JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND
Supplement dated February 27, 1998 to the prospectus dated February 28, 1997
1. The name of the Fund is changed to "J.P. Morgan Institutional International
Equity Fund".
2. The date of the prospectus is changed to February 27, 1998.
3. The following table replaces the Expense Table on page 2.
Expense Table
Annual Operating Expenses*
Advisory Fees ...........................0.60%
Rule 12b-1 Fees..........................None
Other Expenses...........................0.33%
Total Operating Expenses.................0.93%
*Fees and expenses are expressed as a percentage of average net assets of the
Fund for its most recent fiscal year. See Management of the Trust and the
Portfolio. Morgan has agreed to reimburse the Fund for ordinary expenses over
1.00% of the Fund's average net assets. There is no guarantee that this
arrangement will continue beyond February 28, 1999.
Example
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year..................................$ 9
3 Years.................................$ 30
5 Years.................................$ 51
10 Years................................$114
The above expense table is designed to assist investors in understanding the
various direct and indirect costs and expenses that investors in the Fund bear.
The fees and expenses included in Other Expenses are the fees paid to Morgan
under the Administrative Services Agreements and the Shareholder Servicing
Agreement, organization expenses, the fees paid to Pierpont Group, Inc. under
the Fund Services Agreements, the fees paid to Funds Distributor, Inc. under the
Co-Administration Agreements, the fees paid to State Street Bank and Trust
Company as custodian and transfer agent, and other usual and customary expenses
of the Fund and the Portfolio. For a more detailed description of contractual
fee arrangements, see Management of the Trust and the Portfolio and Shareholder
Servicing. In connection with the above example, please note that $1,000 is less
than the Fund's minimum investment requirement and that there are no redemption
or exchange fees of any kind. The example is hypothetical; it is included solely
for illustrative purposes. It should not be considered a representation of
future performance; actual expenses may be more or less than those shown.
<PAGE>
4. The following is added to the Prospectus on page 3.
FINANCIAL HIGHLIGHTS
The following selected data for a share outstanding for the indicated period
should be read in conjunction with the financial statements and related notes
which are contained in the Fund's annual report and are incorporated by
reference into the Statement of Additional Information. The following selected
data have been audited by independent accountants. The Fund's annual report
includes a discussion of those factors, strategies and techniques that
materially affected the Fund's performance during the period of the report, as
well as certain related information. A copy of the Fund's annual report will be
made available without charge upon request.
For the Fiscal Year
Ended
October 31, 1997
-------------------
Net Asset Value, Beginning of Period $11.43
-------------------
Income from Investment Operations
Net Investment Income 0.17
Net Realized and Unrealized
Gain (Loss) on Investment and
Foreign Currency 0.24
-------------------
Total from Investment Operations 0.41
-------------------
Less Distributions to Shareholders from
Net Investment Income (0.25)
Net Realized Gain (0.20)
-------------------
Total Distributions to Shareholders (0.45)
Net Asset Value, End of Period $11.39
===================
Total Return 3.71%
Ratios and Supplemental Data
Net Assets, End of Period (in thousands) $614,659
Ratios to Average Net Assets
Expenses 0.93%
Net Investment Income 1.32%
Decrease Reflected in Expense Ratio
due to Expense Reimbursement ---
5. The following replaces the last sentence of the second to last paragraph
on page 5:
The Portfolio turnover rate for the fiscal year ended October 31, 1997
was 67%.
6. The following replaces the last sentence of the fifth paragraph under
"Investment Objective and Policies":
At October 31, 1997, the approximate Japan weighting was 26% in the EAFE
Index and 25% in the Portfolio.
<PAGE>
JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND
Supplement dated February 27, 1998 to the prospectus dated February 28, 1997
1. The name of the Fund is changed to "J.P. Morgan Institutional Emerging
Markets Equity Fund".
2. The date of the prospectus is changed to February 27, 1998.
3. The following table replaces the Expense Table on page 2.
Expense Table
Annual Operating Expenses*
Advisory Fees ...........................1.00%
Rule 12b-1 Fees..........................None
Other Expenses (after reimbursement).....0.45%
Total Operating Expenses.................1.45%
*Fees and expenses are expressed as a percentage of estimated average net assets
of the Fund for its current fiscal year. See Management of the Trust and the
Portfolio. The expense table has been restated to reflect current expenses and
reimbursements. Morgan has agreed to reimburse the Fund for ordinary expenses
over 1.45% until further notice. Without reimbursement, other expenses and total
operating expenses are estimated to be 0.48% and 1.48%, respectively.
Example
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year..................................$ 15
3 Years.................................$ 46
5 Years.................................$ 79
10 Years................................$174
The above expense table is designed to assist investors in understanding the
various direct and indirect costs and expenses that investors in the Fund bear.
The fees and expenses included in Other Expenses are the fees paid to Morgan
under the Administrative Services Agreements and the Shareholder Servicing
Agreement, organization expenses, the fees paid to Pierpont Group, Inc. Under
the Fund Services Agreements, the fees paid to Funds Distributor, Inc. Under the
Co-Administration Agreements, the fees paid to State Street Bank and Trust
Company as custodian and transfer agent, and other usual and customary expenses
of the Fund and the Portfolio. For a more detailed description of contractual
fee arrangements, see Management of the Trust and the Portfolio and Shareholder
Servicing. In connection with the above example, please note that $1,000 is less
than the Fund's minimum investment requirement and that there are no redemption
or exchange fees of any kind. The example is hypothetical; it is included solely
for illustrative purposes. It should not be considered a representation of
future performance; actual expenses may be more or less than those shown.
<PAGE>
4. On January 23, 1998, The Emerging Markets Equity Portfolio received a
substantial redemption request from its offshore feeder fund. The redemption
reduced Portfolio assets from $649,928,696 to $268,171,079. In response to this
redemption, Morgan instituted a cap on expenses of 1.45% of the Fund's assets.
This cap will remain in place until further notice. Currently, without this
expense cap, the total expenses of the Fund would be 1.48%.
5. The following is added to the Prospectus on page 3.
FINANCIAL HIGHLIGHTS
The following selected data for a share outstanding for the indicated period
should be read in conjunction with the financial statements and related notes
which are contained in the Fund's annual report and are incorporated by
reference into the Statement of Additional Information. The following selected
data have been audited by independent accountants. The Fund's annual report
includes a discussion of those factors, strategies and techniques that
materially affected the Fund's performance during the period of the report, as
well as certain related information. A copy of the Fund's annual report will be
made available without charge upon request.
For the Fiscal Year
Ended
October 31, 1997
-------------------
Net Asset Value, Beginning of Period $10.27
-------------------
Income from Investment Operations
Net Investment Income (Loss) 0.11
Net Realized and Unrealized
Gain (Loss) on Investment and
Foreign Currency (0.43)
-------------------
Total from Investment Operations (0.32)
-------------------
Less Distributions to Shareholders from
Net Investment Income (0.09)
Net Realized Gain ---
-------------------
Total Distributions to Shareholders (0.09)
Net Asset Value, End of Period $9.86
===================
Total Return (3.15)%
Ratios and Supplemental Data
Net Assets, End of Period (in thousands) $306,381
Ratios to Average Net Assets
Expenses 1.37%
Net Investment Income 0.95%
Decrease Reflected in Expense Ratio
due to Expense Reimbursement ---
6. The following replaces the last sentence of the first paragraph on page 6:
The Portfolio turnover rate for the fiscal year ended October 31, 1997
was 55%.
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL INTERNATIONAL EQUITY FUND
J.P. MORGAN INSTITUTIONAL EMERGING MARKETS EQUITY FUND
J.P. MORGAN INSTITUTIONAL INTERNATIONAL OPPORTUNITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED FEBRUARY 27, 1998 FOR THE FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME, WHICH MAY BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC.,
ATTENTION: J.P. MORGAN INSTITUTIONAL FUNDS (800)221-7930.
