As filed with the Securities and Exchange Commission on August 1, 1997.
Registration Nos. 33-54642 and 811-7342
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 37
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 38
The JPM Institutional Funds
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(617) 557-0700
John E. Pelletier, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Stephen K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(I)
[X] on October 1, 1997 pursuant to paragraph (a)(I)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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<PAGE>
The Registrant has previously registered an indefinite number of its shares
under the Securities Act of 1933, as amended, pursuant to Rule 24F-2 under the
Investment Company Act of 1940, as amended. The Registrant has filed Rule 24f-2
notices with respect to its series as follows: Tax Exempt Money Market and Tax
Exempt Bond Funds (for their fiscal years ended August 31, 1996) on October 24,
1996; International Bond Fund (for its fiscal year ended September 30, 1996) on
November 27, 1996; Federal Money Market, Short Term Bond, Bond, Emerging Markets
Equity and International Equity Funds (for their fiscal years ended October 31,
1996) on December 20, 1996; Prime Money Market Fund (for its fiscal year ended
November 30, 1996) on January 17, 1997; European Equity, Japan Equity and Asia
Growth Funds (for their fiscal years ended December 31, 1996) on February 27,
1997; New York Total Return Bond Fund (for its fiscal year ended March 31, 1997)
on May 21, 1997; U.S. Equity, Disciplined Equity and U.S. Small Company Funds
(for their fiscal years ended May 31, 1997) on July 22, 1997; and Diversified
Fund (for its fiscal year ended June 30, 1996) on August 28, 1996. The
Registrant expects to file Rule 24f-2 notices with respect to its Global
Strategic Income Fund (for its fiscal year ending October 31, 1997) on or before
December 30, 1997; International Opportunities Fund (for its fiscal year ending
November 30, 1997) on or before January 29, 1998; Service Tax Exempt Money
Market Fund (for its fiscal year ending August 31, 1997) on or before October
30, 1997; Treasury Money Market, Service Treasury Money Market and Service
Federal Money Market Funds (for their fiscal years ending October 31, 1997) on
or before December 30, 1997; and Service Prime Money Market Fund (for its fiscal
year ending November 30, 1997) on or before January 29, 1998.
The Diversified Portfolio has also executed this Registration Statement.
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<PAGE>
EXPLANATORY NOTE
This post-effective amendment No. 37 to the Registrant's registration
statement on Form N-1A (File No. 33-54642) is being filed with respect to The
JPM Institutional Fund, a series of shares of the Registrant (the "Fund"), for
the purposes of simplifying the Fund's prospectus and establishing a separate
statement of additional for the Fund.
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<PAGE>
THE JPM INSTITUTIONAL FUNDS
(DIVERSIFIED FUND)
CROSS-REFERENCE SHEET
(As Required by Rule 495)
PART A ITEM NUMBER: Prospectus Headings.
1. COVER PAGE: Cover Page.
2. SYNOPSIS: Introduction; Investor Expenses.
3. CONDENSED FINANCIAL INFORMATION: Financial Summary, Financial
Highlights.
4. GENERAL DESCRIPTION OF REGISTRANT: Goal; Investment Approach;
Potential Risks and Rewards; Model Allocation; Risk and Reward Elements;
Master/Feeder.
5. MANAGEMENT OF THE FUND: Cover Page; J.P. Morgan; Portfolio Management;
Management and Administration.
5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: Not Applicable.
6. CAPITAL STOCK AND OTHER SECURITIES: Investing Directly; Dividends and
Distributions; Business Hours and NAV Calculations; Tax Considerations;
Master/Feeder.
7. PURCHASE OF SECURITIES BEING OFFERED: Introduction; Investing Directly;
Opening an Account; Adding to an Account; Telephone Orders; Exchanges;
Business Hours and NAV Calculations; Timing of Orders; Timing of
Settlements.
8. REDEMPTION OR REPURCHASE: Selling Shares; Account and Transaction
Policies.
9. PENDING LEGAL PROCEEDINGS: Not Applicable.
PART B ITEM NUMBER: Statement of Additional Information Headings.
10. COVER PAGE: Cover Page.
11. TABLE OF CONTENTS: Table of Contents.
12. GENERAL INFORMATION AND HISTORY: General.
13. INVESTMENT OBJECTIVE AND POLICIES: Investment Objective and Policies;
Additional Investments; Investment Restrictions; Quality and
Diversification Requirements; Appendix A.
14. MANAGEMENT OF THE FUND: Trustees and Officers.
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<PAGE>
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES: Description of
Shares.
16. INVESTMENT ADVISORY AND OTHER SERVICES: Investment Advisor; Distributor;
Co-Administrator; Services Agent; Custodian and Transfer Agent;
Shareholder Servicing; Eligible Institutions; Independent Accountants;
Expenses.
17. BROKERAGE ALLOCATION AND OTHER PRACTICES: Portfolio Transactions.
18. CAPITAL STOCK AND OTHER SECURITIES: Massachusetts Trust; Description of
Shares.
19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED: Net Asset
Value; Purchase of Shares; Redemption of Shares; Exchange of Shares;
Dividends and Distributions.
20. TAX STATUS: Taxes.
21. UNDERWRITERS: Distributor.
22. CALCULATION OF PERFORMANCE DATA: Performance Data.
23. FINANCIAL STATEMENTS: Financial Statements.
PART C. Information required to be included in Part C is set forth under the
appropriate items, so numbered, in Part C of this Registration Statement.
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<PAGE>
OCTOBER 1, 1997 / PROSPECTUS
THE JPM INSTITUTIONAL DIVERSIFIED FUND
[photo]
----------------------------
A balanced fund seeking high
total return with reduced
risk
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JP MORGAN
[i:\dsfndlgl\institut\0897.pea\101div.pro]
<PAGE>
CONTENTS
- ----------------------------------------------------------------------
2 / THE JPM INSTITUTIONAL DIVERSIFIED FUND
The fund's goal, investment
approach, risks, expenses, Fund description..........................2
and performance
Investor expenses.........................2
Performance...............................3
4 / YOUR INVESTMENT
Investing in the fund
Investing through a financial
professional..............................4
Investing through an employer-
sponsored retirement plan.................4
Investing through an IRA or
rollover IRA..............................4
Investing directly........................4
Opening an account........................4
Adding to an account......................4
Selling shares............................5
Account and transaction policies..........5
Dividends and distributions...............6
Tax considerations........................6
7 / FUND DETAILS
More detailed financial and
risk information Financial highlights......................7
Risk and reward elements..................8
Master/feeder structure...................9
Management and administration.............9
FOR MORE INFORMATION.............back cover
<PAGE>
INTRODUCTION
- ----------------------------------------------------------------------
THE JPM INSTITUTIONAL DIVERSIFIED FUND
This fund is a balanced fund, investing in a diversified portfolio of stocks and
bonds. As a shareholder, you should anticipate risks and rewards beyond those of
a typical bond fund, but less than those of most stock funds.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
[bullet] are pursuing a long-term goal such as retirement
[bullet] want an investment with the potential to outpace inflation
[bullet] seek less risk than a fund investing completely in stocks
[bullet] prefer to leave asset allocation decisions in the hands of an
investment professional
It is NOT designed for investors who:
[bullet] are looking for the higher long-term potential growth (with the
higher risks) of a fund investing completely in stocks
[bullet] require regular income or stability of principal
[bullet] are pursuing a short-term goal or investing emergency reserves
J.P. MORGAN
Known for its commitment to proprietary research and its highly disciplined
investment strategies, J.P. Morgan is the asset management choice for many of
the world's most respected corporations, financial institutions, governments,
and individuals. Today, J.P. Morgan employs over 300 portfolio managers and
analysts around the world and has more than $200 billion in assets under
management, including over $30 billion managed by the fund's advisor, Morgan
Guaranty.
BEFORE YOU INVEST [shaded]
Investors considering the fund should understand that:
[bullet] The value of the fund's shares will fluctuate over time. You
could lose money if you sell when the fund's share price is
lower than when you invested.
[bullet] There is no assurance that the fund will meet its investment
goal.
[bullet] Future returns will not necessarily resemble past performance.
[bullet] Shares in the fund are not bank deposits and are not guaranteed
or insured by any bank, government entity, or the FDIC. [end
shaded text]
1
<PAGE>
JPM INSTITUTIONAL DIVERSIFIED FUND / TICKER SYMBOL: JPDVX
- ----------------------------------------------------------------------
REGISTRANT NAME: THE JPM INSTITUTIONAL FUNDS
[bull's-eye icon] GOAL
The fund seeks to provide high total return from a diversified portfolio of
stocks and bonds.
[chess icon] INVESTMENT APPROACH
Drawing on a variety of analytical tools, the portfolio management team
allocates assets among various types of stock and bond investments, based on the
model allocation shown at right. The team periodically adjusts the fund's actual
asset allocation according to the relative attractiveness of each asset class.
Within this asset allocation framework, the team selects the fund's securities.
With the stock portion of the portfolio, the fund keeps its economic sector
weightings in line with the markets in which it invests, while actively seeking
the most attractive stocks within each sector. In choosing individual stocks,
the team ranks them according to their relative value using a proprietary model
that incorporates research from J.P. Morgan's worldwide network of analysts.
Foreign stocks are chosen using a similar process, while also considering
country allocation and currency exposure.
With the bond portion of the portfolio, the team uses fundamental, economic, and
capital markets research to select securities. The team actively manages the mix
of U.S. and foreign bonds while typically keeping duration--a common measurement
of sensitivity to interest rate movements--within one year of the average for
the U.S. investment-grade bond universe (currently about five years).
[scales icon] POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in the stock and bond markets. The fund's broad diversification among asset
classes and among individual stocks and bonds is more effective in reducing
volatility when asset classes perform differently. Fund performance will also
depend on the management team's asset allocation and securities selection.
Over the long term, investors can anticipate that the fund's total return and
volatility should exceed those of bonds but remain less than those of medium-
and large-capitalization domestic stocks.
The fund's securities and their main risks, as well as fund strategies, are
described in more detail on page 8.
- -----------------------------------------------------------------------------
INVESTOR EXPENSES [shaded]
Below are the current expenses you should expect to pay as an investor in the
fund. The fund has no sales, redemption, exchange, or account fees; the annual
fund expenses shown are deducted from fund assets prior to performance
calculations.
Footnotes for this section are shown at right. [on page 3]
ANNUAL FUND OPERATING EXPENSES (%)
Management fees (actual) 0.55
Marketing (12b-1) fees none
Other expenses2[superscript]
(after reimbursement) 0.10
- ------------------------------------------
TOTAL OPERATING EXPENSES2[superscript]
(after reimbursement) 0.65
- ------------------------------------------
EXPENSE COMPARISON The scale below shows how the fund's annual expenses have
compared to the average for its peer group, as defined by the Lipper balanced
fund category.
0.65% [black wedge]
[line graph with a 1%, 2% and 3% range]
X.XX% [white wedge]
[black wedge] JPM INSTITUTIONAL DIVERSIFIED FUND
[white wedge] Peer group average[end shaded text]
- -----------------------------------------------------------------------------
MODEL ALLOCATION
[pie chart] 52% medium- and large-cap U.S. stocks; 35% U.S. and foreign bonds;
10% foreign stocks; 3% small-cap U.S. stocks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $200
billion, including more than $7.1 billion using the same strategy as this fund.
