purchase put and call options, including
put and call options on futures contracts. 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.
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.
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 the
Portfolio's current or anticipated investments exactly. The 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
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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. The Portfolio may purchase or sell futures
contracts or purchase put or call options, including put and call options on
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 the 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 the
Portfolio to 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 the 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 OTC 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, the 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 Portfolio
intends 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 Portfolio 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 the Portfolio's assets could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
Portfolio Turnover
The table below sets forth the portfolio turnover rates for the
Portfolio. 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
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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 U.S. Fixed Income Portfolio (Bond Fund) -- For the fiscal year ended
October 31, 1995: 293%. For the fiscal year ended October 31, 1996: 186%.
INVESTMENT RESTRICTIONS
The investment restrictions of the Fund and the Portfolio are
identical, unless otherwise specified. Accordingly, references below to the Fund
also include the Portfolio unless the context requires otherwise; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.
The investment restrictions below have been adopted by the Trust with
respect to the Fund and by the 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 the Fund is requested to vote on a change in
the fundamental investment restrictions of the Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.
The 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,
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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;
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;
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9. Acquire securities of other investment companies, except as permitted by the
1940 Act; or
10. Act as an underwriter of securities.
The investment restriction described below is not a fundamental policy of
the Fund or the Portfolio and may be changed by their respective Trustees. This
non-fundamental investment policy requires that the Fund may not 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 net assets
would be in investments that are illiquid.
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.
For purposes of fundamental investment restrictions regarding industry
concentration, Morgan may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if Morgan determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, Morgan
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
TRUSTEES AND OFFICERS
Trustees
The Trustees of the Trust, who are also the Trustees of the Portfolio,
their business addresses, principal occupations during the past five years and
dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; Executive Vice President and Chief
Financial Officer since prior to April 1994, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, TX 78746, and his date of birth is January 1, 1932.
WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
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MATTHEW HEALEY (*)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1992. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group since prior to April 1996. His
address is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is
March 17, 1934.
- ----------------------
(*) Mr. Healey is an "interested person" of the Trust, each Portfolio and the
investment advisor as that term is defined in the 1940 Act.
The Trustees of the Trust are the same as the Trustees of the
Portfolio. 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, the Portfolio and The JPM Pierpont Funds,
up to and including creating a separate board of trustees.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), The JPM Pierpont Funds and JPM Series Trust and
is reimbursed for expenses incurred in connection with service as a Trustee. The
Trustees may hold various other directorships unrelated to these funds.
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Trustee compensation expenses accrued by the Trust for the calendar
year ended December 31, 1996 are set forth below.
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), THE JPM
COMPENSATION PIERPONT FUNDS, JPM SERIES
ACCRUED BY THE TRUST AND THE TRUST DURING
NAME OF TRUSTEE TRUST DURING 1996 1996 (***)
- --------------- ----------------- ----------
Frederick S. Addy, Trustee $12,593 $65,000
William G. Burns, Trustee $12,593 $65,000
Arthur C. Eschenlauer, Trustee $12,593 $65,000
Matthew Healey, Trustee(**), $12,593 $65,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $12,593 $65,000
(*) Includes the Portfolio, each Portfolio in which a series of the Trust
invests, The Emerging Markets Debt Portfolio and The U.S. Small Company
Opportunities Portfolio (collectively the "Master Portfolios").
(**) During 1996, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500 in
insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment companies
comprising the Master Portfolios, The JPM Pierpont Funds, the Trust and JPM
Series Trust) in the fund complex.
The Trustees, in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy.
The Portfolio and the Trust have 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 Portfolio 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 Portfolio have agreed to pay Pierpont
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolio and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
These costs are periodically reviewed by the Trustees.
The aggregate fees paid to Pierpont Group, Inc. by the Portfolio during
the indicated fiscal years are set forth below:
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The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1994:
$23,028. For the fiscal year ended October 31, 1995: $40,729. For the fiscal
year ended October 31, 1996: $36,922.
Officers
The Trust's and Portfolio's executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Funds
Distributor, Inc. ("FDI"), a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The officers conduct and supervise the business
operations of the Trust and the Portfolio. The Trust and the Portfolio have no
employees.
The officers of the Trust and the Portfolio, their principal
occupations during the past five years and dates of birth are set forth below.