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<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 19
Trustees and Officers . . . . . . . . . . . . 24
Investment Advisor . . . . . . . . . . . . . . 28
Distributor . . . . . . . . . . . . . . . . . 31
Co-Administrator . . . . . . . . . . . . . . . 31
Services Agent . . . . . . . . . . . . . . . . 32
Custodian and Transfer Agent . . . . . . . . . 34
Shareholder Servicing . . . . . . . . . . . . 34
Financial Professionals . . . . . . . . . . . 35
Independent Accountants . . . . . . . . . . . 36
Expenses . . . . . . . . . . . . . . . . . . . 36
Purchase of Shares . . . . . . . . . . . . . . 36
Redemption of Shares . . . . . . . . . . . . . 37
Exchange of Shares . . . . . . . . . . . . . . 38
Dividends and Distributions . . . . . . . . . 38
Net Asset Value . . . . . . . . . . . . . . . 39
Performance Data . . . . . . . . . . . . . . . 40
Portfolio Transactions . . . . . . . . . . . . 41
Massachusetts Trust . . . . . . . . . . . . . 43
Description of Shares . . . . . . . . . . . . 44
Special Information Concerning
Investment Structure . . . . . . . . . . . . . 46
Taxes . . . . . . . . . . . . . . . . . . . . 47
Additional Information . . . . . . . . . . . 51
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1
I:\dsfndlgl\institut\0298int.pea\inteqsai.txt
<PAGE>
GENERAL
This Statement of Additional Information relates only to the J.P. Morgan
Institutional International Equity Fund, the J.P. Morgan Institutional Emerging
Markets Equity Fund and the J.P. Morgan Institutional International
Opportunities Fund (the "Funds"). The Funds are a series of shares of beneficial
interest of the J.P. Morgan Institutional Funds, an open-end management
investment company formed as a Massachusetts business trust (the "Trust"). In
addition to the Funds, the Trust consists of other series representing separate
investment funds (each a J.P. Morgan Institutional Fund). The other J.P. Morgan
Institutional Funds are covered by separate Statements of Additional
Information.
This Statement of Additional Information describes the financial history,
investment objectives and policies, management and operation of each of the
Funds to enable investors to select the Funds which best suit their needs. The
J.P. Morgan Institutional Funds operate through a two-tier master-feeder
investment fund structure.
This Statement of Additional Information provides additional information
with respect to the Funds and should be read in conjunction with the relevant
Fund's current Prospectus (the "Prospectus"). The Funds' 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 Funds seek to achieve their investment objectives
by investing all of their investable assets in separate Master Portfolios (each
a "Portfolio"), a corresponding diversified open-end management investment
company having the same investment objective as the corresponding Fund. Each
Fund invests in a Portfolio through a two-tier master-feeder investment fund
structure. See "Special Information Concerning Investment Structure."
The Portfolios are advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
Investments in the Funds are not deposits or obligations of, or
guaranteed or endorsed by, Morgan or any other bank. Shares of the Funds are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in a 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 J.P. Morgan Institutional International Equity Fund (the
"International Equity Fund") is designed for investors with a long term
investment horizon who want to diversify their portfolios by investing in an
actively managed portfolio of non-U.S. securities that seeks to outperform the
Morgan Stanley Capital International ("MSCI") Europe, Australasia and Far East
Index (the "EAFE Index"). The Fund's investment objective is to provide high
total return from a portfolio of equity securities of foreign corporations. The
Fund attempts to achieve its investment objective by investing all of its
investable assets in The International Equity Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the International Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in the equity securities of foreign corporations. Equity securities
consist of common stocks and other securities with equity characteristics such
as preferred stocks, depository receipts, warrants, rights, convertible
securities, trust or limited partnership interests and equity participations
(collectively, "Equity Securities". Under normal circumstances, the Portfolio
expects to invest at least 65% of its total assets in such securities. The
Portfolio does not intend to invest in U.S. securities (other than money market
instruments), except temporarily, when extraordinary circumstances prevailing at
the same time in a significant number of developed foreign countries render
investments in such countries inadvisable.
Investment Process for the International Equity Portfolio
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. 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 EAFE Index to reflect the above-average (below-average)
attractiveness of their stock markets. In determining weightings, Morgan
analyzes a variety of qualitative factors as well -- including the liquidity,
earnings momentum and interest rate climate of the market at hand. These
qualitative assessments can change the magnitude but not the direction of the
country allocations called for by the risk premium forecast. 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 more than 90 international equity analysts,
each an industry and country specialist with an average of nearly ten years of
experience, forecast normalized earnings and dividend payouts for roughly 1,200
non-U.S. companies -- taking a long-term perspective rather than the short time
frame common to consensus estimates. These forecasts are converted into
comparable expected returns by a dividend discount model, and then companies are
ranked from most to least attractive by industry and country. A diversified
portfolio is constructed using disciplined buy and sell rules. The portfolio
manager's objective is to concentrate the purchases in the stocks deemed most
undervalued, and to keep sector weightings close to those of the EAFE Index, the
Fund's benchmark. 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
the Fund's 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 specialists recommend currency strategies that are
implemented in conjunction with the Portfolio's investment strategy.
The J.P. Morgan Institutional Emerging Markets Equity Fund (the
"Emerging Markets Equity Fund") is designed for investors with a long term
investment horizon who want exposure to the rapidly growing emerging markets.
The Emerging Markets Equity Fund's investment objective is to achieve a high
total return from a portfolio of equity securities of companies in emerging
markets. The Fund attempts to achieve its investment objective by investing all
of its investable assets in The Emerging Markets Equity Portfolio (the
"Portfolio"), a diversified open-end management investment company having the
same investment objective as the Emerging Markets Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in Equity Securities of emerging markets issuers. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
Investment Process for the Emerging Markets Equity Portfolio
Country allocation: Morgan's country allocation decision begins with a
forecast of the expected return of each market in the Portfolio's universe.
These expected returns are calculated using a proprietary valuation method that
is forward looking in nature rather than based on historical data. Morgan then
evaluates these expected returns from two different perspectives: first, it
identifies those countries that have high real expected returns relative to
their own history and other nations in their universe. Second, it identifies
those countries that it expects will provide high returns relative to their
currency risk. Countries that rank highly on one or both of these scores are
overweighted relative to the Fund's benchmark, the MSCI Emerging Markets Free
Index, while those that rank poorly are underweighted. To help contain risk,
Morgan places limits on the total size of the Portfolio's country over- and
under-weightings.
Stock selection: Morgan's 25 emerging markets equity analysts -- each
an industry specialist -- monitor a universe of approximately 325 companies in
these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of Morgan's rankings.
J.P. Morgan Institutional International Opportunities Fund (the
"International Opportunities Fund") is designed for long-term investors who want
to invest in an actively managed portfolio of common stocks and other equity
securities of non-U.S. companies, including companies located in emerging
markets. The International Opportunities Fund's investment objective is to
provide high total return from a portfolio of equity securities of foreign
companies in developed and, to a lesser extent, developing markets. The Fund
attempts to achieve its investment objective by investing all of its investable
assets in The International Opportunities Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the International Opportunities Fund.
The Portfolio invests primarily in Equity Securities of non-U.S.
issuers in developed and developing countries. Under normal circumstances, the
Portfolio expects to invest at least 65% of its total assets in such securities.
The Portfolio does not intend to invest in U.S. securities (other than money
market instruments), except temporarily, when extraordinary circumstances
prevailing at the same time in a significant number of foreign countries render
investments in such countries inadvisable.
Investment Process for The International Opportunities Portfolio
Country allocation (developed countries): Morgan's country allocation
decision for securities issued in developed countries begins with a forecast of
equity risk premiums, which provide a valuation signal by measuring the relative
attractiveness of stocks. Using a proprietary approach, Morgan calculates this
risk premium for each of the developed countries 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 emphasized (de-emphasized) to reflect the above-average
(below-average) attractiveness of their stock markets. In determining these
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.