The portfolio management team is led by Gerald Osterberg, vice president, who
has been on the team since the fund's inception in July of 1993 and has been at
J.P. Morgan since 1966, and John M. Devlin, vice president, who joined the team
in December of 1993 and has been at J.P. Morgan since 1986.
JPM INSTITUTIONAL DIVERSIFIED FUND
2
<PAGE>
- ----------------------------------------------------------------------
PERFORMANCE
AVERAGE ANNUAL TOTAL RETURN (%)
Shows performance over time, for periods ended December 31, 1996
- -----------------------------------------------------------------
1 yr. 3 yrs. Since inception3[superscript]
JPM INSTITUTIONAL DIVERSIFIED
FUND
(after expenses) 13.68 13.32 12.83
- -----------------------------------------------------------------
FUND BENCHMARK4[superscript]
(no expenses) 14.10 13.56 12.94
- -----------------------------------------------------------------
S&P 500 INDEX
(no expenses) 22.96 19.68 18.87
- -----------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (%)
Shows changes in returns by calendar year
- -----------------------------------------------------------------
[bar graph]
[vertical: (20%), 0%, 20%, 40%
horizontal: 1994, 1995, 1996
1994: 0.93 FUND, 0.46 Fund Benchmark4[superscript], 1.32 S&P 500 Index
1995: 26.84 FUND, 27.75 Fund Benchmark, 37.58 S&P 500 Index
1996: 13.68 FUND, 14.10 Fund Benchmark, 22.96 S&P 500 Index]
- ------------------------------------------------------------------------------
[shaded]
FINANCIAL SUMMARY For fiscal periods ended June 30
------------------------------------------------------------
1994[3] 1995 1996 1997
Per-share distributions to
shareholders from:
Net investment income ($/share) 0.18 0.31 0.40 x.xx
Net realized gain ($/share) (0.23) 1.37 1.42 x.xx
- ------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($/share) (0.05) 1.68 1.82 X.XX
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($/share) 9.90 11.26 12.01 XX.XX
- ------------------------------------------------------------------------------
TOTAL RETURN (%) (0.56)[5] 17.36 16.91 XX.XX
- ------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 59,222 164,855 193,219 XX,XXX
- ------------------------------------------------------------------------------
EXPENSES AFTER REIMBURSEMENT (%) 0.65[6] 0.65 0.65 X.XX
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE (%) 115[5] 136 144 XXX
- ------------------------------------------------------------------------------
This summary is derived from the fund's current financial statements, which have
been audited by Price Waterhouse LLP, the fund's independent accountants. [end
shaded text]
- ------------------------------------------------------------------------------
[footnotes]
1 This table shows expenses for the past fiscal year as a percentage of
average net assets, after reimbursement for ordinary expenses over
0.65%.
2 Without reimbursement, other expenses and total operating expenses
would have been x.xx% and x.xx% respectively. There is no guarantee
that reimbursement will continue beyond 10/31/98.
3 The fund commenced public investment operations on 9/10/93. Returns are
calculated from 9/30/93. The return for the fund since 9/10/93 is 12.44%.
4 A composite benchmark of unmanaged indices that corresponds to the
fund's model allocation and that consists of the S&P 500 (52%), Russell
2000 (3%), Salomon Brothers Broad Investment Grade Bond (35%), and MSCI
EAFE (10%) indices.
5 Not annualized.
6 Annualized.
JPM INSTITUTIONAL DIVERSIFIED FUND
3
<PAGE>
YOUR INVESTMENT
- ----------------------------------------------------------------------
For your convenience, the JPM Institutional Funds offer several ways to initiate
and maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED SAVINGS PLAN
Your fund investments are handled through your plan. Consult your plan materials
or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
[bullet] Determine the amount you are investing. The minimum amount
for initial investments in the fund is $3,000,000 and for
additional investments $25,000, although these minimums may be
less for some investors. For more information on minimum
investments, call 1-800-766-7722.
[bullet] Complete the application, indicating how much of your
investment you want to allocate to which fund(s). Please
apply now for any account privileges you may want to use in
the future, in order to avoid the delays associated with
adding them later on.
[bullet] Mail in your application, making your initial investment as shown
at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING AN ACCOUNT
BY CHECK
[bullet] Make out a check for the investment amount payable to JPM
Institutional Funds.
[bullet] Mail the check with your completed application to the
Shareholder Services Agent.
BY WIRE
[bullet] Mail your completed application to the Shareholder Services
Agent.
[bullet] Call the Shareholder Services Agent to obtain an account number
and to place a purchase order. FUNDS THAT ARE WIRED WITHOUT A
PURCHASE ORDER WILL BE RETURNED UNINVESTED.
[bullet] After placing your purchase order, instruct your bank to
wire the amount of your investment to:
Morgan Guaranty Trust Company
60 Wall Street, New York, NY
ABA NUMBER: 021-000-238
CREDIT: JPM Institutional Shareholder Services
ACCOUNT NUMBER: 001-57-689
FFC: your account number, name of registered owner(s) and fund
name
BY EXCHANGE
[bullet] Call the Shareholder Services Agent for an exchange.
ADDING TO AN ACCOUNT
BY CHECK
[bullet] Make out a check for the investment amount payable to JPM
Institutional Funds.
[bullet] Mail the check with a completed investment slip to the
Shareholder Services Agent. If you do not have an investment
slip, attach a note indicating your account number and how much
you wish to invest in which fund(s).
BY WIRE
[bullet] Call the Shareholder Services Agent to place a purchase order.
FUNDS THAT ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED
UNINVESTED.
[bullet] Once you have placed your purchase order, instruct your bank
to wire the amount of your investment as described above.
BY EXCHANGE
[bullet] Call the Shareholder Services Agent for an exchange.
YOUR INVESTMENT
4
<PAGE>
SELLING SHARES
BY PHONE
[bullet] Call the Shareholder Services Agent and place your request.
Once your request has been verified, a check for the net
amount, payable to the registered owner(s), will be mailed
to the address of record. For checks payable to any other
party or mailed to any other address, please make your
request in writing (see below).
BY WIRE
[bullet] Call the Shareholder Services Agent to verify that the wire
redemption privilege is in place on your account. If it is
not, a representative can help you add it.
[bullet] Place your wire request. If you are transferring money to a
non-Morgan account, you will need to provide the
representative with the personal identification number (PIN)
that was provided to you when you opened your fund account.
IN WRITING
[bullet] Write a letter of instruction that includes the following
information: the name of the registered owner(s) of the
account; the account number; the fund name; the amount you
want to sell; and the recipient's name and address or wire
information, if different from those of the account
registration.
[bullet] Indicate whether you want the proceeds sent by check or by wire.
[bullet] Make sure the letter is signed by an authorized party. The
Shareholder Services Agent may require additional
information, such as a signature guarantee.
[bullet] Mail the letter to the Shareholder Services Agent.
BY EXCHANGE
[bullet] Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a personal
identification number (PIN), and may record telephone orders or take other
reasonable precautions. However, if the fund does take such steps to ensure the
authenticity of an order, you may bear any loss if the order later proves
fraudulent.
EXCHANGES You may exchange shares in this fund for shares in any other JPM
Institutional or JPM Pierpont mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes, an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day at 4:15 p.m.
eastern time.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until 4:00
p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- ----------------------------------------------------------------------
[shaded]
SHAREHOLDER SERVICES AGENT
J.P. MORGAN FUNDS SERVICES
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available
8:00 a.m. to 5:00 p.m. eastern time
on fund business days. [end shaded
text]
YOUR INVESTMENT
5
<PAGE>
TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends every calendar quarter and makes
capital gains distributions, if any, once a year (usually in September). These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are automatically reinvested in the fund.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another JPM Institutional fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
[shaded]
- ------------------------------------------------------------
TRANSACTION / TAX STATUS
- ------------------------------------------------------------
Income dividends Ordinary income
Short-term capital gains Ordinary income
distributions
Long-term capital gains Capital gains
distributions
Sales or exchanges of Capital gains or losses
shares owned for more
than one year
Sales or exchanges of Gains are treated as ordinary
shares owned for one income; losses are subject
year or less to special rules [end shaded text]
- ------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other nontaxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
YOUR INVESTMENT
6
<PAGE>
FUND DETAILS
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The figures below, which are a more extensive version of those presented on page
3, have been audited by Price Waterhouse LLP, the fund's independent
accountants.
[shaded]
FINANCIAL HIGHLIGHTS
PER-SHARE DATA For fiscal periods ended June 30
---------------------------------------------------------------
1994[1] 1995 1996 1997
NET ASSET VALUE,
BEGINNING OF PERIOD ($) 10.00 9.90 11.26 XX.XX
Income from investment operations:
Net investment income ($) 0.18 0.31 0.40 xx.xx
Net realized and unrealized
gain (loss) on investment and
foreign currency ($) (0.23) 1.37 1.42 xx.xx
TOTAL FROM INVESTMENT OPERATIONS ($) (0.05) 1.68 1.82 XX.XX
Less distributions to shareholders from:
Net investment income ($) (0.05) (0.26) (0.42) xx.xx
Net realized gain ($) -- (0.06) (0.64) xx.xx
TOTAL DISTRIBUTIONS ($) (0.05) (0.32) (1.06) XX.XX
NET ASSET VALUE, END OF PERIOD ($) 9.90 11.26 12.02 XX.XX
SUPPLEMENTAL DATA
TOTAL RETURN (%) (0.56)[2] 17.36 16.91 XX.XX
NET ASSETS AT END OF
PERIOD ($ thousands) 59,222 164,855 193,219 XX.XX
RATIO OF EXPENSES TO AVERAGE
NET ASSETS (%) 0.65[3] 0.65 0.65 XX.XX
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (%) 2.92[3] 3.70 3.34 XX.XX
DECREASE REFLECTED IN EXPENSE RATIO
DUE TO EXPENSE REIMBURSEMENT (%) 0.97[3] 0.53 0.33 XX.XX
- ------------------------------------------------------------------------------
[end shaded text]
[footnotes]