Unless otherwise specified, each officer holds the same position with the Trust
and the Portfolio. The business address of each of the officers unless otherwise
noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1992. His address is Pine Tree Club Estates, 10286 Saint Andrews Road,
Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies advised or administered by the Dreyfus Corporation
("Dreyfus") or its affiliates. From December 1991 to July 1994, she was
President and Chief Compliance Officer of FDI. Her date of birth is August 1,
1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr. Conroy
was a Senior Fund Accountant for Investors Bank & Trust Company. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding the Federal Money Market, Tax Exempt Money Market,
Tax Exempt Bond, New York Total Return Bond and Global Strategic Income
Portfolios). Managing Director, State Street Cayman Trust Company, Ltd. since
October 1994. Prior to October 1994, Mrs. Henning was head of mutual funds at
Morgan Grenfell in Cayman and for five years was Managing Director of Bank of
Nova Scotia Trust Company (Cayman) Limited from September 1988 to September
1993. Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden Road,
George Town, Grand Cayman, Cayman Islands. Her date of birth is March 24, 1942.
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RICHARD W. INGRAM; President and Treasurer. Executive Vice President and
Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Prior to September 1992, Ms. Keeley was an
assistant at the National Association for Public Interest Law. Address: 200 Park
Avenue, New York, New York 10166. Her date of birth is September 14, 1969.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. Prior to September 1992, Mr. Kelley was enrolled at
Boston College Law School and received his JD in May 1992. His date of birth is
December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding the Federal Money Market, Tax Exempt Money Market,
Tax Exempt Bond, New York Total Return Bond and Global Strategic Income
Portfolios). Assistant Vice President, State Street Bank and Trust Company since
November 1994. Assigned as Operations Manager, State Street Cayman Trust
Company, Ltd. since February 1995. Prior to November, 1994, employed by Boston
Financial Data Services, Inc. as Control Group Manager. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands. Her date of birth is May 31, 1961.
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MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its Affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The investment advisor to the Portfolio 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 of the State of
Delaware. The Advisor, 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. The Advisor 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, the Advisor 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 over $234 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.
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The basis of the Advisor'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 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 Portfolio
are not exclusive under the terms of the Advisory Agreement. 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 Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio in which the Fund
invests is currently the Salomon Brothers Broad Investment Grade Bond Index.
J.P. Morgan Investment Management Inc., also 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 Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of J.P.
Morgan Investment Management Inc. and certain other investment management
affiliates of J.P. Morgan.
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 has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets.
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The table below sets forth for the Fund the advisory fees paid by the
Portfolio to the Advisor for the fiscal periods indicated. See "Expenses" in the
Prospectus and below for applicable expense limitations.
The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1994:
$699,081. For the fiscal year ended October 31, 1995: $1,339,147. For the
fiscal year ended October 31, 1996: $2,402,660.
The Investment Advisory Agreement provides that it 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
"Distributor" below. The Investment Advisory Agreement 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."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as the Advisor 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. The Advisor believes that it may perform the services for
the Portfolio contemplated by the Advisory Agreement 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 the Advisor from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under separate agreements, Morgan also provides certain financial, fund
accounting and administrative services to the Trust and the Portfolio and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.
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DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor.
The Distribution Agreement shall continue in effect with respect to the
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 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolio
dated August 1, 1996, FDI also serves as the Trust's and the Portfolio's
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolio, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolio, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
For its services under the Co-Administration Agreements, the Fund and
Portfolio have agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, The JPM Pierpont Funds, the Master
Portfolios, JPM Series Trust, JPM Series Trust II and other investment companies
subject to similar agreements with FDI.
The table below sets forth for the Portfolio the administrative fees
paid to FDI for the fiscal periods indicated. See "Expenses" in the Prospectus
and below for applicable expense limitations.
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The U.S. Fixed Income Portfolio -- For the period August 1, 1996 through October
31, 1996: $6,419.
The table below sets forth for the Portfolio the administrative fees
paid to Signature Broker-Dealer Services, Inc. (which provided distribution and
administrative services to the Trust and placement agent and administrative
services to the Portfolio prior to August 1, 1996) for the fiscal periods
indicated. See "Expenses" in the Prospectus and below for applicable expense
limitations.
The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1994:
$16,107. For the fiscal year ended October 31, 1995: $27,436. For the period
November 1, 1995 through July 31, 1996: $65,610.
SERVICES AGENT
The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
effective December 29, 1995, as amended effective August 1, 1996, pursuant to
which Morgan is responsible for certain administrative and related services
provided to the Fund and the Portfolio. The Services 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.
Under the amended Services Agreements, the Fund and the Portfolio have
agreed to pay Morgan fees equal to their allocable share of an annual complex-
wide charge. This charge is calculated daily based on the aggregate net assets
of the Master Portfolios and JPM Series Trust in accordance with the following
annual schedule: 0.09% on the first $7 billion of their aggregate average daily
net assets and 0.04% of their average daily net assets in excess of $7 billion,
less the complex-wide fees payable to FDI. The portion of this charge payable by
the Fund and Portfolio is determined by the proportionate share that their net
assets bear to the total net assets of the Trust, The JPM Institutional Funds,
the Master Portfolios, the other investors in the Master Portfolios for which
Morgan provides similar services and JPM Series Trust.