Country allocation (emerging countries): Morgan's country allocation
decision for emerging markets securities begins with a forecast of the expected
return of each emerging market in the Portfolio's universe. These expected
returns are calculated using a proprietary valuation method that is forward
looking in nature rather than based on historical data. Morgan then evaluates
these expected returns from two different perspectives: first, it identifies
those countries that have high real expected returns relative to their own
history and other nations in their universe. Second, it identifies those
countries that it expects will provide high returns relative to their currency
risk. Countries that rank highly on one or both of these scores are
overweighted, while those that rank poorly are underweighted.
Stock selection: Morgan's more than 90 international equity analysts
and 25 emerging markets equity analysts, each an industry and country
specialist, forecast normalized earnings, dividend payouts and cash flows for
roughly 1,200 non-U.S. companies -- taking a long-term perspective rather than
the short time frame common to consensus estimates. These forecasts are
converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the Portfolio's purchases in the
stocks deemed most undervalued. Stocks generally become a candidate for sale
when they fall into the bottom half of Morgan's rankings. 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: Morgan actively manages the currency exposure of
the Portfolio's investments in developed countries, in conjunction with country
and stock allocation, with the goal of protecting and possibly enhancing the
Fund's return. Morgan's currency decisions are supported by a proprietary
tactical 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 specialists recommend currency strategies that are
implemented in conjunction with the Portfolio's investment strategy.
Equity Investments
The Portfolios for each of the Funds invest primarily in Equity Securities.
The Equity Securities in which the Funds invest 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 Funds may invest may
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure.
The convertible securities in which the Funds 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.
Common Stock Warrants
The Funds 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 Funds make substantial investments in foreign countries. Investors
should realize that the value of the Funds' investments in foreign securities
may be adversely affected by changes in political or social conditions,
diplomatic relations, confiscatory taxation, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition of (or change in)
exchange control or tax regulations in those foreign countries. In addition,
changes in government administrations or economic or monetary policies in the
United States or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or unfavorably affect the Funds'
operations. Furthermore, the economies of individual foreign nations may differ
from the U.S. economy, whether favorably or unfavorably, in areas such as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position; it may also be more difficult
to obtain and enforce a judgment against a foreign issuer. Any foreign
investments made by the Funds must be made in compliance with U.S. and foreign
currency restrictions and tax laws restricting the amounts and types of foreign
investments.
Generally, investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to domestic companies. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers located in foreign
countries than in the United States.
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.
Since investments in foreign securities may involve foreign currencies,
the value of a Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Funds may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Funds'
currency exposure related to foreign investments.
The Funds may also 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 Funds investments in those countries and the
availability to such Fund 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 Funds investments in such countries illiquid and more volatile than
investments in more developed countries, and such Fund 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 Portfolios buy and
sell securities and receive interest and dividends in currencies other than the
U.S. dollar, the Portfolios may enter from time to time into foreign currency
exchange transactions. The Portfolios either enter into these transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or use forward contracts to purchase or sell foreign
currencies. The cost of a 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 a
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 contracts. 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.
The Portfolios may 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 a 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. The Portfolios may also enter into forward foreign currency
exchange contracts to adjust their currency exposure relative to their
benchmarks. 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.
Money Market Instruments
Although the Funds intend under normal circumstances and to the extent
practicable, to be fully invested in Equity Securities, each Fund may invest in
money market instruments to the extent consistent with its investment objective
and policies. The Funds may make money market investments pending other
investment or settlement, for liquidity or in adverse market conditions. A
description of the various types of money market instruments that may be
purchased by the Funds appears below. Also see "Quality and Diversification
Requirements."
U.S. Treasury Securities. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
Additional U.S. Government Obligations. Each of the Funds 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, each Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which each Fund 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
Bank 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. Each of the Funds, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
Bank Obligations. Each of the Funds 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). The Funds will not invest in obligations for which the Advisor, or
any of its affiliated persons, is the ultimate obligor or accepting bank. Each
of the Funds may also invest in 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. Each of the Funds may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolios and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Advisor. Since master demand obligations typically
are not rated by credit rating agencies, the Funds may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Funds to be liquid because they are payable upon demand. The
Funds do not have any specific percentage limitation on investments in master
demand obligations. 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. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Funds' Trustees. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Funds invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Funds will
always receive securities as collateral whose market value is, and during the
entire term of the agreement remains, at least equal to 100% of the dollar
amount invested by the Funds in each agreement plus accrued interest, and the
Funds will make payment for such securities only upon physical delivery or upon
evidence of book entry transfer to the account of the Custodian. If the seller
defaults, a Fund might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by a Fund may be delayed or limited.
Each of the Funds may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in this Statement of Additional Information.
Additional Investments
When-Issued and Delayed Delivery Securities. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and for money market instruments and other
fixed income securities no interest accrues to a Portfolio until settlement
takes place. At the time a Portfolio makes the commitment to purchase securities
on a when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net asset value
and calculate the maturity for the purposes of average maturity from that date.
At the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, each Portfolio will maintain
with the Custodian a segregated account with liquid assets, consisting of cash,
U.S. Government securities or other appropriate securities, in an amount at
least equal to such commitments. On delivery dates for such transactions, each
Portfolio will meet its obligations from maturities or sales of the securities
held in the segregated account and/or from cash flow. If a Portfolio chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio obligation, incur a
gain or loss due to market fluctuation. It is the current policy of each
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets, less liabilities other
than the obligations created by when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by each of the Funds to the extent permitted under the 1940 Act.
These limits require that, as determined immediately after a purchase is made,
(i)not more than 5% of the value of a Fund's total assets will be invested in
the securities of any one investment company, (ii) not more than 10% of the
value of its total assets will be invested in the aggregate in securities of
investment companies as a group, and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by a Fund. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund bears directly in connection with its own operations.
Reverse Repurchase Agreements. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act a reverse repurchase agreement
is also considered as the borrowing of money by a Portfolio and, therefore, a
form of leverage. The Portfolio will invest the proceeds of borrowings under
reverse repurchase agreements. In addition, a Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. Investors should keep in mind that the counterparty to a contract
could default on its obligation. No Portfolio will invest the proceeds of a
reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. Each Portfolio will establish and maintain with
the Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for each Portfolio's limitations on
reverse repurchase agreements and bank borrowings.
Loans of Portfolio Securities. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
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 a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances before entering into such an
agreement, including the creditworthiness of the borrowing financial
institution, and no Portfolio will make any loans in excess of one year. The
Portfolios will not lend their securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolios, the Advisor or the Distributor,
unless otherwise permitted by applicable law.
Privately Placed and Certain Unregistered Securities. A Portfolio may
not acquire any illiquid holdings 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 Portfolios may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under 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 a Portfolio. The price a Portfolio pays for illiquid holdings or
receives upon resale may be lower than the price paid or received for similar
holdings with a more liquid market. Accordingly the valuation of these holdings
will reflect any limitations on their liquidity.
The Portfolios 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, a Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the 1933 Act, before it may be sold, a Portfolio may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a holding under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
Quality and Diversification Requirements
Each of the Funds intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of a Fund are
subject to the following fundamental limitations: (1) the Fund may not invest
more than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (2)
the Fund may not own more than 10% of the outstanding voting securities of any
one issuer. As for the other 25% of the Fund's assets not subject to the
limitation described above, there is no limitation on investment of these assets
under the 1940 Act, so that all of such assets may be invested in securities of
any one issuer. Investments not subject to the limitations described above could
involve an increased risk to the Fund should an issuer, or a state or its
related entities, be unable to make interest or principal payments or should the
market value of such securities decline.
The Funds will also comply with the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
a regulated investment company. See "Taxes."