1 The fund commenced operations on 7/8/93.
2 Not annualized.
3 Annualized.
FUND DETAILS
7
<PAGE>
- ----------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table identifies the main elements that make up the fund's overall risk and
reward characteristics (described on page 2). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk. [shaded]
<TABLE>
<CAPTION>
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
MARKET CONDITIONS
[bullet] The fund's [bullet] Stocks and [bullet] Under normal circumstances the fund plans to
share price and bonds have generally remain fully invested, with approximately 65% in
performance will outperformed more stable stocks and 35% in bonds; stock investments may include
fluctuate in response to investments (such as U.S. and foreign convertible securities, preferred
stock and bond market short-term bonds and stocks, trust or partnership interests, warrants,
movements cash equivalents) over rights, and investment company securities; bond
the long term investments may include U.S. and foreign corporate and
[bullet] The value of government bonds, and mortgage-backed and asset-backed
the fund's bonds (and [bullet] A diversified, securities
potentially its balanced portfolio
convertible securities should mitigate the [bullet] The fund seeks to limit risk through
and stocks) could fall effects of wide market diversification in a large number of stocks, and to a
when interest rates fluctuations, especially lesser extent bonds (typically holding more than 1,000
rise; the longer a when stock and bond stock and bond positions)
bond's duration and the prices move in different
lower its credit directions [bullet] The fund seeks to keep the average duration
quality, the more it of its bond portfolio within one year of that for the
typically falls [bullet] The fund's U.S. investment-grade bond universe
bonds could rise in
[bullet] The fund's value when interest [bullet] The fund monitors interest rate trends, as
mortgage-backed rates fall well as geographic and demographic information related
securities could to mortgage-backed securities and mortgage prepayments
generate capital losses [bullet] Mortgage-backed
or periods of low yields securities can offer [bullet] During severe market downturns, the fund has
if they are paid off attractive returns the option of investing up to 100% of assets in
substantially earlier or investment-grade short-term securities
later than anticipated
- ----------------------- ----------------------- ------------------------------------------------------
MANAGEMENT CHOICES
[bullet] The fund could [bullet] The fund could [bullet] J.P. Morgan focuses its active management on
underperform its outperform its benchmark asset allocation and securities selection, areas where
benchmark due to its due to these same it believes its research advantage can enhance returns
asset allocation and choices
securities choices
- ----------------------- ----------------------- -----------------------------------------------------
CREDIT QUALITY
[bullet] The default of [bullet] Investment- [bullet] At least 75% of the fund's bonds must be
an issuer would leave grade bonds have a lower investment-grade (BBB/Baa quality or better),
the fund with unpaid risk of default 65% A or better, and no more than 25% BB/Ba or B/B;
interest or principal the fund may include unrated bonds of equivalent quality in
these categories
[bullet] Junk bonds
[bullet] Junk bonds offer higher yields and
(those rated BB/Ba or potential gains [bullet] The fund does not buy bonds lower than B/B
lower) have a higher
risk of default
- ----------------------- ----------------------- -----------------------------------------------------
FOREIGN INVESTMENTS
[bullet] Currency [bullet] Favorable [bullet] The fund anticipates that total foreign
exchange rate movements exchange rate movements investments will not exceed 30% of assets.
could reduce gains or could generate gains or
create losses reduce losses [bullet] The fund actively manages the currency
exposure of its foreign stock and bond investments
[bullet] The fund could [bullet] Foreign relative to its benchmark, and may hedge into the U.S.
lose money because of investments, which dollar from time to time (see also "Derivatives")
foreign government represent a major
actions, political portion of the world's
instability, or lack of securities, offer
adequate and accurate attractive potential
information performance and
opportunities for
diversification
</TABLE>
FUND DETAILS
8
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
DERIVATIVES
[bullet] Derivatives [bullet] Hedges that [bullet] The fund uses derivatives, such as futures,
used for hedging the correlate well with options, and foreign currency forward contracts, for
portfolio or specific underlying positions can hedging and for risk management (i.e., to adjust
securities may not fully reduce or eliminate duration or to establish or adjust exposure to
offset the underlying losses at low cost particular securities, markets or currencies); risk
positions management may include management of the fund's
[bullet] The fund could exposure relative to its benchmark
[bullet] Derivatives make money and protect
used for risk management against losses if [bullet] The fund only establishes hedges that it
may not have the management's analysis expects will be highly correlated with underlying
intended effects and may proves correct positions
result in losses or
missed opportunities [bullet] Derivatives [bullet] While the fund may use derivatives that
that involve leverage incidentally involve leverage, it does not use them
[bullet] Derivatives could generate for the specific purposes of leveraging the portfolio
that involve leverage substantial gains at low
could magnify losses cost
- ------------------------ ------------------------ ------------------------------------------------------
ILLIQUID SECURITIES
[bullet] The fund could [bullet] These [bullet] The fund may not invest more than 15% of net
have difficulty valuing securities may offer assets in illiquid securities
securities precisely more attractive yields
or potential growth than
[bullet] The fund could comparable widely traded
be unable to sell the securities
securities at the time
or price it desired
- ------------------------ ------------------------ ------------------------------------------------------
SHORT-TERM TRADING
[bullet] Increased [bullet] The fund could [bullet] The fund anticipates a portfolio turnover
trading would raise the realize gains in a short rate of approximately 150%
fund's brokerage and period of time
related costs
[bullet] The fund could [bullet] The fund generally avoids short-term trading,
short-term capital gains if a stock is overvalued except to take advantage of attractive or unexpected
[bullet] Increased protect against losses opportunities or to meet demands generated by
distributions would and later falls shareholder activity
raise shareholders'
income tax liability
</TABLE>
[end shaded text]
MASTER/FEEDER
Rather than investing directly, the fund invests in another fund--the master
portfolio--with an identical goal. (Except in this section and the next, this
prospectus uses the term "the fund" to mean both the fund and its master
portfolio, and includes the fund's share of master portfolio expenses when
referring to fund expenses.)
The master portfolio accepts investments from other "feeder" funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms than another. Generally, when
the master portfolio seeks a vote, the fund will hold a shareholder meeting and
cast its vote proportionately, as instructed by its shareholders. Fund
shareholders are entitled to one vote per fund share.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are assisted by Pierpont Group, Inc., which they own and operate on a
cost basis. Funds Distributor, Inc., as co-administrator, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
The fund and its master portfolio pay J.P. Morgan the following fees for
investment advisory and other services:
- --------------------------------------------------------------
Advisory services 0.55% of the master
portfolio's average net assets
- --------------------------------------------------------------
Administrative services Master portfolio and fund's
(fee shared with Funds pro-rata shares of 0.90%
Distributor, Inc.) on the first $7 billion in J.P.
Morgan-advised portfolios, plus
0.04% of assets over $7 billion
- --------------------------------------------------------------
Shareholder services 0.10% of the fund's assets
[end shaded text]
- --------------------------------------------------------------
FUND DETAILS
9
<PAGE>
FOR MORE INFORMATION
- ----------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS Contain performance data, information on portfolio
holdings, and a written analysis of market conditions and fund performance for
the fund's most recently completed fiscal year or half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the SAI by reference.
Copies of the current versions of these documents may be obtained by
contacting:
THE JPM INSTITUTIONAL DIVERSIFIED FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: ___@___.___
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company registration
number is 811-7342.
THE JPM INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The JPM Institutional Funds combine a heritage of integrity and financial
leadership with comprehensive, sophisticated analysis and management techniques.
Drawing on J.P. Morgan's extensive experience and depth as an investment
manager, the JPM Institutional Funds offer a broad array of distinctive
opportunities for mutual fund investors.
JP MORGAN
- -----------------------------------------------------------------------
THE JPM INSTITUTIONAL FUNDS
ADVISOR DISTRIBUTOR
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
(800) 521-5411
<PAGE>
[Marked to show changes from 7/14/97 SAI]
THE JPM INSTITUTIONAL FUNDS
THE JPM INSTITUTIONAL DIVERSIFIED FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED OCTOBER 1, 1997, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY
BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: THE JPM
INSTITUTIONAL FUNDS (800) 221-7930.
i:\dsfndlgl\institut\0897.pea\jidivsai.wpf
<PAGE>
Table of Contents
PAGE
General................................. 1
Investment Objective and Policies.......
1
Investment Restrictions................. 24
Trustees and Officers................... 26
Investment Advisor...................... 31
Distributor............................. 33
Co-Administrator........................ 34
Services Agent.......................... 35
Custodian and Transfer Agent............ 36
Shareholder Servicing................... 36
Eligible Institutions................... 37
Independent Accountants................. 38
Expenses................................ 38
Purchase of Shares...................... 39
Redemption of Shares.................... 39
Exchange of Shares...................... 40
Dividends and Distributions............. 40
Net Asset Value......................... 41
Performance Data........................ 42
Portfolio Transactions.................. 44
Massachusetts Trust..................... 46
Description of Shares................... 47
Special Information
Concerning
Investment Structure.................... 49
Taxes................................... 50
Additional Information.................. 55
Financial Statements.................... 56
Appendix A - Description of Securities
Ratings................................. A-1
i:\dsfndlgl\institut\0897.pea\jidivsai.wpf
<PAGE>
GENERAL
This Statement of Additional Information relates only to The JPM
Institutional Diversified Fund (the "Fund"). The Fund is a series of shares of
beneficial interest of The JPM Institutional Funds, an open-end management
investment company organized 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 financial
history, investment objective and policies, management and operation of the
Fund.
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"). The Fund's executive offices are
located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
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 DIVERSIFIED 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."
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, MORGAN 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.
INVESTMENT OBJECTIVE AND POLICIES
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 herein and in the Prospectus. Since the
investment characteristics and experiences of the Fund correspond directly with
those of the Portfolio, the discussion in this Statement of Additional
Information focuses on the investments and investment policies of the Portfolio.
Accordingly, references below to the Portfolio also include the Fund; similarly,
references to the Fund also include the Portfolio unless the context requires
otherwise.
The Fund is designed for investors who wish to invest for long term
objectives such as retirement and who seek to attain real appreciation in their
investments over the long term, but with somewhat less price fluctuation than a
portfolio consisting solely of equity securities. The Fund's investment
1
<PAGE>
objective is to provide a high total return from a diversified portfolio of
equity and fixed income securities.
The mix of equities and fixed income is based on the risk premium model and the
anticipation of changing economic trends. The risk premium is the difference
between Morgan's forecast of the long-term return on stocks (determined using
Morgan's proprietary dividend discount model) and the current nominal yield on
30-year U.S. Treasury bonds. When the risk premium is high, more assets are
allocated to stocks. When the risk premium is low, more assets are allocated to
bonds. Within U.S. equities, the allocation between large cap and small cap
stocks is based on the relative dividend discount rate spread between large and
small cap. The equity portion of the Portfolio will be invested primarily in
large and medium sized U.S. companies with market capitalizations above $1.5
billion, with the balance in small U.S. companies primarily included in the
Russell 2000 Index and in foreign issuers primarily in developed countries.
Within fixed income, the allocation among sectors is based on Morgan's analysis
of their relative valuations.
INVESTMENT PROCESS FOR THE PORTFOLIO'S EQUITY COMPONENT
With respect to the equity portion of the Portfolio, Morgan uses:
Fundamental research: Morgan's 20 domestic equity analysts, each an
industry specialist with an average of 13 years of experience, follow 600 medium
and large capitalization U.S. companies. Their research goal is to forecast
intermediate-term earnings and prospective dividend growth rates for the most
attractive companies among those researched.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns using a proprietary dividend discount model, which
calculates the intermediate-term earnings by comparing a company's current stock
price with the "fair value" price forecasted by the estimated intermediate-term
earnings power. Within each sector, companies are ranked by their expected
return and grouped into quintiles: those with the highest expected returns
(Quintile 1) are deemed the most undervalued relative to their long-term
earnings power, while those with the lowest expected returns (Quintile 5) are
deemed the most overvalued.