Under Administrative Services Agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of the Portfolio in
accordance with the following schedule: 0.06% of the first $7 billion of the
Portfolio's aggregate average daily net assets, and 0.03% of the Portfolio's
average daily net assets in excess of $7 billion. Prior to December 29, 1995,
the Trust and the Portfolio had entered into Financial and Fund Accounting
Services Agreements with Morgan, the provisions of which included certain of the
activities described above and, prior to September 1, 1995, also included
reimbursement of usual and customary expenses. The table below sets forth for
the Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent. See "Expenses" in the Prospectus and below for applicable
expense limitations.
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The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1994:
$140,493. For the fiscal year ended October 31, 1995: $167,081. For the fiscal
year ended October 31, 1996: $191,348.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's and the Portfolio's
custodian and fund accounting agent and the Fund's transfer and dividend
disbursing agent. Pursuant to the Custodian Contract, State Street is
responsible for maintaining the books of account and records of portfolio
transactions and holding portfolio securities and cash. In the case of foreign
assets held outside the United States, the Custodian employs various
subcustodians who were approved by the Trustees of the Portfolio 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.
SHAREHOLDER SERVICING
The Trust on behalf of the Fund 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 the 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
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
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, the Fund has agreed to pay
Morgan for these services a fee at the annual rate of 0.05% (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). Morgan
acts as shareholder servicing agent for all shareholders.
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 administrative services to the Fund and the Portfolio under the
Services Agreement and in acting as Advisor to the Portfolio under the
Investment
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Advisory Agreement, 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.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreement, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund or the Portfolio 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 Portfolio 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 the Fund
and the Portfolio, assists in the preparation and/or review of the Fund's and
the Portfolio's federal and state income tax returns and consults with the Fund
and the Portfolio as to matters of accounting and federal and state income
taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator and Distributor," "Services Agent" and "Shareholder
Servicing" above, the Fund and the Portfolio are responsible for usual and
customary expenses associated with their respective operations. Such expenses
include organization expenses, legal fees, accounting expenses, insurance costs,
the compensation and expenses of the Trustees, registration fees under federal
securities laws, and extraordinary expenses applicable to the Fund or the
Portfolio. For the Fund, such expenses also include transfer, registrar and
dividend disbursing costs, the expenses of printing and mailing reports, notices
and proxy statements to Fund shareholders, and filing fees under state
securities laws. For the Portfolio, such expenses also include applicable
registration fees under foreign securities laws, custodian fees and brokerage
expenses. For additional information regarding waivers or expense subsidies, see
"Management of the Trust and the Portfolio" in the Prospectus.
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 the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described
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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 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, OTC market
or by readily available market quotations from a dealer in such securities. The
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." If the Trust on behalf of the Fund and its corresponding
Portfolio determine that it would be detrimental to the best interest of the
remaining shareholders of the 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 the Fund and the Portfolio have
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Fund and the Portfolio 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 Portfolio and therefore
shareholders of the Fund that receive redemptions in kind will receive
securities of the Portfolio. The Portfolio has advised the Trust that the
Portfolio will not redeem in kind except in circumstances in which the Fund is
permitted to redeem in kind.
Further Redemption Information. The Trust, on behalf of the Fund, and
the Portfolio reserve the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: () 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, 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.
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EXCHANGE OF SHARES
An investor may exchange shares from any JPM Institutional Fund into
any other JPM Institutional Fund or JPM 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
The Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Determination of the net income for the Fund 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
The Fund 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 the day the following legal holidays are observed:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Fund and the Portfolio may also close for purchases and redemptions at such
other times as may be determined by the Board of Trustees to the extent
permitted by applicable law. The days on which net asset value is determined are
the Fund's business days.
The net asset value of the Fund is equal to the value of the Fund's
investment in the 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
Portfolio in valuing its assets.
The Fund's 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 OTC 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
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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. 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 bonds, no
readily available market quotations exist for most municipal securities. The
Portfolio values municipal securities on the basis of prices from a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining values.
Trading in securities in most foreign markets is normally completed
before the close of 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 the 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 Fund 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 Fund 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, the annualized
yield for the Fund is computed by dividing the 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.
Historical performance of the Fund shown below is that of The JPM
Institutional Bond Fund, a series of the Trust which also invests in the
Portfolio, and is presented in accordance with applicable SEC staff
interpretations.
Below is set forth historical yield information of The JPM
Institutional Bond Fund for the period indicated:
Bond Fund (9/30/97): 30-day yield: 6.60%.