The Funds may invest in convertible debt securities, for which there
are no specific quality requirements. In addition, at the time a Fund invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Advisor's
opinion. At the time a Fund invests in any other short-term debt securities,
they must be rated A or higher by Moody's or Standard & Poor's, or if unrated,
the investment must be of comparable quality in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
Options and Futures Transactions
Exchange Traded and OTC Options. All options purchased or sold by the
Portfolios will be traded on a securities exchange or will be purchased or sold
by securities dealers (OTC options) that meet creditworthiness standards
approved by the Portfolios' Board of Trustees. While exchange-traded options are
obligations of the Options Clearing Corporation, in the case of OTC options, a
Portfolio relies on the dealer from which it purchased the option to perform if
the option is exercised. Thus, when a Portfolio purchases an OTC option, it
relies on the dealer from which it purchased the option to make or take delivery
of the underlying securities. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Provided that a 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, a 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 Portfolios may
purchase or sell (write) futures contracts and purchase put and call options,
including put and call options on futures contracts. In addition, the Portfolios
for the Emerging Markets Equity and the International Opportunities Funds may
sell (write) put and call options, including options on futures. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
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 Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
Combined Positions. The Portfolios that are permitted to purchase and
write options may do so in combination with each other, or in combination with
futures or forward contracts, to adjust the risk and return characteristics of
the overall position. For example, a 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 a
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and 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, a Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
Asset Coverage for Futures Contracts and Options Positions. The
Portfolios intend to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolio can
commit assets to initial margin deposits and option premiums. In addition, the
Portfolios will comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if the guidelines
so require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
Risk Management
The Portfolios for the Emerging Markets Equity and International
Opportunities Funds may employ non-hedging risk management techniques. Examples
of risk management strategies include synthetically altering a portfolio's
exposure to the equity markets of particular countries by purchasing futures
contracts on the stock indices of those countries to increase exposure to their
equity markets. 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.
Anticipatory hedging. The Portfolio for the International Equity Fund
may purchase futures contracts on stock indices in anticipation of purchasing
securities. Such transactions are considered anticipatory hedging if all
transactions are entered into with the intent of completion and at least 75% of
all anticipatory hedge transactions entered into are completed. The Portfolio
may not use futures to increase country allocation/security exposure that is not
in anticipation of securities purchases.
Portfolio Turnover
The table below sets forth the portfolio turnover rates for the
Portfolios corresponding to the Funds. A rate of 100% indicates that the
equivalent of all of the Portfolio's assets have been sold and reinvested in a
year. High portfolio turnover may result in the realization of substantial net
capital gains or losses. To the extent net short term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. See "Taxes" below.
The International Equity Portfolio (International Equity Fund) For the
fiscal year ended October 31, 1995: 59%. For the fiscal year ended October 31,
1996: 57%. For the fiscal year ended October 31, 1997: 67%.
The Emerging Markets Equity Portfolio (Emerging Markets Equity Fund) For
the fiscal year ended October 31, 1995: 41%. For the fiscal year ended October
31, 1996: 31%. For the fiscal year ended October 31, 1997: 55%.
The International Opportunities Portfolio (International Equity Fund) For the
period February 26, 1997 (commencement of operations) through November 30, 1997:
72%.
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding
Portfolio are identical, unless otherwise specified. Accordingly, references
below to a Fund also include the Fund's corresponding Portfolio unless the
context requires otherwise; similarly, references to a Portfolio also include
its corresponding Fund unless the context requires otherwise.
The investment restrictions below have been adopted by the Trust with
respect to each Fund and by each corresponding Portfolio. Except where otherwise
noted, these investment restrictions are "fundamental" policies which, under the
1940 Act, may not be changed without the vote of a majority of the outstanding
voting securities of the Fund or Portfolio, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a security holders meeting
if the holders of more than 50% of the outstanding voting securities are present
or represented by proxy, or (b) more than 50% of the outstanding voting
securities. The percentage limitations contained in the restrictions below apply
at the time of the purchase of securities. Whenever a Fund is requested to vote
on a change in the fundamental investment restrictions of its corresponding
Portfolio, the Trust will hold a meeting of Fund shareholders and will cast its
votes as instructed by the Fund's shareholders.
The International Equity Fund and its corresponding Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes and
then only in amounts up to 30% of the value of the Fund's net assets at the time
of borrowing, and except in connection with reverse repurchase agreements and
then only in amounts up to 33 1/3% of the value of the Fund's net assets; or
purchase securities while borrowings, including reverse repurchase agreements,
exceed 5% of the Fund's total assets; provided, however, that the Fund may
increase its interest in an open-end management investment company with the same
investment objective and restrictions as the Fund's while such borrowings are
outstanding. The Fund will not mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not to exceed 30% of
the value of the Fund's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in securities or other obligations of any one such
issuer; provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with the same
investment objective and restrictions as the Fund's. This limitation shall not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the Fund's total
assets;
3. Purchase the securities of an issuer if, immediately after such purchase, the
Fund owns more than 10% of the outstanding voting securities of such issuer;
provided, however, that the Fund may invest all or part of its investable assets
in an open-end management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply to permitted
investments of up to 25% of the Fund's total assets;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would exceed 25% of the
value of the Fund's total assets; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the Fund's. For
purposes of industry concentration, there is no percentage limitation with
respect to investments in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Fund's
investment objective and policies, see "Additional Investment Information" in
the Prospectus and "Investment Objectives and Policies" in this Statement of
Additional Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination thereof,
real property, including limited partnership interests, commodities, or
commodity contracts, except for the Fund's interests in hedging and foreign
exchange activities as described under "Additional Investment Information" in
the Prospectus; or interests in oil, gas, mineral or other exploration or
development programs or leases. However, the Fund may purchase securities or
commercial paper issued by companies that invest in real estate or interests
therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or maintain a
short position in securities, except to obtain such short-term credit as
necessary for the clearance of purchases and sales of securities, provided that
this restriction shall not be deemed to apply to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Fund may be
deemed to be an underwriter under the 1933 Act by virtue of disposing of
portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to Investment
Restriction No. 1. The Fund's arrangements in connection with its hedging
activities as described in "Additional Investment Information" in the Prospectus
shall not be considered senior securities for purposes hereof.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act, or any SEC or SEC staff
interpretations thereof, are amended or modified, the Emerging Markets Equity
Fund and its corresponding Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
2. Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33 1/3% of the value of the Fund's total assets
(including the amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of the Fund's total
assets, the Fund will reduce its borrowings within three business days to the
extent necessary to comply with the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Fund's total assets would be
invested in securities or other obligations of any one issuer; or (b) the Fund
would hold more than 10% of the outstanding voting securities of that issuer.
This limitation shall not apply to Government securities (as defined in the 1940
Act);
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in repurchase
agreements;
5. Purchase or sell physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but the Fund may
purchase or sell futures contracts or options (including options on futures
contracts, but excluding options or futures contracts on physical commodities)
and may enter into forward foreign currency contracts;
6. Purchase or sell real estate, but the Fund may purchase or sell securities
that are secured by real estate or issued by companies (including real estate
investment trusts) that invest or deal in real estate;
7. Underwrite securities of other issuers, except to the extent the Fund,
in disposing of portfolio securities, may be deemed an underwriter within the
meaning of the 1933 Act;
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder; and
9. Notwithstanding any other investment restriction of the Fund, the Fund may
invest all of its investable assets in an open-end management investment company
having the same investment objective and restrictions as the Fund.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified, the International Opportunities
Fund and its corresponding Portfolio may not:
1. Purchase any security if, as a result, more than 25% of its total assets
would be invested in securities of issuers in any single industry. This
limitation shall not apply to securities issued or guaranteed as to principal or
interest by the U.S. Government, its agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph 7
below, the issuance of shares of beneficial interest in multiple classes or
series, the purchase or sale of options, futures contracts, forward commitments,
swaps and transactions in repurchase agreements are not deemed to be senior
securities.
3. Borrow money, except in amounts not to exceed one third of the Fund's total
assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets,
(iii) in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets and (iv)
pursuant to reverse repurchase agreements entered into by the Fund.
4. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that invest
in real estate or interests therein, (iii) invest in securities that are secured
by real estate or interests therein, (iv) purchase and sell mortgage-related
securities and (v) hold and sell real estate acquired by the Fund as a result of
the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
7. Make loans, except that the Fund (1) may lend portfolio securities with a
value not exceeding one-third of the Fund's net assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
securities (including privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures or
other securities, whether or not the purchase is made upon the original issuance
of the securities.