Disciplined portfolio construction: A broadly diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are allocated among
stocks in the first three quintiles. The stocks selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that a perceived misvaluation will be corrected within a reasonable
time frame, and the manager's estimate of the magnitude of the risks versus the
potential rewards. A stock that falls into the fourth and fifth quintiles
generally becomes a candidate for sale, either because its price has risen or
its fundamentals have deteriorated. The Portfolio's sector weightings are
matched to those of the S&P 500 Index, reflecting Morgan's belief that its
research has the potential to add value at the individual stock level, but not
at the sector level. Morgan also controls the Portfolio's exposure to style and
theme bets and maintains near-market security weightings in individual security
holdings. This process results in an investment portfolio containing 250-300
stocks.
2
<PAGE>
INVESTMENT PROCESS FOR THE PORTFOLIO'S FIXED INCOME COMPONENT
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 a range between one year shorter and one year longer than that of
the Salomon Brothers Broad Investment Grade Bond Index. The maturities of the
individual fixed income securities in the Portfolio may vary widely, however.
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.
INVESTMENT PROCESS FOR THE PORTFOLIO'S U.S. SMALL COMPANY COMPONENT
Fundamental research: Morgan's domestic equity analysts also
continuously monitor 300-500 small cap stocks with the aim of identifying
companies that exhibit superior financial strength and operating returns.
Meetings with management and on-site visits play a key role in shaping their
assessments. Because Morgan's analysts follow both the larger and smaller
companies in their industries -- in essence, covering their industries from top
to bottom -- they are able to bring broad perspective to the research they do on
both.
See "Systematic Valuation" above.
Disciplined portfolio construction: A diversified portfolio is
constructed as for the equity component, but purchases are concentrated among
the stocks in the top two quintiles of the rankings. Once a stock falls into the
third quintile, it generally becomes a candidate for sale. The portfolio manager
seeks to hold sector weightings close to those of the Russell 2000 Index. Sector
neutrality is also seen as a way to help to protect the portfolio from
3
<PAGE>
macroeconomic risks and--together with diversification--represents an important
element of Morgan's investment strategy.
INVESTMENT PROCESS FOR THE PORTFOLIO'S INTERNATIONAL EQUITY COMPONENT
Country allocation: Morgan's country allocation decision begins with a
forecast of equity risk premiums, which provide a valuation signal by measuring
the relative attractiveness of stocks versus bonds. Using a proprietary
approach, Morgan calculates this risk premium for each of the nations in the
Portfolio's universe, determines the extent of its deviation -- if any -- from
its historical norm, and then ranks countries according to the size of those
deviations. Countries with high (low) rankings are overweighted (underweighted)
in comparisons to the Morgan Stanley Capital International Europe, Australia and
Far East Index (EAFE) to reflect the above-average (below-average)
attractiveness of their stock markets. In determining weightings, Morgan
analyzes a variety of qualitative factors as well -- including the liquidity,
earnings momentum and interest rate climate of the market at hand. These
qualitative assessments can change the magnitude but not the direction of the
country allocations called for by the risk premium forecast. Morgan places
limits on the total size of the Portfolio's country over- and under-weightings
relative to the EAFE Index.
Stock selection: Morgan's 44 international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. The comparable
expected returns generated by the dividend discount model are used to rank
companies from most to least attractive by industry and country. A diversified
portfolio is constructed using disciplined buy and sell rules. The portfolio
manager's objective is to concentrate the purchases in the stocks deemed most
undervalued and to keep sector weightings close to those of the EAFE Index. Once
a stock falls into the bottom half of the rankings, it generally becomes a
candidate for sale. Where available, warrants and convertibles may be purchased
instead of common stock if they are deemed a more attractive means of investing
in an undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
return. Morgan's currency decisions are supported by a proprietary tactical
model which forecasts currency movements based on an analysis of four
fundamental factors -- trade balance trends, purchasing power parity, real
short-term interest differentials and real bond yields -- plus a technical
factor designed to improve the timing of transactions. Combining the output of
this model with a subjective assessment of economic, political and market
factors, Morgan's currency group recommends currency strategies that are
implemented in conjunction with the Portfolio's investment strategy.
FIXED INCOME INVESTMENTS
The Portfolio may invest in a broad range of debt securities of
domestic and foreign corporate and government issuers. The corporate securities
in which the Portfolio may invest include debt securities of various types and
maturities, e.g., debentures, notes, mortgage securities, equipment trust
certificates and
4
<PAGE>
other collateralized securities and zero coupon securities. 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 securities. Collateralized
securities are subject to certain risks, including a decline in the value of the
collateral backing the security, failure of the collateral to generate the
anticipated cash flow or in certain cases more rapid prepayment because of
events affecting the collateral, such as accelerated prepayment of mortgages or
other loans backing these securities or destruction of equipment subject to
equipment trust certificates. In the event of any such prepayment the Portfolio
will be required to reinvest the proceeds of prepayments 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 interest is more volatile than
that of interest bearing debt securities with the same maturity.
MONEY MARKET INSTRUMENTS
The Portfolio may invest in money market instruments and other
short-term securities 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 Portfolio appears below.
U.S. TREASURY SECURITIES. The Portfolio 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.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio 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 Portfolio must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Portfolio
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 Portfolio may also invest in short-term
obligations of foreign sovereign governments or of their agencies,
instrumentalities, authorities or political subdivisions. These securities may
5
<PAGE>
be denominated in the U.S. dollar or in another currency. See "Foreign
Investments."
BANK OBLIGATIONS. The Portfolio 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 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 Portfolio will not invest in obligations for which
the Advisor, or any of its affiliated persons, is the ultimate obligor or
accepting bank. The Portfolio 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 Portfolio 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 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 rating agencies, the
Portfolio 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 Portfolio's quality restrictions. See "Quality and
Diversification Requirements." Although there is no secondary market for master
demand obligations, such obligations are considered by the Portfolio to be
liquid because they are payable upon demand. The Portfolio 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 Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Portfolio's Trustees. In a repurchase agreement, the Portfolio
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
6
<PAGE>
purchase price, reflecting an agreed upon interest rate. This interest rate is
effective for the period of time the Portfolio 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 the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio 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
Portfolio 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 Portfolio in each agreement plus accrued
interest, and the Portfolio will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of its
custodian. If the seller defaults, the Portfolio 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 Portfolio may be delayed or
limited.
The Portfolio 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 herein.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus the Portfolio may invest in bonds and other
debt securities of domestic and foreign issuers to the extent consistent with
its investment objective and policies. See "Quality and Diversification
Requirements." For information on short-term investments in these securities,
see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. The Portfolio may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists 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.
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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.
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 Portfolio 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
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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 Portfolio'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 Portfolio'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 the Portfolio 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 securities in which the Portfolio may invest are subject to the
Portfolio'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
The Portfolio may invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources.
However, the Portfolio will invest only in municipal obligations that have been
issued on a taxable basis or have an attractive yield excluding tax
considerations.
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term unsecured
negotiable promissory notes that are sold to meet seasonal working capital or
interim construction financing needs of a municipality or agency. While these
obligations are intended to be paid from general revenues or refinanced with
long-term debt, they frequently are backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
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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 Portfolio 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 Portfolio 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 "Commercial Paper" above.
EQUITY INVESTMENTS
The Portfolio may invest in equity securities consisting of common stock
and other securities with equity characteristics comprised of preferred stock,
warrants, rights, convertible securities, trust certificates, limited
partnership interests and equity participations (collectively, " Equity
Securities"). The Equity Securities in which the Portfolio invests include those
listed on any domestic or foreign securities exchange or traded in the
over-the-counter (OTC) market as well as certain restricted or unlisted
securities.
EQUITY SECURITIES. The Equity Securities in which the Portfolio may invest
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure.
The convertible securities in which the 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 securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
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COMMON STOCK WARRANTS
The Portfolio may invest in common stock warrants that entitle the
holder to buy common stock from the issuer of the warrant at a specific price
(the strike price) for a specific period of time. The market price of warrants
may be substantially lower than the current market price of the underlying
common stock, yet warrants are subject to similar price fluctuations. As a
result, warrants may be more volatile investments than the underlying common
stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may investment in certain foreign securities. The Portfolio
does not expect to invest more than 30% of its total assets at the time of
purchase in securities of foreign issuers and in obligations of foreign branches
of domestic banks. 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.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts (" ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs include American Depositary Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
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Since investments in foreign securities may involve foreign currencies,
the value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Portfolio may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Portfolio's
currency exposure as described in the Prospectus.
The Portfolio may invest in countries with emerging economies or securities
markets. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Portfolio's, to a limited extent, investments in those
countries and the availability to the Portfolio of additional investments in
those countries. The small size and inexperience of the securities markets in
certain of such countries and the limited volume of trading in securities in
those countries may make the Portfolio's investments in such countries illiquid
and more volatile than investments in more developed countries, and the
Portfolio may be required to establish special custodial or other arrangements
before making certain investments in those countries. There may be little
financial or accounting information available with respect to issuers located in
certain of such countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio may buy and sell
securities and receive interest and dividends in currencies other than the U.S.
dollar, the Portfolio may enter from time to time into foreign currency exchange
transactions. The Portfolio either enters into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or uses forward contracts to purchase or sell foreign currencies. The
cost of the Portfolio's spot currency exchange transactions is generally the
difference 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 contracts are
derivative instruments, as their value derives from the spot exchange rates of
the currencies underlying the contract. These contracts are entered into in the
interbank market directly between currency traders (usually 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 currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
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The Portfolio may enter into forward foreign currency exchange contracts to
adjust its currency exposure relative to the EAFE Index, the benchmark for its
international equity investments. The Portfolio may also enter into forward
foreign currency exchange contracts in connection with settlements of securities
transactions and other anticipated payments or receipts. In addition, from time
to time, the Advisor may reduce the Portfolio's foreign currency exposure by
entering into forward foreign currency exchange contracts to sell a foreign
currency in exchange for the U.S. dollar. Forward foreign currency exchange
contracts may involve the purchase or sale of a foreign currency in exchange for
U.S. dollars or may involve two foreign currencies.
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 vis a vis 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.
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 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 , the Portfolio will maintain with its 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
Portfolio's total assets less liabilities other than the obligations created by
these commitments.
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INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the Investment
Company Act of 1940, as amended (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 Portfolio'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 Portfolio. As a shareholder of another
investment company, the 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 Portfolio bears directly in connection with its own operations. The
Portfolio has 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
investment companies, subject to certain conditions specified in the applicable
order.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the 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 its 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 the Portfolio's limitations on reverse repurchase
agreements and bank borrowings.
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 its
custodian. Mortgage dollar roll transactions are considered reverse repurchase
agreements for purposes of the Portfolio's investment restrictions.
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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
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 the Portfolio not will make any loans in excess of one year.
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.
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 illiquid
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 similar 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 investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
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 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,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
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SYNTHETIC INSTRUMENTS. The Portfolio may invest in certain synthetic
variable rate instruments. Such instruments generally involve the deposit of
asset-backed securities in a trust arrangement and the issuance of certificates
evidencing interests in the trust. The certificates are generally sold in
private placements in reliance on Rule 144A.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of the Portfolio is
subject to the following fundamental limitations: (1) the Portfolio 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 Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio'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. Investments not subject to the limitations
described above could involve an increased risk to the Portfolio 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.
BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased by the
Portfolio, such as those rated Ba or B by Moody's Investors Service, Inc.
("Moody's") or BB or B by Standard & Poor's Ratings Group (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 principal and
interest and to greater market fluctuations. While generally providing higher
coupons or interest rates than investments in higher quality securities, 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 corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Portfolio invests in such lower quality securities, 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 securities, 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 securities for purposes of determining the Fund's net asset value. See
Appendix A for more detailed information on these ratings.
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The Portfolio may invest in convertible debt securities, for which
there are no specific quality requirements. The fixed income portion of the
Portfolio invests in a diversified portfolio of securities with the 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 Portfolio invests in any commercial paper, bank
obligation or repurchase agreement, the issuer must have outstanding debt rated
A or higher by Moody's or Standard & Poor's, the issuer's parent corporation, if
any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by
Standard & Poor's, or if no such ratings are available, the investment must be
of comparable quality in the Advisor's opinion. At the time the Portfolio
invests in any other short-term debt securities, they must be rated A or higher
by Moody's or Standard & Poor's, or if unrated, the investment must be of
comparable quality in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income or equity securities and indexes of
fixed income or equity securities, (b) futures contracts on fixed income
securities and indexes of fixed income or equity securities and (c) put and call
options on futures contracts on fixed income securities and indexes of fixed
income or equity securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
The Portfolio may use futures contracts and options for hedging and risk
management purposes. See "Risk Management" below. 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,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. 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 options 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
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Portfolio may reduce certain risks associated with owning its portfolio
securities, 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 correlated
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
connection 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
securities 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
Portfolio's total assets. In addition, the Portfolio will not purchase or sell
(write) futures contracts, options on futures contracts or commodity options for
risk management purposes if, as a result, the aggregate initial margin and
options premiums required to establish these positions exceed 5% of the net
asset value of the Portfolio.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Portfolio
obtains 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
allowing 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
liquid 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
security, 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.
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
instrument underlying the option does not fall enough to offset the cost of
purchasing 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
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than sell, the instrument underlying the option at the option's strike price. A
call buyer typically attempts to participate in potential price increases 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.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put option,
it takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Portfolio assumes the obligation to pay
the strike price for the instrument underlying the option if the other party to
the option chooses to exercise it. The Portfolio may seek to terminate its
position in a put option it writes before exercise by purchasing an offsetting
option in the market at its current price. If the market is not liquid for a put
option the Portfolio has written, however, the Portfolio must continue to be
prepared to pay the strike price while the option is outstanding, regardless of
price changes, and must continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would generally
expect to profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would expect to
suffer a loss. This loss should be less than the loss from purchasing and
holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an index of
securities or a futures contract is required to deposit cash or securities or a
letter of credit as margin and to make mark to market payments of variation
margin as the position becomes unprofitable.
OPTIONS ON INDEXES. Options on securities indexes are similar to options on
securities, except that the exercise of securities index options is settled by
cash payment and does not involve 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 or selling 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.
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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.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the Portfolio
will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Portfolio's 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.
Provided that the Portfolio has arrangements with certain qualified
dealers who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula, the Portfolio may
treat the underlying securities used to cover written OTC options as liquid. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase
or sell (write) futures contracts and purchase put and call options, including
put and call options on futures contracts. In addition, the Portfolio may sell
(write) put and call options, including options on futures. Futures contracts
obligate the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
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initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the FCM, as required by the 1940 Act and the SEC's
interpretations thereunder.
COMBINED POSITIONS. The Portfolio is permitted to purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match 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
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 options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in 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
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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 the 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.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques. Examples
of risk management strategies include synthetically altering the duration of the
fixed income portion of portfolio or the mix of securities in the Portfolio. For
example, if the Advisor wishes to extend maturities in the fixed income portion
of the portfolio in order to take advantage of an anticipated decline in
interest rates, but does not wish to purchase the underlying long term
securities, it might cause the Portfolio to purchase futures contracts on long
term debt securities. Similarly, if the Advisor wishes to decrease fixed income
securities or purchase equities, it could cause the Portfolio to sell futures
contracts on debt securities and purchase futures contracts on a stock index.
Such non-hedging risk management techniques are not speculative, but because
they involve leverage include, as do all leveraged transactions, the possibility
of losses as well as gains that are greater than if these techniques involved
the purchase and sale of the securities themselves rather than their synthetic
derivatives.
PORTFOLIO TURNOVER
The Portfolio's turnover rates for the fiscal years ended June 30, 1996 and 1997
were 144% and ___%, respectively. A rate of 100% indicates that the equivalent
of all of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are
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realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. See "Taxes" below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by each of the Fund
and 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 and
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, the Trust will hold a meeting of Fund
shareholders and will cast its votes as instructed by the Fund's shareholders.
The Fund has the same investment restrictions as the Portfolio, except
it is a fundamental policy that the Fund may invest all or part of its
investable assets in another open-end investment company with the same
investment objective and restrictions (such as the Portfolio). References below
to the Portfolio's investment restrictions also include the Fund's investment
restrictions.
The Portfolio may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;1
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such purchase, the
Portfolio owns more than 10% of the outstanding voting securities of such
issuer. This limitation shall not apply to permitted investments of up to 25% of
the Portfolio's total assets;
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1 For purposes of this limitation, the staff of the SEC considers (a) all
supranational organizations as a group to be a single industry and (b) each
foreign government and its political subdivisions to be a single industry.
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4. Borrow money (not including reverse repurchase agreements), except from banks
for temporary or extraordinary or emergency purposes and then only in amounts up
to 30% of the value of the Portfolio's total assets, taken at cost at the time
of such borrowing (and provided that such borrowings and reverse repurchase
agreements do not exceed in the aggregate one-third of the market value of the
Portfolio's and the Portfolio's total assets less liabilities other than the
obligations represented by the bank borrowings and reverse repurchase
agreements). The Portfolio will not mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not to exceed 30% of
the value of the Portfolio's net assets at the time of such borrowing. The
Portfolio will not purchase securities while borrowings exceed 5% of the
Portfolio's total assets. This borrowing provision is included to facilitate the
orderly sale of portfolio securities, for example, in the event of abnormally
heavy redemption requests, and is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with the Portfolio's
use of futures contracts and options are not deemed to be a pledge of assets;
5. Issue any senior security, except as appropriate to evidence indebtedness
which constitutes a senior security and which the Portfolio is permitted to
incur pursuant to Investment Restriction No. 4 and except that the Portfolio 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 Portfolio's total assets, less liabilities other than
obligations created by reverse repurchase agreements. The Portfolio's
arrangements in connection with its use of futures contracts and options shall
not be considered senior securities for purposes hereof;
6. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies (see "Investment Objective and Policies");
7. Purchase or sell commodities or commodity contracts, but this restriction
shall not prohibit the Portfolio from purchasing or selling futures contracts or
options (including options on futures contracts, but excluding options or
futures contracts on physical commodities) or entering into foreign currency
forward contracts; or purchase or sell real estate or interests in oil, gas, or
mineral exploration or development programs. However, the Portfolio may purchase
securities or commercial paper issued by companies which invest in real estate
or interests therein, including real estate investment trusts, and purchase
instruments secured by real estate or interests therein;
8. Purchase securities on margin, make short sales of securities, or maintain a
short position in securities, except to obtain such short term credit as
necessary for the clearance of purchases and sales of securities, provided that
this restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities or to restrict the
Portfolio's use of futures contracts or options;
9. Acquire securities of other investment companies, except as permitted by the
1940 Act or in connection with a merger, consolidation, reorganization,
acquisition of assets or an offer of exchange; or
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10. Act as an underwriter of securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - The investment restriction
described below is not a fundamental policy of the Fund and the Portfolio and
may be changed by their respective Trustees. This non-fundamental investment
policy requires that the Portfolio may not:
(i) acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Portfolio'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 (the "SEC") 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.
MATTHEW HEALEY (*)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1992. His address is Pine Tree
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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.
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(*) Mr. Healey is an "interested person" as that term is defined
in the 1940 Act of the Trust, the Portfolio and the
Advisor.
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 and the Portfolio, 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 Portfolio
(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.
Trustee compensation expenses accrued by the Trust for the calendar
year ended December 31, 1996 are set forth below.
TOTAL TRUSTEE
COMPENSATION ACCRUED
AGGREGATE TRUSTEE BY THE MASTER
COMPENSATION PORTFOLIOS (*),
ACCRUED BY THE JPM PIERPONT FUNDS,
TRUST DURING JPM SERIES TRUST AND
1996 THE TRUST
DURING 1996 (***)
NAME OF TRUSTEE
Frederick S. Addy, Trustee $12,593 $65,000
$12,593 $65,000
William G. Burns, Trustee
Arthur C. Eschenlauer, $12,593 $65,000
Trustee
Matthew Healey, Trustee (**) $12,593 $65,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $12,593
$65,000
(*) Includes the Portfolio and 21 other portfolios in which the
Trust and The JPM Pierpont Funds invest (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
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$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 Trust, The JPM Pierpont Funds
and JPM Series Trust) in the fund complex.
The Trustees, in addition to reviewing actions of the Trust's and the
Portfolio's various service providers, decide upon matters of general policy.
Each of the Portfolio and the Trust has 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 principal offices of
Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, New York 10017.
The aggregate fees paid to Pierpont Group, Inc. by the Fund and the
Portfolio during the indicated fiscal years are set forth below:
FUND -- For the fiscal years ended June 30, 1995, 1996, and 1997: $10,267,
$11,024, and $______, respectively.
PORTFOLIO
- -- For the fiscal years ended June 30, 1995, 1996, and 1997: $11,702, $13,109,
and $_______, respectively.
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" or the "Distributor" ), 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.
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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
Portfolio only. 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.
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.
MARK A. KARPE; Vice President and Assistant Secretary. Counsel of FDI and
an officer of certain investment companies advised or administered by The
Dreyfus Corporation or its affiliates since September 1996. From August 1993 to
May 1996, Mr. Karpe was enrolled at Hofstra Law School and received his JD in
May 1996. From August 1992 to July 1993, Mr. Karpe was employed as an Associate
Examiner with the Enforcement Department of the National Association of
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Securities Dealers, Inc. Prior to September 1992, Mr. Karpe was an Associate
Analyst with the Enforcement Department of the American Stock Exchange. His date
of birth is November 22, 1968.
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
Portfolio only. 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.
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.
JOHN E. PELLETIER; Vice President and Secretary. Senior Vice President,
General Counsel, Secretary and Clerk 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. From February 1992 to April
1994, Mr. Pelletier served as Counsel for TBCA. From August 1990 to February
1992, Mr. Pelletier was employed as an Associate at Ropes & Gray. His date of
birth is June 24, 1964.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
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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 Fund has not retained the services of an investment adviser because
the Fund seeks to achieve its investment objective by investing all of its
investable assets in 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. 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 $208 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of 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
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300 capital market researchers, portfolio managers and traders. The conclusions
of the equity analysts' fundamental research is quantified into a set of
projected returns for individual companies through the use of a dividend
discount model. These returns are projected for 2 to 5 years to enable analysts
to take a longer term view. These returns, or normalized earnings, are used to
establish relative values among stocks in each industrial sector. These values
may not be the same as the markets' current valuations of these companies. This
provides the basis for ranking the attractiveness of the companies in an
industry according to five distinct quintiles or rankings. This ranking is one
of the factors considered in determining the stocks purchased and sold in each
sector. The Advisor's fixed income investment process is based on analysis of
real rates, sector diversification and quantitative and credit analysis.