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Total Return Quotations. As required by regulations of the SEC, the
annualized total return of the Fund 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 of the Fund shown below is that of
The JPM Institutional Bond Fund, a series of the Trust which also invests in the
Portfolio, and is presented in accordance with applicable SEC staff
interpretations. The historical performance information of The JPM Institutional
Bond Fund includes historical performance of The JPM Pierpont Bond Fund, which
also invests in the Portfolio and which commenced operations before The JPM
Institutional Bond Fund, and is presented in accordance with applicable SEC
staff interpretations. The applicable financial information in the registration
statements for The JPM Pierpont Funds (Registration Nos. 33-54632 and 811-7340)
is incorporated herein by reference.
Below is set forth historical return information of The JPM
Institutional Bond Fund for the periods indicated:
Bond Fund (4/30/97): Average annual total return, 1 year: 7.02%; average annual
total return, 5 years: 7.35%; average annual total return, commencement of
operations(*) to period end: 7.81%; aggregate total return, 1 year: 7.02%;
aggregate total return, 5 years: 42.58%; aggregate total return, commencement of
operations(*) to period end: 48.82%.
- --------------------
(*) The predecessor JPM Pierpont Bond Fund commenced operations on March 11,
1988.
General. The Fund's performance will vary from time to time depending
upon market conditions, the composition of the Portfolio, and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of the 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 the 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 Fund's shares, including appropriate market indices including
the benchmark indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
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PORTFOLIO TRANSACTIONS
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. 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 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.
Portfolio transactions for the Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objectives. See "Investment Objectives and Policies --
Portfolio Turnover."
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best price and execution on a competitive basis for both
purchases and sales of securities.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
brokerage transactions to affiliates of the Advisor. In order for affiliates of
the Advisor to effect any portfolio transactions for the 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 the 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.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolio 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 the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, the Advisor to the extent permitted by applicable laws and
regulations, may, but
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is not obligated to, aggregate the securities to be sold or purchased for the
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 the Advisor in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to the Portfolio. In some instances, this procedure might adversely affect the
Portfolio.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which the 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 the Fund or of any other
series of the Trust and that every written agreement, obligation, instrument or
undertaking made on behalf of the 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 Fund.
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 the Fund is liable to
the 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 the 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
the 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 the Fund.
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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 the 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 the Fund (or in the assets of other series, if applicable).
To date shares of 28 series have been authorized, of which 25 are currently
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 that Fund available for
distribution to such shareholders. See "Massachusetts Trust." Fund shares have
no preemptive or conversion rights and are fully paid and nonassessable. The
rights of redemption and 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
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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, 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 28 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.
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TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the 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) held less than three months,
but only if such currencies (or options, futures or forward contracts on foreign
currencies) are not directly related to the 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
quarter of its taxable year, (i) at least 50% of the value of the Fund's total
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities
limited, in respect of any one issuer, to an amount not greater than 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 or
securities of other regulated investment companies). As a regulated investment
company, the Fund (as opposed to its shareholders) will not be subject to
federal income taxes on the net investment income and capital gain that it
distributes to its shareholders, provided that at least 90% of its net
investment income and realized net short-term capital gain in excess of net
long-term capital loss for the taxable year is distributed in accordance with
the Code's timing requirements.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The 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 the
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 be
taxable to a shareholder in the year declared rather than the year paid.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(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. Distributions to corporate shareholders of the
Fund are not eligible for the dividends received deduction. Distributions of net
long-term capital gain (i.e., net long-term capital gain in excess of net
short-term capital loss) are taxable to shareholders of the Fund as long-term
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capital gain, 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 of any gain or loss realized on the redemption or
exchange of the Fund's shares. Additionally, any loss realized on a redemption
or exchange of shares of the 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.
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 a put is acquired or a call option is
written thereon or the straddle rules described below are otherwise applicable.
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.
Except as described below, if an option written by the 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 the 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 certain foreign currency contracts, or to fluctuations in
exchange rates between the time the Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by the 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 the 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. Certain straddles treated as short sales for tax purposes
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, the
Portfolio's ability to enter into forward currency contracts, options and
futures contracts may be limited.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each taxable 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
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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. However, gain or loss recognized on certain foreign currency
contracts will be treated as ordinary income or loss.
Foreign Shareholders. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss 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 treated
as 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 or foreign entity, the Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift of shares of the 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.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the 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 the 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 Portfolio is organized as a New York trust. The Portfolio is
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 the
Fund in the 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
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shares or the Portfolio's outstanding voting securities 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 Fund, 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 Prospectus 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 Prospectus 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
Prospectus 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 Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities 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.
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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.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
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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.
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
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during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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.
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.
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