8. With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities), if:
a. such purchase would cause more than 5% of the Fund's total assets to be
invested in the securities of such issuer; or
b. such purchase would cause the Fund to hold more than 10% of the
outstanding voting securities of such issuer.
(Although permitted to do so by restriction No. 3 above, the Fund has no
current intention to engage in borrowing for financial leverage.)
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - International Equity Fund - The
investment restriction described below is not a fundamental policy of the Fund
or the Portfolio and may be changed by their respective Trustees. This
non-fundamental investment policy requires that the Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - Emerging Markets Equity Fund. The
investment restrictions described below are not fundamental policies of the Fund
or the Portfolio and may be changed by their respective Trustees. These
non-fundamental investment policies require that the Fund may not:
(i) Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection with
a merger, consolidation, reorganization, acquisition of assets or an offer of
exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid;
(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the SEC
or its staff. Transactions in futures contracts and options shall not constitute
selling securities short; or
(iv) Purchase securities on margin, but the Fund may obtain such short term
credits as may be necessary for the clearance of transactions.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - International Opportunities Fund.
The investment restrictions described below are not fundamental policies of the
Fund and its corresponding Portfolio and may be changed by the Trustees. These
non-fundamental investment policies require that the Fund may not:
(i) Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection with
a merger, consolidation, reorganization, acquisition of assets or an offer of
exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid;
(iii) Sell any security short, except to the extent permitted by the 1940
Act. Transactions in futures contracts and options shall not constitute selling
securities short;
(iv) Purchase securities on margin, but the Fund may obtain such short term
credits as may be necessary for the clearance of transactions.
All Funds. There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, Morgan may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if Morgan determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, Morgan
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
TRUSTEES
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios and the other Master Portfolios, as defined below, their business
addresses, principal occupations during the past five years and dates of birth
are set forth below.
Frederick S. Addy -- Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, 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. ("Pierpont Group") since prior to 1993. His
address is Pine Tree Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL
33436, and his date of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March 17,
1934.
The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. A majority of the disinterested Trustees have adopted written
procedures reasonably appropriate to deal with potential conflicts of interest
arising from the fact that the same individuals are Trustees of the Trust, each
of the Portfolios and the J.P. Morgan Funds up to and including creating a
separate board of trustees.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), the J.P. Morgan Funds and J.P. Morgan 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.
---------------------- *Mr. Healey is an "interested person" of the Trust,
the Advisor and each Portfolio as that term is defined in the 1940 Act.
<PAGE>
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1997 are set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION ACCRUED BY
AGGREGATE TRUSTEE THE MASTER PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES TRUST AND
PAID BY THE TRUST THE TRUST 1997(**)
DURING 1997
NAME OF TRUSTEE
<S> <C> <C>
Frederick S. Addy, Trustee $11,772.77 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
William G. Burns, Trustee $11,786.38 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Arthur C. Eschenlauer, Trustee $11,786.38 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Matthew Healey, Trustee (***) $11,786.38 $72,500
Chairman and Chief Executive
Officer
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Michael P. Mallardi, Trustee $11,786.38 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- --------------------------------------------- ------------------------------ -------------------------------------------
</TABLE>
-------------------------------------------------
- -------------------------------- --------------------------------------------
(*) Includes the Portfolio and 21 other portfolios (collectively, the "Master
Portfolios") for which Morgan acts as investment advisor.
(**) 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, J.P. Morgan Funds, the Trust and
J.P. Morgan Series Trust) in the fund complex.
(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $147,500,
contributed $22,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.
The Trustees, in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy.
Each of the Portfolios 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 Portfolios and the Trust.
Pierpont Group, Inc. was organized in July 1989 to provide services for the J.P.
Morgan Funds (formerly "The Pierpont Family of Funds"), and the Trustees are the
equal and sole shareholders of Pierpont Group, Inc. The Trust and the Portfolios
have agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during the indicated fiscal periods are set forth below:
International Equity Fund -- For the fiscal year ended October 31, 1995:
$30,279. For the fiscal year ended October 31, 1996: $29,774. For the fiscal
year ended October 31, 1997: $25,727.
International Equity Portfolio -- For the fiscal year ended October 31,
1995: $48,442. For the fiscal year ended October 31, 1996: $39,391. For the
fiscal year ended October 31, 1997: $32,439.
Emerging Markets Equity Fund -- For the fiscal year ended October 31, 1995:
$14,527. For the fiscal year ended October 31, 1996: $11,374. For the fiscal
year ended October 31, 1997: $13,144.
Emerging Markets Equity Portfolio -- For the fiscal year ended October 31,
1995: $53,162. For the fiscal year ended October 31, 1996: $36,851. For the
fiscal year ended October 31, 1997: $34,045.
International Opportunities Fund -- For the period February 26, 1997
(commencement of operations) through November 30, 1997: $3,978.
International Opportunities Portfolio -- For the period February 26, 1997
(commencement of operations) through November 30, 1997: $5,110.
OFFICERS
The Trust's and Portfolios' executive officers (listed below), other than
the Chief Executive Officer and the officers who are employees of the Advisor,
are provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust and the Portfolios. The Trust and
the Portfolios have no employees.
The officers of the Trust and the Portfolios, 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, the
Portfolio and the other Master Portfolios. 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 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews Road,
Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies advised or administered by the Dreyfus Corporation
("Dreyfus") or its affiliates. From December 1991 to July 1994, she was
President and Chief Compliance Officer of FDI. Her date of birth is August 1,
1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr. Conroy
was a Senior Fund Accountant for Investors Bank & Trust Company. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of The
Emerging Markets Equity 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. (together "RCM"), Waterhouse Investors Cash Management Fund,
Inc. ("Waterhouse") 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 Services 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, Waterhouse 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.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse 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
Emerging Markets Equity 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, Waterhouse 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.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Supervisor for the Budgeting and Expense Division. Prior to September 1995, Ms.
Pace served as a Funds Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New York
10166. His date of birth is May 18, 1961.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
and is responsible for U.S. mutual fund tax matters. Prior to September 1995,
Ms. Rotundo served as a Senior Tax Manager in the Investment Company Services
Group of Deloitte & Touche LLP. Her address is 60 Wall Street, New York, New
York 10260. Her date of birth is September 26, 1965.
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 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 Funds have not retained the services of an investment adviser
because each Fund seeks to achieve its investment objective by investing all of
its investable assets in a corresponding Portfolio. Subject to the supervision
of the Portfolio's Trustees, Morgan makes each Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Morgan is 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 approximately $250 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 300 capital market researchers, portfolio managers and traders.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the emphasis on
security selection as the method to achieve investment performance superior to
the benchmark. The benchmark for the Portfolios in which the Funds invest are
currently: The International Equity Portfolio -- EAFE; The Emerging Markets
Equity Portfolio -- MSCI Emerging Markets Free Index; The International
Opportunities Portfolio -- MSCI All Country World ex-U.S. Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary of
J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolios are managed by officers of the Advisor who, in acting for
their customers, including the Portfolios, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel 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 Investment
Advisory Agreements, the Portfolio corresponding to each Fund has agreed to pay
the Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.
International Equity: .60%
Emerging Markets Equity: 1.00%
International Opportunities: .60%
The table below sets forth for each Fund listed the advisory fees paid by
its corresponding Portfolio to the Advisor for the fiscal period indicated. See
the Funds financial statements which are incorporated herein by reference.
International Equity Portfolio -- For the fiscal year ended October 31,
1995: $3,174,965. For the fiscal year ended October 31, 1996: $5,007,993. For
the fiscal year ended October 31, 1997: $5,305,885.
Emerging Markets Equity Portfolio -- For the fiscal year ended October 31,
1995: $5,713,506. For the fiscal year ended October 31, 1996 : $7,825,873. For
the fiscal year ended October 31, 1997: $9,422,758.
International Opportunities Portfolio -- For the period February 26, 1997
(commencement of operations) through November 30, 1997: $904,113.
The Investment Advisory Agreements provide that they will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. Each of the Investment Advisory Agreements will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."