The investment advisory services the Advisor provides to the 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 objective 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 Portfolio' s benchmark is comprised of 52% S&P
500, 35% Salomon Brothers Broad Investment Grade Bond, 3% Russell 2000 and 10%
EAFE
indexes.
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
Agreement, the Portfolio has agreed to pay the Advisor a fee, which is computed
daily and
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may be paid monthly, equal to the annual rate of 0.55% of the Portfolio's
average daily net assets.
For the fiscal years ended June 30, 1995, 1996, and 1997 the advisory
fees paid by the Portfolio to the Advisor were $663,000, $1,122,941, and
$________, respectively.
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.
DISTRIBUTOR
Fund's Distributor, Inc. ("FDI"), a registered broker dealer, serves as the
Trust's exclusive Distributor and holds itself available to receive purchase
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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. FDI is a wholly owned indirect subsidiary of Boston Institutional
Group, Inc. FDI also serves as exclusive placement agent for the Portfolio. FDI
currently provides administration and distribution services for a number of
other investment companies.
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.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust and the
Portfolio; (ii) provides officers for the Trust and the Portfolio; (iii)
prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v) files
Portfolio regulatory documents and mails Portfolio communications 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
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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, the Portfolio, the other
Master Portfolio and certain other investment companies subject to similar
agreements with FDI.
The table below sets forth the administrative fees paid to FDI for the
fiscal period indicated. See "Expenses" below for applicable expense
limitations.
PORTFOLIO -- For the period August 1, 1996 through June 30,
1997: $___________.
FUND -- For the period August 1, 1996 through June 30, 1997:
$-----------.
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,
1997) were as follows:
PORTFOLIO -- For the fiscal years ended June 30, 1995, 1996, and 1997: $7,770,
$19,517, and $______, respectively.
FUND -- For the fiscal years ended June 30, 1995, 1996, and 1997: $28,135,
$31,954, and $______, respectively.
See "Expenses" below for applicable expense limitations.
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 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 Services Agreements, Morgan provides certain administrative
and related services to the Fund and the Portfolio, including services related
to tax compliance, financial statements, calculation of performance data,
oversight of service providers and certain regulatory and Board of Trustee
matters.
Under the amended Services Agreements, each of the Fund and Portfolio 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
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 excess of $7 billion, less the
complex-wide fees payable to FDI. The portion of this charge payable by the Fund
or the Portfolio is determined by the proportionate share that its net assets
bear to the total net assets of the Trust, the Master Portfolios, other
investors in the Master Portfolios for which Morgan provides similar services
and JPM Series Trust.
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Under Administrative Services Agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, each of the Fund and 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 Master
Portfolios in accordance with the following schedule: 0.06% of the first $7
billion of the Master Portfolio's aggregate average daily net assets, and 0.03%
of the Master Portfolios' 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 the fees paid to Morgan, net of fee waivers and reimbursements,
as Services Agent. See "Expenses" below for applicable expense limitations.
PORTFOLIO -- For the fiscal years ended June 30, 1995, 1996, and 1997: $63,153,
$45,687, and $______, respectively.
FUND -- For the fiscal years ended June 30, 1995, 1996, and 1997: $(96,795)*.,
$12,610, and $_______, respectively.
- ------------------------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees under
the prior financial and fund accounting services agreements. No fees were paid
for the fiscal period.
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 transfer agent and Fund's dividend disbursing
agent. Pursuant to the Custodian Contracts, State Street is responsible for
maintaining the books of account and records of portfolio transactions and
holding portfolio securities and cash. 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
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maintenance of shareholder accounts and records with the transfer agent;
transmitting purchase and redemption orders to the 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 a fee for these services at the annual rate of 0.10% of the average daily
net asset value 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.
The shareholder servicing fees paid by the Fund to Morgan, net of fee
waivers and reimbursements, were $53,030, $127,086, and $________ for the fiscal
years ended June 30, 1995, 1996, and 1997, respectively.
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 Agreements and in acting as Advisor to the Portfolio under the
Investment Advisory Agreement, may raise issues under these laws. However,
Morgan believes that it may properly perform these services and the other
activities described herein 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 Agreements, 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.
The Fund may be sold to or through financial intermediaries who are
customers of Morgan ("Eligible Institutions"), including financial institutions
and broker-dealers, that may be paid fees by Morgan or its affiliates for
services provided to their clients that invest in the Fund. See Eligible
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.
ELIGIBLE INSTITUTIONS
The services provided by Eligible Institutions may include 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, providing periodic
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statements showing the client's account balance and integrating these statements
with those of other transactions and balances in the client'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, tabulating 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
Institutions may establish their own terms and conditions for providing their
services and may charge investors a transaction-based or other fee for their
services. 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
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 each 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," "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 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 and 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
registration fees under foreign securities laws, custodian fees and brokerage
expenses. Under fee arrangements prior to September 1, 1995, Morgan as Services
Agent was responsible for reimbursements to the Trust and the Portfolio and the
usual and customary expenses described above (excluding organization and
extraordinary expenses, custodian fees and brokerage expenses).
Morgan has agreed that it will reimburse the Fund through at least
October 31, 1998 to the extent necessary to maintain the Fund's total operating
expenses (which include expenses of the Fund and the Portfolio) at the annual
rate of 0.65% of the Fund's average daily net assets. This limit does not cover
extraordinary expenses during the period. There is no assurance that Morgan will
continue this waiver beyond the specified period.
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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 Morgan
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 Distributor.
Prospective investors who are not already customers of Morgan may apply to
become customers of Morgan for the sole purpose of Fund 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.
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 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. In addition, securities accepted in payment for shares must: (i)
meet the investment objective and policies of the Portfolio; (ii) be acquired by
the applicable Portfolio for investment and not for resale; (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 establish their own
minimums and charge the investor a fee for their services it provides to its
customers.
REDEMPTION OF SHARES
If the Trust on behalf of the Fund determines 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, has
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elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Fund is 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 Portfolio has made a similar election. 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. 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
shareholder's taxpayer identification number and address. The Trust, on behalf
of the Fund, reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: (i) for up to seven
days, (ii) during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into any other JPM Institutional
Fund, JPM Pierpont Fund or shares of JPM Series Trust without charge. An
exchange 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 accounts
that are registered in the same name, address and taxpayer identification
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 another fund
and the usual purchase and redemption procedures and requirements are applicable
to exchanges. 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. See Purchase of Shares and Redemption of Shares in
the Prospectus and in the prospectuses for the other JPM Institutional Funds,
The JPM Pierpont Funds and JPM Series Trust. Shares of the fund to be acquired
are purchased for settlement when the proceeds from redemption become available.
The Fund reserves the right to discontinue, alter or limit its exchange
privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Dividends consisting of substantially all the Fund's net investment income, if
any, are declared and paid quarterly. The Fund may also declare an additional
dividend of net investment income in a given year to the extent necessary to
avoid the imposition of federal excise tax on the Fund .
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Substantially all the realized net capital gains, if any, 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. Declared dividends and
distributions are payable to shareholders of record on the record date.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his Eligible
Institution or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserves the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
Determination of the net income for the Fund is made at the time
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
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 remainder by the number of its
outstanding shares, rounded to the nearest cent. Expenses, including the fees
payable to Morgan, are accrued daily.
The days on which net asset value is determined are the Fund's business
days. 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, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas. The
Fund 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 following is a discussion of the procedures used by the Portfolio in
valuing its assets.
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
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
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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.
In the case Equity Securities, the value of investments listed on a
domestic securities exchange, other than options on stock indexes, is based on
the last sale prices on such exchange at 4:00 P.M. or, in the absence of
recorded sales, at the average of readily available closing bid and asked prices
on such exchange. Securities listed on a foreign exchange are valued at the last
quoted sale price available before the time when net assets are valued. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
OTC market. The value of each security for which readily available market
quotations exist is based on a decision as to the broadest and most
representative market for such security. For purposes of calculating net asset
value all assets and liabilities initially expressed in foreign currencies will
be converted into U.S. dollars at the prevailing market rates available at the
time of valuation.
Options on stock indexes traded on national securities exchanges are valued at
the close of options trading on such exchanges which is currently 4:10 P.M., New
York time. Stock index futures and related options, which are traded on
commodities exchanges, are valued at their last sales price as of the close of
such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
(including certain restricted and illiquid securities) are valued at fair value
in accordance with procedures established by and under the general supervision
and responsibility of the Trustees. Such procedures include the use of
independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions.
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. Shareholders may obtain current
performance information by calling Morgan at (800) 766-7722.
The Fund may make historical performance information available and may
compare its performance to other investments or relevant indexes, including data
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from Lipper Analytical Services, Inc., Micropal Inc., Morningstar Inc., Ibbotson
Associates, Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Frank Russell Index and other industry publications.
TOTAL RETURN QUOTATIONS. 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 operations, if less) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. This method of calculating
total return is required by regulations of the SEC. Total return data similarly
calculated, unless otherwise indicated, over other specified periods of time may
also be used. All performance figures are based on historical earnings and are
not intended to indicate future performance.
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.
Below is set forth historical return information for the Fund for the
period indicated.
(6/30/97): Average annual total return, 1 year: 20.72%; average annual total
return, 5 years: N/A; average annual total return, commencement of operations(*)
to period end: 14.02%; aggregate total return, 1 year: 20.72%; aggregate total
return, 5 years: N/A; aggregate total return, commencement of operations(*) to
period end: 64.70%.
- --------------------
* The Fund commenced public investment operations on September 10, 1993.
GENERAL. The Fund's performance will vary from time to time depending upon
market conditions 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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From time to time, the Fund may quote performance in terms of actual
distributions, total return, or capital appreciation in reports, sales
literature, and advertisements published by the Fund.
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 all the Portfolio. See "Investment Objective 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's fixed income investments 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 objective. See "Investment
Objective and Policies -- Portfolio Turnover."
In connection with fixed income 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.
In connection with transactions in Equity Securities for the Portfolio, the
overriding objective is to obtain the best possible execution of purchase and
sale orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best possible
execution. The Advisor monitors the reasonableness of the brokerage commissions
paid in light of the execution received. The Trustees of the Portfolio review
regularly the reasonableness of commissions and other transaction costs incurred
by the Portfolio in light of facts and circumstances deemed relevant from time
to time, and, in that connection, will receive reports from the Advisor and
published data concerning transaction costs incurred by institutional investors
generally. Research services provided by brokers to which the Advisor has
allocated brokerage business in the past include economic statistics and
forecasting services, industry and company analyses, portfolio strategy
services, quantitative data, and consulting services from economists and
political analysts. Research services furnished by brokers are used for the
benefit of all the Advisor's
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clients and not solely or necessarily for the benefit of the Portfolio. The
Advisor believes that the value of research services received is not
determinable and does not significantly reduce its expenses. The Portfolio does
not reduce its fee to the Advisor by any amount that might be attributable to
the value of such services.