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 Portfolios contemplated by the Advisory Agreements without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent the Advisor from continuing to perform such services for the
Portfolios.
If the Advisor were prohibited from acting as investment advisor to any
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, administrative and shareholder services to the Trust and the
Portfolios and shareholder services for the Trust. See "Services Agent" and
"Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for each of 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 each 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
each of the Funds 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 Portfolios
dated August 1, 1996, FDI also serves as the Trust's and the Portfolios'
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 Portfolios, 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 Portfolios, 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 Fund and
Portfolio has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to each Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and other
investment companies subject to similar agreements with FDI.
The table below sets forth for each Fund and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods indicated.
International Equity Fund -- For the period August 1, 1996 through October
31, 1996: $6,625. For the fiscal year ended October 31, 1997: $22,259.
International Equity Portfolio -- For the period August 1, 1996 through
October 31, 1996: $6,212. For the fiscal year ended October 31, 1997: $21,379.
Emerging Markets Equity Fund -- For the period August 1, 1996 through
October 31, 1996 : $2,593. For the fiscal year ended October 31, 1997: $11,473.
Emerging Markets Equity Portfolio -- For the period August 1, 1996 through
October 31, 1996: $5,719. For the fiscal year ended October 31, 1997: $22,642.
International Opportunities Fund -- For the period from February 26, 1997
(commencement of operations) to November 30, 1997: $3,398.
International Opportunities Portfolio -- For the period from February 26, 1997
(commencement of operations) to November 30, 1997: $3,446.
The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to Signature Broker-Dealer Services, Inc.
(which provided distribution and administrative services to the Trust and
placement agent and administrative services to the Portfolios prior to August 1,
1996) for the fiscal periods indicated.
International Equity Fund -- For the fiscal year ended October 31, 1994:
$37,065. For the fiscal year ended October 31, 1995: $83,762. For the period
November 1, 1995 through July 31, 1996: $68,651.
International Equity Portfolio -- For the fiscal year ended October 31,
1994: $22,024. For the fiscal year ended October 31, 1995: $31,500. For the
period November 1, 1995 through July 31, 1996: $70,197.
Emerging Markets Equity Fund -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $22,572. For the fiscal
year ended October 31, 1995: $42,329. For the period November 1, 1995 through
July 31, 1996: $27,031.
The Emerging Markets Equity Portfolio -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $30,828. For the fiscal
year ended October 31, 1995: $35,189. For the period November 1, 1995 through
July 31, 1996: $66,251.
SERVICES AGENT
The Trust, on behalf of each Fund and Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
effective December 29, 1995, as amended August 1, 1996 pursuant to which Morgan
is responsible for certain administrative and related services provided to each
Fund and its corresponding 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, preparation of financial statements, calculation of
performance data, oversight of service providers and certain regulatory and
Board of Trustee matters.
Under the amended Services Agreements, the Funds and the Portfolios
have 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 J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their average daily net assets in excess
of $7 billion, less the complex-wide fees payable to FDI. The portion of this
charge payable by each Fund and Portfolio is determined by the proportionate
share that its net assets bear to the total net assets of the Trust, the Master
Portfolios, the other investors in the Master Portfolios for which Morgan
provides similar services and J.P. Morgan Series Trust.
Under administrative services agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, each Fund and its corresponding
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 Portfolios' 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 each Portfolio had
entered into Financial and Fund Accounting Services Agreements with Morgan, the
provisions of which included certain of the activities described above and,
prior to September 1, 1995, also included reimbursement of usual and customary
expenses.
The table below sets forth for each Fund and its corresponding Portfolio the
fees paid to Morgan, net of applicable fee waivers and reimbursements, as
Services Agent.
International Equity Fund -- For the fiscal year ended October 31, 1995:
$(63,230)*. For the fiscal year ended October 31, 1996: $114,261. For the fiscal
year ended October 31, 1997: $217,946.
International Equity Portfolio -- For the fiscal year ended October 31,
1995: $349,443. For the fiscal year ended October 31, 1996: $196,299. For the
fiscal year ended October 31, 1997: $274,750.
Emerging Markets Equity Fund -- For the fiscal year ended October 31, 1995:
$(26,975)*. For the fiscal year ended October 31, 1996: $57,566. For the fiscal
year ended October 31, 1997: $113,255.
Emerging Markets Equity Portfolio -- For the fiscal year ended October 31,
1995: $337,050. For the fiscal year ended October 31, 1996: $183,498. For the
fiscal year ended October 31, 1997: $292,269.
International Opportunities Fund -- For the period February 26, 1997
(commencement of operations) through November 30, 1997: $35,840.
International Opportunities Portfolio -- For the period February 26, 1997
(commencement of operations) through November 30, 1997: $46,055.
- ------------------------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees under
the 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 each of the
Portfolio's custodian and fund accounting agent and each Fund transfer and
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. In addition, the
Custodian has entered into a subcustodian agreements on behalf of the Fund with
Bankers Trust Company for the purpose of holding TENR Notes and with Bank of New
York and Chemical Bank, N.A. for the purpose of holding certain variable rate
demand notes. In the case of foreign assets held outside the United States, the
Custodian employs various subcustodians who were approved by the Trustees of the
Portfolios in accordance with the regulations of the SEC. The Custodian
maintains portfolio transaction records. As Transfer Agent and Dividend
Disbursing Agent, State Street is responsible for maintaining account records
detailing the ownership of Fund shares and for crediting income, capital gains
and other changes in share ownership to
shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of a financial professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include but are not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rate of 0.10% (expressed
as a percentage of the average daily net asset values of Fund shares owned by or
for shareholders for whom Morgan is acting as shareholder servicing agent).
Morgan acts as shareholder servicing agent for all shareholders.
The table below sets forth for each Fund listed the shareholder servicing
fees paid by each Fund to Morgan, net of fee waivers and reimbursements, for the
fiscal periods indicated.
International Equity Fund -- For the fiscal year ended October 31, 1995:
$168,565. For the fiscal year ended October 31, 1996: $596,245. For the fiscal
year ended October 31, 1997: $701,585. Emerging Markets Equity Fund -- For the
fiscal year ended October 31, 1995: $79,381. For the fiscal year ended October
31, 1996: $229,764. For the fiscal year ended October 31, 1997: $365,202.
International Opportunities Fund -- For the period from February 26, 1997
(commencement of operations) to November 30, 1997: $117,243.
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 Funds and the Portfolios under the
Services Agreements and in acting as Advisor to the Portfolios under the
Investment Advisory Agreements may raise issues under these laws. However,
Morgan believes that it may properly perform these services and the other
activities described 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 Funds or the Portfolios might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.
The Funds may be sold to or through financial intermediaries who are
customers of Morgan ("financial professionals"), 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 Funds. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Funds as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
The services provided by financial professionals 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 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 financial professional, 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 financial professional's clients may
reasonably request and agree upon with the financial professional.
Although there is no sales charge levied directly by a Fund, financial
professionals 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 financial professionals but in all cases
will be retained by the financial professional and not remitted to the Fund or
Morgan.
Each Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on a Fund's behalf. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolios are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of each of
the Funds and the Portfolios, assists in the preparation and/or review of each
Fund's and Portfolio's federal and state income tax returns and consults with
the Funds and the Portfolios as to matters of accounting and federal and state
income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator and Distributor," "Services Agent" and "Shareholder
Servicing" above, the Funds and the Portfolios 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
Funds or the Portfolios. For the Funds, 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 Portfolios, such expenses also include
applicable 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 certain
Portfolios and the usual and customary expenses described above (excluding
organization and extraordinary expenses, custodian fees and brokerage expenses).
PURCHASE OF SHARES
Method of Purchase. Investors may open accounts with a 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 a financial professional include customers
of their affiliates and references to transactions by customers with Morgan or a
financial professional include transactions with their affiliates. Only Fund
investors who are using the services of a financial institution acting as
shareholder servicing agent pursuant to an agreement with the Trust on behalf of
a Fund may make transactions in shares of a Fund.