The Portfolio paid the following approximate brokerage commissions for the
fiscal years ended June 30, 1997: $_______; 1996: $220,206; and 1995: $145,589.
The increases in brokerage commissions reflected above were due to
increased portfolio activity and an increase in net investments by investors in
the Portfolio.
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 Distributor or the Advisor or any other "affiliated person" (as
defined in the 1940 Act) of the 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
including other Master Portfolios, the Advisor to the extent permitted by
applicable laws and regulations, may, but 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.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
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the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which 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.
The Trust was organized on November 4, 1992. 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, 22 series of shares have been
authorized and are available for sale to the public. No series of shares has any
preference over any other series of shares.
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Portfolio and that every
written agreement, obligation, instrument or undertaking made on behalf of any
Portfolio 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
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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.
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.
Shareholders of the Fund are entitled to one vote for each share and to
the appropriate 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 action by shareholder vote as may be required by either the
1940 Act or the Declaration 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 percent of Trust shares and will assist shareholders in
communicating with each other as prescribed in Section 16(c) of the 1940 Act.
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 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 neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the Portfolio.
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 a series (or in the assets of other series, if applicable).
To date shares of 22 series have been authorized and are available for sale to
the public. Each share represents an equal proportional interest in the Fund
with each other share. Upon liquidation of the Fund, holders are entitled to
share pro rata in the net assets of the Fund available for distribution to such
shareholders. Shares of the Fund have no preemptive or conversion rights and are
fully paid and nonassessable. The rights of redemption and exchange are
described in the Prospectus or elsewhere in this Statement of Additional
Information.
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The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, PROVIDED, HOWEVER, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply
to the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
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.
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The Trustees may, but have no current intention to, create any classes
within the Fund. The Trustees may 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 Portfolio shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares."
As of July 22, 1997, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of the
Fund:
Celtic Insurance Company Ltd. (12.53%), Boston Foundation
Inc. (11.38%), Morgan as Agent for Unifi Inc. Profit
Sharing Plan Trust JPM Institutional Dividend Fund
NationsBank Master Trust (10.43%), Westinghouse Personal
Investment Plan Bankers Trust Co. as Trustee (7.59%), BG
Sulzle Inc. Employee Pension Chase Manhattan Bank NA
(5.73), Retirement Plan for Employees of Association
American Arbitration Pension Committee (5.74%), T.J.
Martell Foundation (5.22%).
The address of each owner listed above is c/o Morgan, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information, the officers and Trustees as a group owned less than 1% of the
shares of the Fund.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio 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.
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
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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
investment 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
restrictions, or a failure by the Fund's shareholders to approve a change in the
Portfolio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution 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 actions 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.
Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional 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 operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), 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 instructions 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.
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 subject to change by legislative or administrative action.
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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 Fund as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. The Fund expects that a portion of these
distributions to corporate shareholders will be eligible for the
dividends-received deduction, subject to applicable limitations under the Code.
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 capital gain, regardless of whether such distributions are taken in
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cash or reinvested in additional shares and regardless of how long a shareholder
has held shares in the Fund. 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.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting 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
capital gain or loss if the shares have been held for more than one year, and
otherwise 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 distributions received by the shareholder with respect to
such shares.
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
52
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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
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.
The Portfolio may invest in Equity Securities of foreign issuers. If
the Portfolio purchases shares in certain foreign corporations (referred to as
passive foreign investment companies ("PFICs") under the Code), the Portfolio
may be subject to federal income tax on a portion of an "excess distribution"
from such foreign corporation or gain from the disposition of such shares, even
though a portion of such income may have to be distributed as a taxable dividend
by the Portfolio to its shareholders. In addition, certain interest charges may
be imposed on the Fund or its shareholders in respect of deemed unpaid taxes
arising from such distributions or gains. Alternatively, the Fund may in some
cases be permitted to include each year in its income and distribute to
shareholders a pro rata portion of the PFIC's income, whether or not distributed
to the Fund.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Fund would be entitled to elect to mark to market their
stock in certain PFICs. Marking to market in this context means recognizing as
gain for each taxable year the excess, as of the end of that year, of the fair
market value of each PFIC's stock over the owner's adjusted basis in that stock
(including mark to market gains of a prior year for which an election was in
effect).
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term 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
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individual, the shareholder was present in the United States for more than 182
days during the taxable year and certain other conditions are met.
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.
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.
FOREIGN TAXES. It is expected that the Fund may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries. So long as more than 50% in value of the total assets of the Fund at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect to treat any foreign income taxes deemed paid
by it as paid directly by its shareholders. The Fund will make such an election
only if it deems it to be in the best interest of Fund shareholders. The Fund
will notify its shareholders in writing each year if it makes the election and
of the amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If the Fund makes the election, each shareholder will be required
to include in his income (in addition to the dividends and distributions he
receives) his proportionate share of the amount of foreign income taxes deemed
paid by the Fund and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if he itemizes deductions, a deduction for his
share of the foreign income taxes in computing federal income tax liability. (No
deduction will be permitted in computing an individual's alternative minimum tax
liability.) A shareholder who is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the election described in this paragraph, but may not be able to claim a credit
or deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. A tax-exempt shareholder will not ordinarily benefit
from this election. Shareholders who choose to utilize a credit (rather than a
deduction) for foreign taxes will be subject to the limitation that the credit
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
paid by the Fund from its foreign source net investment income will be treated
as foreign source income. The Fund's gains and losses from the sale of
securities will generally be treated as derived from U.S. sources, however, and
certain foreign currency gains and losses likewise will be treated as derived
from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source "passive income," such as the portion of dividends
received from the Fund which qualifies as foreign source income. In addition,
the foreign tax credit is allowed to offset only 90% of the alternative minimum
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tax imposed on corporations and individuals. Because of these limitations, if
the election is made, shareholders may nevertheless be unable to claim a credit
for the full amount of their proportionate shares of the foreign income taxes
paid by the Portfolio.
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, the term "majority
of the outstanding voting securities" means the vote of (i) 67% or more of the
Fund's shares or the Portfolio's outstanding voting securities present at a
meeting, if the holders of more than 50% of the Fund's outstanding shares 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 Portfolio's
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
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Trust, the Portfolio 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.
FINANCIAL STATEMENTS
The financial statements and the reports thereon of Price Waterhouse
LLP are incorporated herein by reference from the Fund's June 30, 1997 annual
report filing made with the SEC pursuant to Section 30(b) of the 1940 Act and
Rule 30b2-1 thereunder (Accession No. _______________). The Fund's financial
reports include the Portfolio's financial statements. The annual and subsequent
semi-annual reports are available without charge upon request by calling J.P.
Morgan Funds Services at (800) 766-7722.
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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.
A-1
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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
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
A-2
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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.
A-3
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PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The following financial statements are included in Part A:
Financial Highlights: (to be completed)
The following financial statements are incorporated by reference into Part B:
[The JPM Institutional Diversified Fund
Statement of Assets and Liabilities at June 30, 1997
Statement of Operations for the Fiscal Year Ended June 30, 1997
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements June 30, 1997]
[The Diversified Portfolio
Schedule of Investments at June 30, 1997
Statement of Assets and Liabilities at June 30, 1997
Statement of Operations for the Fiscal Year Ended June 30, 1997
Statement of Changes in Net Assets
Supplementary Data
Notes to Financial Statements June 30, 1997]
(b) Exhibits
Exhibit Number
1. Declaration of Trust, as amended, was filed as Exhibit No. 1 to
Post-Effective Amendment No. 25 to the Registration Statement filed on
September 26, 1996 (Accession Number 0000912057-96-021281).
1(a). Amendment No. 5 to Declaration of Trust; Fifth Amended and Restated
Establishment and Designation of Series of Shares of Beneficial
Interest.*
1(b). Amendment No. 6 to Declaration of Trust; Sixth Amended and Restated
Establishment and Designation of Series of Shares of Beneficial Interest
filed as Exhibit No. 1(b) to Post-Effective Amendment No. 31 to the
Registration Statement on February 28, 1997 (Accession Number
0001016964-97-000041).
1(c). Amendment No. 7 to Declaration of Trust; Seventh Amended and Restated
Establishment and Designation of Series of Shares of Beneficial Interest
filed as Exhibit No. 1 to Post-Effective Amendment No. 1 to the
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Registration Statement on April 15, 1997 (Accession Number 0001016964-
97-000053).
2. Restated By-Laws of Registrant.*
4. Form of Share Certificate.*
6. Distribution Agreement between Registrant and Funds Distributor, Inc.
("FDI").*
8. Custodian Contract between Registrant and State Street Bank and Trust
Company ("State Street").*
9(a). Co-Administration Agreement between Registrant and FDI.*
9(b). Restated Shareholder Servicing Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan Guaranty").**
9(c). Transfer Agency and Service Agreement between Registrant and State
Street.*
9(d). Restated Administrative Services Agreement between Registrant and Morgan
Guaranty.*
9(e). Fund Services Agreement, as amended, between Registrant and Pierpont
Group, Inc.*
9(f). Service Plan with respect to Registrant's Service Money Market Funds.**
10. Opinion and consent of Sullivan & Cromwell.*
11. Consents of independent accountants. (to be filed by amendment)
13. Purchase agreements with respect to Registrant's initial shares.*
16. Schedule for computation of performance quotations.*
17. Financial Data Schedules. (to be filed by amendment)
18. Powers of Attorney. (filed here with)
- -------------------------
* Incorporated herein by reference to Post-Effective No. 29 to the
Registration Statement filed on December 26, 1996 (Accession Number
0001016964-96-000061).
** Incorporated herein by reference to Post-Effective No. 33 to the
Registration Statement filed on April 30, 1997 (Accession Number 00001016964-
97-000059).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
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Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Shares of Beneficial Interest ($0.001 par value).
Title of Class: Number of Record Holders as of June 30, 1997.
The JPM Institutional Prime Money Market Fund: 167
The JPM Institutional Federal Money Market Fund: 15
The JPM Institutional Bond Fund: 151
The JPM Institutional Diversified Fund: 42
The JPM Institutional U.S. Small Company Fund: 473
The JPM Institutional International Equity Fund: 401
The JPM Institutional Emerging Markets Equity Fund: 475
The JPM Institutional International Bond Fund: 7
The JPM Institutional Short Term Bond Fund: 26
The JPM Institutional U.S. Equity Fund: 133
The JPM Institutional Tax Exempt Money Market Fund: 67
The JPM Institutional Tax Exempt Bond Fund: 167
The JPM Institutional New York Total Return Bond Fund: 73
The JPM Institutional European Equity Fund: 7
The JPM Institutional Japan Equity Fund: 9
The JPM Institutional Asia Growth Fund: 6
The JPM Institutional Disciplined Equity Fund: 55
The JPM Institutional International Opportunities Fund: 105
The JPM Institutional Global Strategic Income Fund: 31
The JPM Institutional Treasury Money Market Fund: 0
The JPM Institutional Service Money Market Fund: 1
The JPM Institutional Service Prime Money Market Fund: 1
The JPM Institutional Service Federal Money Market Fund: 1
The JPM Institutional Service Tax Exempt Money Market Fund: 1
ITEM 27. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.