Each 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 for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by
the applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, OTC market or by readily available market quotations from a
dealer in such securities. Each Fund reserves the right to accept or reject at
its own option any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
financial professional, and the financial professional may establish its own
minimums and charge the investor a fee for this service and other services it
provides to its customers. Morgan may pay fees to financial professionals for
services in connection with fund investments. See "Financial Professionals"
above.
REDEMPTION OF SHARES
If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust on behalf of all of the Funds and their corresponding
Portfolios have elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Funds and their corresponding Portfolios are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of the Fund during any 90 day period for any one shareholder. The
Trust will redeem Fund shares in kind only if it has received a redemption in
kind from the corresponding Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind.
Further Redemption Information. 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. In addition, if a
shareholder sends a check for the purchase of fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of a Fund, and the Portfolios reserve the right to
suspend the right of redemption and to postpone the date of payment upon
redemption as follows: (i) for up to seven days, (ii) during periods when the
New York Stock Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the SEC by rule or
regulation, (iii) during periods in which an emergency, as determined by the
SEC, 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.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares from any Fund into shares of any other
J.P. Morgan Institutional Fund or J.P. Morgan Fund 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. Shares of the Fund to be acquired are purchased for
settlement when the proceeds from redemption become available. In the case of
investors in certain states, state securities laws may restrict the availability
of the exchange privilege. The Trust reserves the right to discontinue, alter or
limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Dividends and capital gains distributions paid by a 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 financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Funds reserve the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
Each of the Funds computes its net asset value once daily on Monday
through Friday at the time in the Prospectus. The net asset value will not be
computed on the day the following legal holidays are observed: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The Funds and
the Portfolios may also close for purchases and redemptions at such other times
as may be determined by the Board of Trustees to the extent permitted by
applicable law. The days on which net asset value is determined are the Funds'
business days.
The net asset value of each Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolios corresponding to each Fund in valuing their assets.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued 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 prices on such exchange. 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 currency exchange rate on the valuation date.
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. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
(normally 4:00 p.m.) and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of actual
distributions, average annual and aggregate annual total returns 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 Funds may make historical performance information available and may
compare its performance to other investments or relevant indexes, including the
benchmark indicated under "Investment Advisor" above or data 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.
Composite performance information shown in the prospectus has been
calculated in accordance with Performance Presentation Standards of the
Association for Investment Management and Research ("AIMR").
Total Return Quotations. As required by regulations of the SEC, the
average annual total return of the Funds for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Fund over the period are reinvested. It is
then assumed that at the end of the period, the entire amount is redeemed. The
annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance information for any period prior to the
establishment of a Fund will be that of its corresponding predecessor J.P.
Morgan fund and will be presented in accordance with applicable SEC staff
interpretations.
Below is set forth historical return information for the Funds or their
predecessors for the periods indicated:
International Equity Fund: 12/31/97: Average annual total return, 1 year:
1.46%; average annual total return, 5 years: 9.42%; average annual total return,
commencement of operations to period end1: 4.57%; aggregate total return, 1
year: 1.46%; aggregate total return, 5 years: 56.84%; aggregate total return,
commencement of operations to period end1: 40.43%.
Emerging Markets Equity Fund: 12/31/97: Average annual total return, 1
year: 7.71%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations to period end2: 0.29%; aggregate total
return, 1 year: 7.71%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations(*) to period end2: 1.20%.
International Opportunities Fund: 12/31/97: Average annual total return, 1
year: N/A; average annual total return, 5 years: N/A; average annual total
return, commencement of operations to period end3: 1.74%; aggregate total
return, 1 year: N/A; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations to period end3: 1.74%.
General. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
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1 J.P. Morgan International Equity Fund commenced operations on June 1, 1990
2 J.P. Morgan Emerging Markets Equity Fund commenced operations on November 15,
1993.
3 J.P. Morgan International Opportunities Fund commenced operations on February
26, 1997.
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the funds; (7)
comparisons of investment products (including the funds) with relevant markets
or industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) discussions of
various statistical methods quantifying the fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The funds
may also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any of the funds.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all Portfolios 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 Portfolios. See "Investment Objectives and Policies."
Portfolio transactions for the Portfolio will be undertaken principally to
accomplish a 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 Objectives and Policies --
Portfolio Turnover".
In connection with portfolio transactions, the overriding objective is
to obtain the best execution of purchase and sales 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 execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of each Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolios in light of facts and circumstances deemed relevant from time to
time, and, in that connection, will receive reports from the Advisor and
published data concerning transaction costs incurred by institutional investors
generally. Research services provided by brokers to which 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 clients and not solely or necessarily for the
benefit of an individual Portfolio. The Advisor believes that the value of
research services received is not determinable and does not significantly reduce
its expenses. The Portfolios do not reduce their fee to the Advisor by any
amount that might be attributable to the value of such services.
The Portfolios or their predecessors corresponding to the International
Equity, Emerging Markets Equity, and International Opportunities Funds paid the
following brokerage commissions for the indicated fiscal periods:
International Equity (October): 1997: $2,008,842; 1996: $2,303,648; 1995:
$1,691,642.
Emerging Markets Equity (October): 1997: $ 2,855,850; 1996: $1,840,532;
1995: $1,475,147.
International Opportunities (For the period February 26, 1997 (commencement of
operations) through November 30, 1997): $ 1,027,285.
The increases in brokerage commissions reflected above were due to
increased portfolio activity and an increase in net investments by investors in
a Portfolio or its predecessor.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Portfolio's brokerage
transactions to affiliates of the Advisor. In order for affiliates of the
Advisor to effect any portfolio transactions for a Portfolio, the commissions,
fees or other remuneration received by such affiliates must be reasonable and
fair compared to the commissions, fees, or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. Furthermore, the Trustees of each Portfolio, including a majority of the
Trustees who are not "interested persons," have adopted procedures which are
reasonably designed to provide that any commissions, fees, or other remuneration
paid to such affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolios will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other customers
including other Portfolios, 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 a Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to a Portfolio. In some instances,
this procedure might adversely affect a Portfolio.
If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which each Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "The
JPM Institutional Funds" to "J.P. Morgan Institutional Funds". Effective January
1, 1998, the name of the funds were changed from "The JPM Institutional
International Equity Fund" to the "J.P. Morgan Institutional International
Equity Fund", "The JPM Institutional Emerging Markets Equity Fund" to the "J.P.
Morgan Institutional Emerging Markets Equity Fund" and the "JPM Institutional
International Opportunities Fund" to the "J.P. Morgan Institutional
International Opportunities Fund".
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of a Fund is liable to a
Fund or to a shareholder, and that no Trustee, officer, employee, or agent is
liable to any third persons in connection with the affairs of a Fund, except as
such liability may arise from his or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or its duties to such third
persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of a
Fund. With the exceptions stated, the Trust's Declaration of Trust provides that
a Trustee, officer, employee, or agent is entitled to be indemnified against all
liability in connection with the affairs of a Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in a Fund (or in the assets of other series, if applicable). To
date shares of 24 series are currently available for sale to the public. Each
share represents an equal proportional interest in a Fund with each other share.
Upon liquidation of a Fund, holders are entitled to share pro rata in the net
assets of a Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of a Fund have no preemptive or conversion rights
and are fully paid and non-assessable. The rights of redemption and exchange are
described in the Prospectus and elsewhere in this Statement of Additional
Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, provided, however, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
that all objections so sustained have been met, and shall enter an order so
declaring, the Trustees shall mail copies of such material to all shareholders
with reasonable promptness after the entry of such order and the renewal of such
tender.
The Trustees have authorized the issuance and sale to the public of
shares of 24 series of the Trust. The Trustees have no current intention to
create any classes within the initial series or any subsequent series. The
Trustees may, however, authorize the issuance of shares of additional series and
the creation of classes of shares within any series with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The proceeds from the issuance of any additional series would be
invested in separate, independently managed portfolios with distinct investment
objectives, policies and restrictions, and share purchase, redemption and net
asset valuation procedures. Any additional classes would be used to distinguish
among the rights of different categories of shareholders, as might be required
by future regulations or other unforeseen circumstances. All consideration
received by the Trust for shares of any additional series or class, and all
assets in which such consideration is invested, would belong to that series or
class, subject only to the rights of creditors of the Trust and would be subject
to the liabilities related thereto. Shareholders of any additional series or
class will approve the adoption of any management contract or distribution plan
relating to such series or class and of any changes in the investment policies
related thereto, to the extent required by the 1940 Act.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares".
As of January 31, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:
International Equity Fund: Blue Cross Blue Shield of North Carolina (8.13%).
Emerging Markets Equity Fund: JPMIM as agent for Carnegie Corp. of New York
(9.21%); JPMIM as agent for A.P. Sloan Foundation (8.74%); Lincoln National Life
Insurance Company (6.22%); JPMIM as agent for Ameritech Union (5.59%); Charles
Schwab & Co. Inc. Special Custody Account for Benefit of Customers (5.41%);
Batrus & Co. (5.09%).
International Opportunities Fund: Morgan as agent for S. Lutz (7.36%); J.P.
Morgan Delaware as agent for Diversified Growth Fund (7.15%).
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 each Fund.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio, a separate registered investment
company with the same investment objective as the Fund. The investment objective
of the Funds or Portfolios may be changed only with the approval of the holders
of the outstanding shares of each Fund and each Portfolio.
In addition to selling a beneficial interest to a Fund, a Portfolio may
sell beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures may
result in differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and are
present in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Morgan at (800) 521-5411.
The Trust may withdraw the investment of a Fund from a 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 a Portfolio's investment objective, policies or
restrictions, or a failure by a 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 a 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 a 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
Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; and (b) 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, a 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, a 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. Each Fund intends to
make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund in
October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will 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
are generally taxable to shareholders of the Funds as ordinary income whether
such distributions are taken in cash or reinvested in additional shares. If
dividend payments exceed income earned by a Fund, the over distribution would be
considered a return of capital rather than a dividend payment. The Funds intend
to pay dividends in such a manner so as to minimize the possibility of a return
of capital. 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 a Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. As a result of
the enactment of the Taxpayer Relief Act of 1997 (the "Act"), long-term capital
gain of an individual is generally subject to a maximum rate of 28% in respect
of a capital asset held directly by such individual for more than one year but
not more than
eighteen months, and the maximum rate is reduced to 20% in respect of a capital
asset held in excess of 18 months. The Act authorizes the Treasury department to
promulgate regulations that would apply these rules in the case of long-term
capital gain distributions made by a Fund. The Treasury department has indicated
that, under such regulations, individual shareholders will be taxed at a maximum
rate of 28% in respect of capital gains distributions designated as 28% rate
gain distributions and will be taxed at a maximum rate of 20% in respect of
capital gains distributions designated as 20% rate gain distributions,
regardless of how long they have held their shares in a Fund. No loss will be
allowed on the redemption or exchange of shares of a Fund if, within a period
beginning 30 days before the date of such redemption or exchange and ending 30
days after such date, the shareholder acquires (such as through dividend
reinvestment) securities that are substantially identical to shares of the Fund.
The Fund had a capital loss carryforward at November 30, 1997 of approximately
$30,000 which will expire in the year 2005. No capital gains distribution is
expected to be paid to shareholders until future gains have been realized in
excess of such carryforward.
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 a Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by a Portfolio pursuant to the exercise of a put option written by it,
the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
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. Investors should thus consider the consequences
of purchasing shares in the Fund shortly before the Fund declares a sizable
dividend distribution.
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. As noted above, long-term capital
gain of an individual holder is subject to a maximum tax rate of 28% in respect
of shares held for more than one year. The maximum rate is reduced to 20% in
respect of shares held for more than 18 months. 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. In addition, no loss will be allowed on the redemption or exchange
of shares of the Fund, if within a period beginning 30 days before the date of
such redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
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 a Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time a
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by a Portfolio, if any, denominated in
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates are also treated as ordinary
income or loss.
Forward currency contracts, options and futures contracts entered into
by a Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by a
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 Funds may invest in Equity Securities of foreign issuers. If a
Portfolio purchases shares in certain foreign corporations (referred to as
passive foreign investment companies ("PFICs") under the Code), the
corresponding fund may be subject to federal income tax on a portion of an
"excess distribution" from such foreign corporation, including any 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 Fund to its shareholders. In addition,
certain interest charges may be imposed on a Fund as a result of such
distributions. Alternatively, a Fund may in some cases be permitted to include
each year in its income and distribute to shareholders a pro rata portion of the
foreign investment fund's income, whether or not distributed to the Fund.
For taxable years of the Portfolios beginning after 1997, the
Portfolios will be permitted to "mark to market" any marketable stock held by a
Portfolio in a PFIC. If a Portfolio made such an election, the corresponding
Fund would include in income each year an amount equal to its share of the
excess, if any, of the fair market value of the PFIC stock as of the close of
the taxable year over the adjusted basis of such stock. The Fund would be
allowed a deduction for its share of the excess, if any, of the adjusted basis
of the PFIC stock over its fair market value as of the close of the taxable
year, but only to the extent of any net mark-to-market gains with respect to the
stock included by the Fund for prior taxable years.
Foreign Shareholders. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
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, a 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 a Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
Foreign Taxes. It is expected that the International Bond 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. In the case of the International Bond Fund, so long as
more than 50% in value of the total assets of the Fund (including its share of
the assets of the corresponding Portfolio) at the close of any taxable year
consists of stock or securities of foreign corporations, the Fund may elect to
treat any foreign income taxes 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 its 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 and the amount of
foreign taxes, if any, for which shareholders of the Fund will not be eligible
to claim a foreign tax credit because the holding period requirements (described
below) have not been satisfied. 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.) Effective for dividends paid
after September 5, 1997, shareholders of the Fund will not be eligible to claim
a foreign tax credit with respect to taxes paid by the Fund (notwithstanding
that the Fund elects to treat the foreign taxes deemed paid by it as paid
directly by its shareholders) unless certain holding period requirements are
met. 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 International Bond 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 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 International Bond Fund. Effective for
taxable years of a shareholder beginning after December 31, 1997, individual
shareholders of the Fund with $300 or less of creditable foreign taxes ($600 in
the case of an individual shareholder filing jointly) may elect to be exempt
from the foreign tax credit limitation rules described above (other than the 90%
limitation applicable for purposes of the alternative minimum tax), provided
that all of such individual shareholder's foreign source income is "qualified
passive income" (which generally includes interest, dividends, rents, royalties
and certain other types of income) and further provided that all of such foreign
source income is shown on one or more payee statements furnished to the
shareholder.
Shareholders making this election will not be permitted to carry over any excess
foreign taxes to or from a tax year to which such an election applies.
State and Local Taxes. Each Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of a Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that each
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Portfolios are organized as New York trusts. The Portfolios are
not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by a Fund
in its corresponding Portfolio does not cause the Fund to be liable for any
income or franchise tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares 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 Funds, Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities 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.
I:\dsfndlgl\institut\0298int.pea\inteqsai.txt
<PAGE>
FINANCIAL STATEMENTS
The following financial statements and the reports thereon of Price
Waterhouse LLP of the International Equity, Emerging Markets Equity and
International Opportunities Funds are incorporated herein by reference to their
respective annual report filings made with the SEC pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder. Any of the following financial reports
are available without charge upon request by calling JP Morgan Funds Services at
(800) 521-5411. Each Fund's financial statements include the financial
statements of the Fund's corresponding Portfolio.
Date of Annual Report; Date
Annual Report Filed; and
Accession Number
Name of Fund
J.P. Morgan Institutional International Equity 10/31/97;
Fund 12/31/97
0001047469-97-009226
J.P. Morgan Institutional Emerging Markets 10/31/97;
Equity Fund 12/31/97;
0001047469-97-009259
J.P. Morgan Institutional International 11/30/97;
Opportunities Fund 1/26/98;
0001047469-98-002293
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have 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 have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face 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.
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.
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.