Registrant, its Trustees and officers are insured against certain expenses in
connection with the defense of claims, demands, actions, suits, or proceedings,
and certain liabilities that might be imposed as a result of such actions, suits
or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, trustee, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful
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defense of any action, suite or proceeding) is asserted against the Registrant
by such director, trustee, officer or controlling person or principal
underwriter in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not Applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) FDI, located at 60 State Street, Suite 1300, Boston, Massachusetts 02109, is
the principal underwriter of the Registrant's shares.
FDI acts as principal underwriter of the following investment companies other
than the Registrant:
BJB Investment Funds
Burridge Funds
Foreign Fund, Inc.
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
H.T. Insight Funds, Inc. d/b/a
Harris Insight Funds
LKCM Fund
Monetta Fund, Inc.
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds, Inc.
The Munder Funds Trust
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
The Skyline Funds
St. Clair Money Market Fund
Waterhouse Investors Cash Management Funds, Inc.
The JPM Pierpont Funds
JPM Series Trust
JPM Series Trust II
FDI is registered with the Securities and Exchange Commission as a broker-dealer
and is a member of the National Association of Securities Dealers. FDI is an
indirect wholly-owned subsidiary of Boston Institutional Group, Inc., a holding
company all of whose outstanding shares are owned by key employees.
(b) The information required by this Item 29(b) with respect to each director,
officer and partner of FDI is incorporated herein by reference to Schedule A
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of Form BD filed by FDI with the Securities and Exchange Commission pursuant to
the Securities Act of 1934 (SEC File No. 8-20518).
(C) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
PIERPONT GROUP, INC.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
MORGAN GUARANTY TRUST COMPANY OF NEW YORK: 60 Wall Street, New York, New York
10260-0060, 522 Fifth Avenue, New York, New York 10036 or 9 West 57th Street,
New York, New York 10019 (records relating to its functions as shareholder
servicing agent, and administrative services agent).
STATE STREET BANK AND TRUST COMPANY: 1776 Heritage Drive, North Quincy,
Massachusetts 02171 and 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as fund accountant, custodian, transfer agent
and dividend disbursing agent).
FUNDS DISTRIBUTOR, INC.: 60 State Street, Boston, Massachusetts 02109
(records relating to its functions as distributor and co-administrator).
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant shall furnish
each person to whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon request and
without charge.
(b) The Registrant undertakes to comply with Section 16(C) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the
Registrant, except that the request referred to in the third full
paragraph thereof may only be made by shareholders who hold in the
aggregate at least 10% of the outstanding shares of the Registrant,
regardless of the net asset value of shares held by such requesting
shareholders.
(C) The Registrant undertakes to file a Post-Effective Amendment on behalf
of The JPM Institutional Treasury Money Market Fund, The JPM
Institutional Service Treasury Money Market Fund, The JPM Institutional
Service Federal Money Market Fund, The JPM Institutional Service Prime
Money Market Fund and The JPM Institutional Service Tax Exempt Money
Market Fund using financial statements which need not be certified,
within four to six months from the commencement of public investment
operations of such funds.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston and Commonwealth of Massachusetts on the 1st day of August, 1997.
THE JPM INSTITUTIONAL FUNDS
By /s/ Richard W. Ingram
-----------------------
Richard W. Ingram
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated on August 1, 1997.
/s/ Richard W. Ingram
- ------------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer)
Matthew Healey*
- -----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer)
Frederick S. Addy*
- ------------------------------
Frederick S. Addy
Trustee
William G. Burns*
- ------------------------------
William G. Burns
Trustee
Arthur C. Eschenlauer*
- ------------------------------
Arthur C. Eschenlauer
Trustee
Michael P. Mallardi*
- ------------------------------
Michael P. Mallardi
Trustee
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*By /s/ Richard W. Ingram
----------------------------
Richard W. Ingram
as attorney-in-fact pursuant to a power of attorney filed herewith.
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<PAGE>
SIGNATURES
The Diversified Portfolio (the "Portfolio") has duly caused this registration
statement on Form N-1A ("Registration Statement") of The JPM Institutional Funds
(the "Trust") (File No. 33-54642) to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of George Town, Grand Cayman, on the 1st
day of August, 1997.
THE DIVERSIFIED PORTFOLIO
/s/ Lenore J. McCabe
By -------------------------
Lenore J. McCabe
Assistant Secretary and Assistant Treasurer
Pursuant to the requirements of the Securities Act of 1933, the Trust's
Registration Statement has been signed below by the following persons in the
capacities indicated on August 1, 1997.
Richard W. Ingram*
- ----------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer) of the
Portfolio
Matthew Healey*
- ----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer) of
the Portfolio
Frederick S. Addy*
- ----------------------------
Frederick S. Addy
Trustee of the Portfolio
William G. Burns*
- ----------------------------
William G. Burns
Trustee of the Portfolio
Arthur C. Eschenlauer*
- ----------------------------
Arthur C. Eschenlauer
Trustee of the Portfolio
Michael P. Mallardi*
- ----------------------------
Michael P. Mallardi
Trustee of the Portfolio
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<PAGE>
/s/ Lenore J. McCabe
*By ------------------------
Lenore J. McCabe
as attorney-in-fact pursuant to a power of attorney filed herewith.
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<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
------------- ----------------------
EX-99.18 Powers of Attorney
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Matthew Healey, Richard W.
Ingram, Marie E. Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A.
Keeley, Karen Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J.
Kelley, Michael S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J.
McCabe, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities (i) the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The JPM Pierpont Funds, The JPM Institutional Funds
or JPM Series Trust (each a "Trust"); (ii) the Registration Statement(s), and
any and all amendments thereto, filed by any other investor in any separate
registered investment company (each such separate registered investment company,
a "Portfolio") in which The JPM Pierpont Funds or The JPM Institutional Funds
invest, in either case with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended; and (iii) any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable each Trust and Portfolio to
comply with such Acts, the rules, regulations and requirements of the Securities
and Exchange Commission and the corporate, securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms as
his own act and deed any and all acts that such attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof. Any one of such attorneys
and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of July 1997.
Frederick S. Addy
/s/ Frederick S. Addy
JPM502C
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Matthew Healey, Richard W.
Ingram, Marie E. Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A.
Keeley, Karen Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J.
Kelley, Michael S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J.
McCabe, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities (i) the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The JPM Pierpont Funds, The JPM Institutional Funds
or JPM Series Trust (each a "Trust"); (ii) the Registration Statement(s), and
any and all amendments thereto, filed by any other investor in any separate
registered investment company (each such separate registered investment company,
a "Portfolio") in which The JPM Pierpont Funds or The JPM Institutional Funds
invest, in either case with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended; and (iii) any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable each Trust and Portfolio to
comply with such Acts, the rules, regulations and requirements of the Securities
and Exchange Commission and the corporate, securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms as
his own act and deed any and all acts that such attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof. Any one of such attorneys
and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th
day of July 1997, in Hamilton, Bermuda.
William G. Burns
/s/ William G. Burns
JPM502C
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Matthew Healey, Richard W.
Ingram, Marie E. Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A.
Keeley, Karen Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J.
Kelley, Michael S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J.
McCabe, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities (i) the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The JPM Pierpont Funds, The JPM Institutional Funds
or JPM Series Trust (each a "Trust"); (ii) the Registration Statement(s), and
any and all amendments thereto, filed by any other investor in any separate
registered investment company (each such separate registered investment company,
a "Portfolio") in which The JPM Pierpont Funds or The JPM Institutional Funds
invest, in either case with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended; and (iii) any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable each Trust and Portfolio to
comply with such Acts, the rules, regulations and requirements of the Securities
and Exchange Commission and the corporate, securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms as
his own act and deed any and all acts that such attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof. Any one of such attorneys
and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th
day of July 1997, in Hamilton, Bermuda.
Arthur C. Eschenlauer
/s/ Arthur C. Eschenlauer
JPM502C
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Richard W. Ingram, Marie E.
Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A. Keeley, Karen
Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J. Kelley, Michael
S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J. McCabe, and each of
them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities (i)
the Registration Statements on Form N-1A, and any and all amendments thereto,
filed by The JPM Pierpont Funds, The JPM Institutional Funds or JPM Series Trust
(each a "Trust"); (ii) the Registration Statement(s), and any and all amendments
thereto, filed by any other investor in any separate registered investment
company (each such separate registered investment company, a "Portfolio") in
which The JPM Pierpont Funds or The JPM Institutional Funds invest, in either
case with the Securities and Exchange Commission under the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended; and (iii)
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable each Trust and Portfolio to comply with such
Acts, the rules, regulations and requirements of the Securities and Exchange
Commission and the corporate, securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th
day of July 1997, in Hamilton, Bermuda.
Matthew Healey
/s/ Matthew Healey
JPM502C
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Matthew Healey, Richard W.
Ingram, Marie E. Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A.
Keeley, Karen Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J.
Kelley, Michael S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J.
McCabe, and each of them, with full powers of substitution as his true and
lawful attorneys and agents to execute in his name and on his behalf in any and
all capacities (i) the Registration Statements on Form N-1A, and any and all
amendments thereto, filed by The JPM Pierpont Funds, The JPM Institutional Funds
or JPM Series Trust (each a "Trust"); (ii) the Registration Statement(s), and
any and all amendments thereto, filed by any other investor in any separate
registered investment company (each such separate registered investment company,
a "Portfolio") in which The JPM Pierpont Funds or The JPM Institutional Funds
invest, in either case with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended; and (iii) any and all instruments which such attorneys and agents, or
any of them, deem necessary or advisable to enable each Trust and Portfolio to
comply with such Acts, the rules, regulations and requirements of the Securities
and Exchange Commission and the corporate, securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms as
his own act and deed any and all acts that such attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof. Any one of such attorneys
and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th
day of July 1997, in Hamilton, Bermuda.
Michael P. Mallardi
/s/ Michael P. Mallardi
JPM502C
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<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Matthew Healey, Marie E.
Connolly, Joseph F. Tower III, John E. Pelletier, Elizabeth A. Keeley, Karen
Jacoppo-Wood, Mary A. Nelson, Douglas C. Conroy, Christopher J. Kelley, Michael
S. Petrucelli, Mark Karpe, Jacqueline Henning and Lenore J. McCabe, and each of
them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities (i)
the Registration Statements on Form N-1A, and any and all amendments thereto,
filed by The JPM Pierpont Funds, The JPM Institutional Funds or JPM Series Trust
(each a "Trust"); (ii) the Registration Statement(s), and any and all amendments
thereto, filed by any other investor in any separate registered investment
company (each such separate registered investment company, a "Portfolio") in
which The JPM Pierpont Funds or The JPM Institutional Funds invest, in either
case with the Securities and Exchange Commission under the Investment Company
Act of 1940, as amended, and the Securities Act of 1933, as amended; and (iii)
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable each Trust and Portfolio to comply with such
Acts, the rules, regulations and requirements of the Securities and Exchange
Commission and the corporate, securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 9th
day of July 1997, in Hamilton, Bermuda.
Richard W. Ingram
/s/ Richard W. Ingram
JPM502C
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